Transcript of a Conference call on India article IV Consultation

February 25, 2014

Washington, D.C.
Thursday, February 20, 2014

MS. UTSUNOMIYA: Hello and thank you all for participating in this conference call on the publication of the IMF’s 2014 India Article IV Staff Report. I'm Keiko Utsunomiya, Media Relations Officer from the Communications Department.

I'd like to introduce Mr. Paul Cashin, Assistant Director of the Asia and Pacific Department. He's also IMF Mission Chief for India. Also joining us in this call from Delhi, India is Mr. Thomas Richardson, IMF's Senior Resident Representative.

This is an on the record conference, and the content of this call and all the related documents posted on the online IMF Press Center are under embargo until 9:00 a.m. Washington time which is 14:00 GMT, about 50 minutes from now.

Paul will give us brief opening remarks followed by a question and answer session.

MR. CASHIN: Thank you, Keiko. This is a conference call on the 2014 Article IV Staff Report for India which is our annual health check-up, if you like, on the Indian economy. We do this once a year for virtually all of the 188 members of the IMF, and today we're speaking on India.

I'd just like to go through several of the key findings of the report, and at the end of that turn to Tom in Delhi as well for his remarks.

I guess one of the key findings of the report, first off, is that growth has slowed significantly in India, and it will take a period of time to recover back to the higher levels that India enjoyed in previous years.

Why has India’s growth slowed down? Chiefly because of the structural bottlenecks and weaknesses in investment. We have India coming in at about 4 2/3 percent growth this fiscal year. Rising to about 5.5 percent growth next year on the back of stronger global growth, better export competitiveness, and the effects of recent policy actions including the CCI (Cabinet Committee on Investments) approval of investment. So growth is an issue for India.

Also, the second main issue and the main issue that we spoke about in the staff report is the inflation issue, which is a key macro challenge for India, and will definitely require a tightening of the monetary stance to roll it back.

We've seen in India 10 percent CPI inflation for several years, with inflation expectations even higher than that. So inflation in many ways is reaching its tentacles right throughout the economy and has many consequences. One of which is driving Indians out of saving in financial assets into saving through gold, and of course inflation adversely affects the poor most of all. So we're very supportive of Reserve Bank of India (RBI) Governor Raghuram Rajan's move towards CPI inflation as a key benchmark in how the RBI thinks about its monetary policy deliberations, and as we outlined in the report, to defeat high inflation going to require a tight monetary policy stance for some period of time until we see a sustainable decline in inflation.

The third key aspect in the Staff Report concerns resilience to external shocks. There we see India as much more resilient to external shocks than they were about the middle of last year. But of course, global financial market volatility, as we've seen recently, is still a risk. But in recent months India's taken very substantial measures to narrow both its external and fiscal imbalances, tighten monetary policy, move forward on structural reforms, and address aspects of market volatility.

Although the spillovers from this volatility to India will continue to pose a risk, as we've seen recently, India’s current account deficit has contracted. We have it coming in in the report at about 3.3 percent of GDP, but we think it'll be even lower than that on our current numbers. The authorities have also met their fiscal target for this fiscal year. Investment project approvals are accelerating, and they're beginning to tackle the inflation issue by tightening the monetary stance. So, all of these developments certainly make India more resilient to any external shocks that may be coming along.

Now I'd like to turn over to Tom Richardson who will go through a couple of the other major findings in the report. Then, perhaps, we can open it up to questions.

MR. RICHARDSON: Thank you very much, Paul. Thank you to colleagues who are calling in at this either late or early hour depending on where you are.

I'd just like to amplify a couple of remarks that Paul has made. We definitely see some challenges in India. We're happy that the fiscal target for this year is likely to be met, but we do have some concerns about the quality of fiscal adjustment going forward.

We are keen, I think over the medium term, to see the Indian authorities address what we think is a weakness in revenue performance by broadening tax bases more than by raising tax rates. Broadening the tax bases makes a lot of sense as the way to bring their revenue to GDP ratio up from the current level of about 9 percent of GDP for the central government which we think is quite low.

I would also point out that there is a link, of course, between the fiscal deficit and the current account deficit. Those twin deficits are interlinked, and over time we think that bringing down the fiscal deficit will also tend to make India's welcome current account deficit reduction more durable and sustainable over the medium term.

I think maybe I would also just come back to a point on growth that Paul mentioned, which is that although growth has slowed a bit to just below 5 percent the last couple of years, those are pretty good levels for many countries around the world. But for India they're probably not enough given the demographic challenges that India faces.

We often think about India having a demographic dividend over time that there will be significant inflows of working age populations that can contribute to savings and therefore to growth over time. But it's really important to ensure that jobs are created, particularly those kinds of jobs that will contribute to the increasing formalization of the Indian workforce. So that's a very important point.

The final point that I would make and then I'll turn it back to Paul, is that we believe the Indian financial system is fundamentally sound. It is well regulated, and capital adequacy is good across the system. At the same time with the slowdown in growth, we've seen corporate balance sheets and financial sector balance sheets weaken a bit. So non-performing asset levels have increased, and the volume of restructured assets has also increased.

Although we think the system is fundamentally sound, we see some signs of growing stress, that call for heightened security and surveillance over time. We're happy that the RBI is increasing emphasis on the need for provisioning for impaired assets. We know from elsewhere around the world, early recognition and provisioning of impaired assets is the fastest way to get out of a financial sector problem. So we think that that's important. Nevertheless, I think that is an area where we put a lot of attention. I think once you take a look at the report you'll see that. Thanks, Paul.

MS. UTSUNOMIYA: Thank you, Paul and Tom. We are ready to take questions from callers, please.

QUESTIONER: Hello. I have a question regarding the current account deficit. You seem to have a pretty different forecast than the government has. Where is the discrepancy coming from? Are they showing too much optimism?

I’m also wondering about tapering. So as you were mentioning it's so far so good on the actual tapering round. Is India out of the woods or where is its main weakness and where could it come from?

MR. CASHIN: Thank you for those questions. Yes, as I said the staff report was drafted following consultations in November and discussed at our Board in late January. So the numbers you see in there are the deficit of about 3 1/3 percent of GDP.

Since that time revised GDP estimates have come out, and we're a little bit more optimistic in terms of the diminution on the gold-import side. So that's why I said in my opening remarks we can see India coming in with around 2.5 percent of GDP current account deficit for this fiscal year, which is a little bit above where the authorities are speaking.

Why do we have that difference? We see gold imports being quite durably reduced, but that is contingent on reducing inflation, as I mentioned earlier, which is driving a lot of the gold imports. So as the monetary policy stance is tightened and begins to have an effect on inflation as well as when inflation-indexed bonds kick in progressively through the economy then we'll see people having an alternative for their savings to gold. Gold imports will, we think, stay relatively constant around about 800 metric tons in the coming years.

But on the export side, given the recent depreciation of the rupee for India, that's driving a lot of their increased exports. Also reduced mining imports, hopefully. So we can see them having a current account deficit of around 2.5 percent for this fiscal year, which is pretty close to the benchmark norm that we would say that is a sustainable current account position for India as we outlined in the staff report.

There was a follow-up question on the tapering issue, is India out of the woods? Well, I don't think you'll ever find an IMF economist making such a forthright statement, but nonetheless as I outlined in my opening remarks, India is definitely much more resilient to external shocks this time around than they were in the middle of last year.

You've seen that in the recent January wobbles in global financial markets. India was barely affected by those, and the rupee exchange rate held fairly solid. Flows are now resuming back into India. Why are they more resilient? Because India has taken these steps to narrow the current account deficit. They've achieved their fiscal targets. They've tightened their monetary stance. They're progressing on structural reform.

The three main, I guess, red lights for markets focusing on Emerging Markets, certainly on the last 12 months or so, were those economies which had high inflation rates, and large external and fiscal imbalances. India has begun to tackle all of those, and you're seeing the fruits of that by their increased resilience this time around.

QUESTIONER: As you know, India's headed for elections in April, May. You will have a new Prime Minister at the end of May, so there will be new government. So what do you expect -- what would be IMF's recommendations for the new government in the financial/economic sector to improve India's growth, trade and current inflation? Thank you.

MR. CASHIN: Thank you for that question. Yes, we included quite a deal of text in the staff report on our recommendations for improving India's growth rate. As we said there, traditionally India has grown at 7, 8, 9 percent, and we see no reason why it can't go back to those sorts of levels if some of the bottlenecks are eased and structural reforms are introduced, which are presently holding back India's growth path.

And what would they be? They would be mostly focused on power generation, mining reforms in terms of pricing of natural resources as well. Also, introduction of better revenue raising and as Tom Richardson mentioned earlier, and perhaps he can amplify on that as well.

By that we would mean introducing the GST (Goods and Services Tax) and some of the other tax reforms. Introducing subsidy reforms, which we think really can be a game changer in terms of fiscal sustainability. But it's on those structural reforms that once they're introduced would, we think, certainly accelerate India's growth path, and have them again, coming back at 7, 8, 9 percent annual growth on a regular basis. But maybe Tom would like to amplify on some of the fiscal reforms that we think future governments should undertake as well?

MR. RICHARDSON: Yeah, thanks very much, Paul. I think our advice to India would be the same, regardless.

On the fiscal front, as Paul suggested, we think there are some structural things that they can do that would be growth enhancing while also improving India's sustainability, reduced vulnerability, and so forth.

We think the goods and services tax, which has been discussed for many years, does stand some chance of passage in the next Parliament, and we think that would be a really important way to get growth going, as some people have argued, it is like India signing a free trade agreement with itself. It would remove internal trade borders between states, and we think that would certainly enhance growth across the country.

On the expenditure side, subsidy reform, as Paul mentioned, is really an important thing. We believe that by reducing unproductive subsidies, subsidies that are not targeted at the poor, room can be made in the budget for productivity enhancing investments.

One of the things that we think is really significant and noticeable, something we've seen in lots of countries around the world, is that fuel subsidies themselves are actually fairly anti-poor. They're not pro-poor as sometimes people think. They tend to be regressive across countries, and we've done some research at the IMF that suggest that that's true in India as well.

In fact if you look at who wins and who loses from fuel subsidies, it turns out that the top 10 percent of the Indian population captures something like seven times more of the benefit from fuel subsidies than does the bottom 10 percent of the population. So there's no way that you can argue that fuel subsidies are pro-poor.

One way that India can, I think, better target subsidies, not only fuel subsidies, but also food subsidies, is by moving forward with direct cash transfers linked to the unique identification system, that so called Aadhaar, that the government is pushing forward. We think that will be a very important way to remove duplication, get rid of ghosts, insure that you're actually targeting people who are truly in need. That will free up some room to spend scarce public resources on high priority public investment. Thanks, Paul.

QUESTIONER: Good morning and afternoon respectively. It sounds as if the IMF is broadly supportive of the Reserve Bank of India's move towards an inflation targeting regime. But reading through the report there seems to be some differences in how quickly the interest rate should be raised with the IMF highlighting that it should be raised continually over the coming months, whereas the India authorities are concerned about the significant risk of over tightening particularly in the light of the need to create jobs. Why is the IMF more dismissive of these concerns?

MR. CASHIN: Well, I wouldn't say we were dismissive, but as you'll see in the report we were certainly advocating a tightening of the monetary stance because as I outlined in my opening remarks, we definitely see inflation reaching its tentacles into many areas of the India economy. All of them adverse tentacles, mostly.

In terms of monetary policy tackling the inflation issue, India has had negative real interest rates for many years. Inflation expectations are in double digits and have been so for several years. Definitely inflation adversely affects the competiveness of their exports. So we advocated in the report that the monetary stance would need to be tightened, and probably on a rather prolonged basis, until we at least see real rates on deposits heading into positive territory.

So as part of that, of course, given the current circumstances where monetary policy would perhaps be bearing a larger portion of the burden of, in a sense, killing inflation. We also welcomed the Central Bank's move to increase the weight on CPI inflation in their monetary policy deliberations. We think that's definitely the right way to go. A lot of the recommendations we had in the report also echo those that were in the Patel Committee's report to the Governor, as recently released. We're fully supportive of many of those recommendations as well.

As part of the move to CPI inflation, we really, as Governor Rajan has also outlined recently, do not see any great long-term trade-off between inflation and growth. Inflation is actually detrimental to growth, particularly in some of our own work where we see inflation going above 6 percent adversely affecting growth. And certainly work by the RBI itself that shows that inflation above 6 definitely has an adverse effect on growth.

So really there is no long-run trade-off between killing inflation and growth. We think a low inflation rate is proactive for growth. Definitely helps the living standards of the poor. So in that sense the overall move to CPI inflation, tightening the monetary stance, we welcome those. We advocate those as an important way to increase the rate of growth and thereby employment.

MS. UTSUNOMIYA: We'll wait maybe one or two more minutes, but if there are no more questions we'll conclude.

MR. RICHARDSON: Keiko, maybe while we're waiting for further questions, if I can just come in on the previous point.

MS. UTSUNOMIYA: Please go ahead.

MR. RICHARDSON: I think Paul expressed it very clearly and well that we think that the emphasis on headline inflation is a good one. But something that we've been -- a point that we've been making for some years in our Article IV consultations has been that the slowdown in growth really doesn't appear to have been driven so much by tight macroeconomic policies, but rather by structural bottlenecks.

Consequently we believe that it is those structural bottlenecks that need to be removed to get growth going. Inflation at over 10 percent leading to negative real interest rates, as Paul mentioned, doesn't suggest that monetary policy was excessively tight. We also think that fiscal policy, with deficits of 8, 9 percent of GDP in some years, it would be hard to argue that fiscal policy has been contractionary. So, we do think that structural reforms are the key way to get going.

MS. UTSUNOMIYA: We would like to conclude the Conference Call on the 2014 India Staff Report. Let me remind you that the content of the discussion and all the related documents are embargoed until 9:00 a.m. Washington time which is about 27 minutes from now.

Thank you again for your participation. Have a nice day.


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