Transcript

Transcript of an International Monetary Fund Conference Call on the 2015 India Article IV Staff Report

March 12, 2015

Paul Cashin, Assistant Director and Mission Chief for India, Asia and Pacific Department

Tom Richardson, Senior Resident Representative, Asia and Pacific Department

Keiko Utsunomiya, Senior Communications Officer, Communications Department

MS. UTSUNOMIYA: Hello and welcome to the conference call on the release of the 2015 India Article IV Staff Report. My name is Keiko Utsunomiya, Senior Communication's Officer at the International Monetary Fund. I'm here with Mr. Paul Cashin, Assistant Director and Mission Chief for India in the IMF's Asian and Pacific Department. Also participating from Delhi, India is the Fund's Senior Resident Representative, Mr. Tom Richardson.

Let me remind you that the content of this call and all the related materials posted on the online IMF Press Center are under embargo until 9:00 a.m. Washington time which is 1300 GMT and 6:30 p.m. India standard time. Paul will give you short opening remarks, and Tom will follow-up if needed. Then we'll take questions from you. Thank you, Paul.

MR. CASHIN: Thank you, Keiko. We're here to present the 2015 Article IV Consultation Staff Report and Selected Issues Papers. We finished the consultation with the Indian authorities in mid-December, and then these papers were completed, and drafted, and presented to our Board in late January. We'll talk a little bit about the post-Board developments in terms of the macro economy in a little while, but a quick summary of what the Staff Report contains.

We certainly see that India's near-term growth has improved, and the balance of risks is now more favorable in the economy, helped by increased political certainty, some good policy actions, and better business confidence. Also, definitely lower commodity prices, particularly oil, are having a big benefit to India. Nonetheless, we see that while inflation has certainly come down, expectations of inflation are still high and fiscal deficits are still rather large which puts upward pressure on inflation, and certainly limits the policy space that the Indian authorities have to conduct counter-cyclical policies.

As we've been arguing for the last couple of years, definitely supply side constraints are still there in the economy, particularly in agriculture, mining, and power sectors. They certainly constrain the medium-term growth that India is able to achieve. In terms of risks we see, the main external risk to India being from a resumption of global financial market volatility. But we also recognize that India is much better positioned to deal with such volatility than it was in the middle of 2013. The current account deficit is much smaller now, and India has bulked up on reserves which they can certainly use to smooth consumption in the presence of such shocks.

On the domestic side, we still see weaknesses in the public sector banks in terms of NPLs. Also, corporate balance sheets, given the amount of external borrowing, could also pose risks to the economy. On the upside, if oil prices continue at their low level, and even maintain that low level for longer than current projections indicate, that would be an upside risk for India, and would definitely help contain inflation and both external and fiscal imbalances.

They were the main points made in the report. I might turn it over to Mr. Richardson to see if he has any further additions, and then we'd certainly welcome taking some of your questions.

MS. UTSUNOMIYA: Thank you, Paul. Tom?

MR. RICHARDSON: Great. Thank you. Thanks, Keiko. Thanks, Paul. Maybe I'll just make a couple of remarkson, in particular, the fiscal side. Where, you know, we note, of course, the government has just proposed a budget to Parliament which tilts the composition of spending in a welcome way towards infrastructure spending. That's, of course, a good thing. We think India needs a lot of infrastructure spending, so that's a good thing.

We also see some positive signs on the tax side to simplify, clarify the tax regime and help improve the business climate. We're also supportive of the Authorities continued intention to achieve a medium-term target for the central government fiscal deficit of about 3 percent of GDP, albeit pushed out by another year relative to the previous timeline.

I think, you know, there I would like to emphasize the importance of looking at the big picture for India. It's not just the central government that matters. You need to add the deficits of the states to the deficit of the center to get the deficit measure that we care about, the general government deficit, which is still in the neighborhood of, you know, 6 1/2 percent of GDP, coming down but still quite high by international comparative standards.

I think when we look across the emerging market space we do see other countries that have made a bit more progress in fiscal consolidation, and we're hoping that, over time India will be able to bring this deficit level down. As we look at the composition of the adjustment over time we're starting to think that revenue enhancement, particularly improved revenue administration, tax administration is a way to bring the revenue to GDP ratio up. We don't necessarily think that tax rates need to go up so much, but bringing people into the tax net will be important for fairness considerations. But also even more importantly, for boosting revenue to be able to provide the financing for public infrastructure spending as well as health and education, and all the other important components of spending that India really needs to do.

I should say also that we're happy the government has taken steps to deal with the large volume of fuel subsidies that used to occupy our minds so heavily, and liberalizing or freeing up -- diesel prices, for example, is an important achievement of the government. We think building in a bit of a buffer by raising excess taxes on diesel is also going to help going forward.

More generally, looking down the road, better targeting of subsidies by using the Aadhaar unique identification number system, and linking that to broader financial inclusion, access of poorer households to bank accounts, and therefore to the ability to provide direct benefit transfers, direct cash transfers instead of in kind subsidy support. Those will be ways of reducing leakage, better targeting subsidy spending, and ultimately both achieving the growth of the subsidies and helping to support fiscal consolidation.

I'll stop there for now. Then we can come back to fiscal issues and others in the question and answer.

MR. CASHIN: Thanks, Tom. I might just jump back in with a couple of other points before we open it up to questions. Since we went to our Executive Board with the report, of course, there's been a couple of major data and other developments in the economy. You'll see from our IMF survey article which accompanies the release of these reports that, of course, one of the main developments has been the Central Statistical Office’s (CSO) release of revised GDP figures. In the IMF survey article we are describing our new forecast for India for fiscal year (FY)14-15 and FY15-16.

In the staff report, which was completed, of course, prior to CSO’s release of their new numbers, we had India growing at about 5.6 percent in FY14-15 and then 6.3 percent in FY15-16. We, along with the Ministry of Finance and the RBI, have done a lot of thinking about the new series of GDP numbers. We have revised our forecasts now. While still tentative at this stage where we would welcome further data and information as it comes in, but we now predict India to grow in the orbit of about 7 1/4 percent in fiscal year 2014-15, rising to about 7 1/2 percent the following year, FY2015-16. We're happy to talk about this when we open up into the Q&A session.

Also, the other big development we've seen is the new monetary policy framework, flexible inflation targeting. We're very much supportive of that introduction, and we would welcome questions on that if people have. So with that I'll turn it back to Keiko.

MS. UTSUNOMIYA: Thank you Paul and Tom. Now we're ready to take questions from callers.

QUESTIONER: I have a couple of questions. One was on monetary policy. You've been quite clear in the report what your recommendations were, but you did not comment much on the first rate cut of January. Also, on the second cut, you recommend tight monetary policy. Does it mean that now you see India having exhausted the room it had for rate cuts?

I have a second question. There's also been changes in the CPI base, so I assume that the forecast you have in the report are not taking that into account. There's quite a different between your forecast in inflation and the government's and the central bank. Where does the difference come from?

MR. CASHIN: Okay. Thank you. Yes, in terms of the monetary stance, we had in the report a set of views, and we said that the monetary stance should be data dependent. By that we meant if we see inflation coming down then there may be some room for nominal rate cuts. The important measure to keep in mind in setting the monetary stance is real interest rates. We've seen those rise into the orbit of 1 1/2 percent, or a little bit higher than that, as inflation came down, and it came down at a faster pace than I think we (and most others) were expecting. That would be fair to say. This inflation decline mostly fueled by lower oil prices, of course, which came down rather rapidly towards the end of last year. Also food prices came down.

But nonetheless, as inflation came down then that would tend to open up a bit of room for lowering nominal interest rates, while still maintaining a tight monetary stance, which is what we recommend. We still say India has a tight monetary stance, even after these nominal rate cuts, because the real rates are still broadly where they were previously as inflation has declined.

On our numbers, the RBI can achieve its 6 percent CPI inflation by Q1 2016 target, even with cutting these rates. That's fine. The CPI numbers you're referring to in the Staff Report are period average inflation rates. That must be kept in mind. But we think, on our projections, they will achieve the 6 percent figure. So there's no necessary conflict between nominal rate cuts and real interest rates, which is our preferred measure of the tightness of the stance, as long as inflation is declining, and it's certainly been declining over the last several months.

What we think is probably the more challenging target is the medium-term target under the new monetary policy framework which is a 4 percent median over the medium-term, by 16-17, 17-18, plus/minus 2 percent. That will be quite a challenging target to achieve. Even though inflation has come down quite a lot in India from something like 10 percent towards the end of 2013. Now it's down around 5 percent. That's a big reduction, but, yes, it must be recognized that most of India's trading partners and competing economies have inflation much lower than 5 percent. So even 5 percent inflation is still rather sizeable.

Your other question was on the CPI base change. Yes, in the staff report we're using the old CPI index numbers. We're not detecting that changing the base is going to make a tremendous amount of difference. It may lower inflation slightly because it has a lesser weight for food items in the new consumption basket than in the previous index. But as I said, the numbers in the Staff Report are period averages, and we think RBI can certainly achieve their 6 percent CPI inflation by Q1 of 2016 target. But the more challenging target is the medium-term inflation target.

QUESTIONER: I was interested in your views on whether you consider the monetary policy framework to be complete? We don't really know what monetary policy committee would look like, but there are competing proposals which, in the Indian tradition, seem to be based on 250 page reports. One is dominated by the RBI. Insiders one would have outsides, but a veto for the governor. So I'd just be very interested to learn what you thought about that?

My second question, if I may ask two, is about policy transmission which is, you know, the RBI's cutting rates, but the banking sector seems to be capital constrained and saddled with quite a lot of bad loans. So it's all very well to cut rates and stuff, but I just wondered what more needs to be done to make them make a real difference to borrowing costs of business and households? Thank you.

MR. CASHIN: Okay, sure. Yes, we've seen the new flexible inflation targeting framework introduced. I believe the agreement was reached on that toward the end of February. As we articulate in the report and in the previous year's Staff Report, we're very much in favor of this move to have CPI inflation as the nominal anchor, to have proper forecasting of CPI inflation brought into the monetary policy framework.

As I said in answer to the earlier question, having the Central Bank with this medium-term target as their objective, we welcome all of these initiatives. As we noted in the last Staff Report and continue to note in this Report, we think this new framework will provide clear objectives and operational autonomy for the Central Bank. So we're certainly supporters of that. We think price stability, given India's long and tortuous history of very high inflation and high expectations of inflation is important.

As to your question about the composition and construct of the monetary policy committee, I don't believe we actually have a view on that. But we're waiting to see what the composition of the committee might be. I think any amendments to the RBI act we'll have to look very closely at that based on the construct and composition of this committee. But we think the first couple of steps in adopting the new monetary framework have been major achievements and we really do think that this will be a game changer in India in terms of rolling back inflation, given India’s long history of quite high inflation.

Your other question was on borrowing costs and monetary transition. Yes, we have a selected issues chapter in the report on monetary transmission. I think it would be fair to say monetary transmission in India is not extremely rapid. Everyone talks a lot about changing the repo rate and the policy rate. The actual transmission through to borrowing and lending rates though, is rather slow. Part of that has to do with the construct of the India financial sector where you still have quite high statutory liquidity requirements and other elements.

We've also noted, as I'm sure you have, that credit growth in India has been rather tepid in recent years. So we would certainly hope that with the new monetary policy framework bringing down inflation, focusing on that, and as I mentioned earlier in answer to the previous questions, then we would see real interest rates rising, enabling proper remuneration for Indian savers. But nonetheless, we would also hope that as the fiscal deficit comes down the SLR requirements would continue to be reduced, and certainly the governor and the RBI have been reducing the SLR numbers over the last year or two. So we would support that continuing as the fiscal deficit comes down. Hopefully that would then improve monetary policy transmission in the financial system.

QUESTIONER: Thank you for doing this. What steps do you think India should take to go back to its growth state of 10 percent? Is it possible anymore?

MR. CASHIN: Well, 10 percent is a very large number; I might let Tom take a shot at that question. But we have a number of recommendations in the report on structural reforms. Once Tom has spoken on that maybe we can come back to the new growth numbers. Tom?

MR. RICHARDSON: Thanks a lot. It's a great question. Of course, you know, in light of the new GDP series we're going to be debating for some time where potential output is and whether 10 percent is an appropriate target.

Without commenting too much on that, let me just say that I think we have for a couple of years, and continue in this report, to urge a whole set of structural reforms that are going to be business-friendly, going to be growth-enhancing. Including, particularly in the power sector, where backward power linkages are important to, sort out one of the major challenges that businesses tell us are hampering investment, and that's lack of reliable power.

I think, you know, in addition, land acquisition, land rights are going to be very important to clarify that and to move forward in a way that allows projects to be initiated clearly and implemented. So from that perspective we do think addressing the land acquisition amendments is putting the right question on the table for India to debate.

I think as well, we see a number of agricultural sector reforms to improve the efficiency of the farm sector more generally. Again, building cold storage chains and ensuring that you can get produce to market without a lot of it wasted in an efficient way, those are important. I think here we are happy the government has taken the steps it has to reduce the public stockpiling of grains that was above what seemed rational from a food security standpoint. We think it's also appropriate that minimum support price increases have been more modest and more in-line with where you'd like inflation to be, so those are positive steps.

But, you know, more generally, you do still have a fairly heavily state-dominated food system, food corporation of India, and the whole public distribution for food, is unusual by international standards. I think, you know, we want to see ways of moving toward more market-based agricultural outcomes. We do think that direct benefit transfer, using cash transfers to provide the subsidies and the food security act are going to be a way to move in that direction.

Finally, from an infrastructure standpoint, a lot of the infrastructure will have to be public infrastructure. I think there, as India urbanizes the need for public infrastructure spending, including in water and sanitation, there's been a lot of work recently on the long-term costs for sanitation in India. Those are important public sector activities. Not only health spending, but also education spending, those are also going to be key to getting growth going. Clearly, India has a big labor force, but that labor force has to be well-education to be competitive on the international market. So I guess I'll stop on those points.

MR. CASHIN: I might just pick up on that for a second. I mentioned earlier on our new growth forecast, we would concur with the Ministry's Budget and the Economic Survey that, definitely, there's a recovery proceeding in India. Although with these new GDP numbers would indicate that it's probably happening at a faster pace than we, and others, previously expected.

I guess the underlying point to your question is what do we think about potential output. That's a difficult concept to measure, particularly when we only have, as you know, several years of data with the new series. But initial indications are that, there's still an output gap, as with the old GDP series, though it may be shrinking faster. We would, at least at this stage for our first-pass estimates, we would peg medium-term growth for India at around 7 3/4 percent at present if, as you say, and as Tom has outlined, some of the structural reforms can be introduced.

Then there's certainly no reason why India could not resume 8 percent, 9 percent, even higher growth path going forward, but it will take some time to introduce these measures. So until we get a little more data and a little more experience with this new GDP series we'll keep working on our near-term and medium-term growth estimates in the future.

QUESTIONER: I just want to make sure I heard the projection for the next fiscal year correctly. It was 7.5 percent GDP growth under the new series? If that's correct that's markedly lower than the projection in the economic survey which is 8.1 to 8.5 percent. What would you say accounts for that difference?

MR. CASHIN: Sure. The actual projections, just to make clear, is for this fiscal year, 14-15, we're projecting around 7 1/4 percent growth.

QUESTIONER: Right.

MR. CASHIN: It's next fiscal year we're projecting 7 1/2 percent, that is FY15-16. So what accounts for those differences? I guess there's several reasons. We note that the CSO itself had a projection of about 7.4 percent. We've come in at 7 1/4 percent. Our previous projection under the old GDP series was about 5 1/2 percent, so it's quite an increase.

Why do we differ from CSO in the first instance? We see, as we've seen in previous years, that to meet the fiscal targets that the government has set for itself it tends to be the case that certainly government spending is very much constrained in the fourth quarter of each fiscal year. We're just coming through that phase right now. So that would account for a lower growth path in our numbers. As well as that, we need to factor in the previous increases in the interest rate which occurred earlier in 2014 which would also be percolating through into the economy now.

For those reasons, plus we're still getting used to the new series, and I do share some of the Ministry's, I believe the word “puzzled” was used by the Chief Economic Advisor and others, in that this GDP series doesn't quite square with some of the high frequency numbers that we see there in terms of capital utilization, corporate profitability, credit growth, and other dimensions. Nonetheless, the fact is that inflation is still coming down. That tends to indicate to me, at least, that there's still slack in the economy, and that's why I say we still see an output gap.

But in terms of our actual growth numbers, we come in at around 7 1/4 percent for this fiscal year. I guess you should refer your inquiry to the Ministry as to how they generated their 8.1 percent growth figure. I can't really speak to that.

QUESTIONER: You say in the report that the Making India Campaign is getting momentum, and yet the report indicates the severe constraints to continuing investments. What do you think is happening? What do you think India needs to do here to improve their investment climate?

MR. CASHIN: I think maybe Tom you were going to take this one?

MR. RICHARDSON: Yes, sure. I think we do still see some stress in the balance sheets of banks and also the corporate sector. As the backlog of infrastructure projects that were initiated a few years ago works its way through the system and works its way into implementation that is a constraint that we highlight in the report.

The Indian financial system, as you know, is heavily bank-led, bank-oriented; it’s a bank-led financial system. So if banks are feeling some stress that is an issue. I would emphasize that we did something called a financial sector assessment, an FSAP, about two and half, three years ago. We do this once in five years for every big systemic country, and so India's next one will come up in a couple of years. But we continue to stand by the broad assessment of the financial system of India which is that it's, broadly, fundamentally well-capitalized, well-supervised, appropriately regulated.

So we don't see systemic concerns, particularly if you look at the numbers for NPAs and the broader set of stressed assets, those under corporate debt restructuring. You know, the trends haven't been very encouraging over the past couple of years, creating some headwinds for investment. That, in the end, was the argument the government gave for expanding infrastructure spending in the budget because, you know, the private sector is somewhat constrained.

So what to do about that? I mean, we do think, of course, that the RBI Governor's on the right track by pressing for payment discipline in the financial system, ensuring that bank loans are repaid and that the debt recovery system is effective. That's going to be important for ensuring that future growth is sustainable.

I also think that the broader effort to improve the business climate is one that merits a lot of attention. As you know, government has put emphasis on raising India's ranking in the World Bank Doing Bbusiness survey rankings. We think that there are a lot of things, some low hanging fruits actually, that can be plucked to raise India's ranking on those scores.

One thing I would mention which has come up in the budget speech, and it is quite important, is the idea of enhancing the bankruptcy or insolvency regime. As an economist, of course, we're all worried about new businesses coming into the market and encouraging them. But we also know that many businesses fail and that's normal. That's a normal part of capitalism. For businesses to fail and for those assets then to be quickly and efficiently transformed into productive assets for new firms you have to have a functioning and effective, quickly resolving insolvency regime. There, I think, we're quite enthusiastic about steps that they're taking.

I would also say, finally, on this that the tax administration regime of India could be made more business-friendly. I think that, certainly, was a motivation of the Minister in the budget speech. There's clearly some attention to that. One thing that got some attention in the budget speech, but not as much, perhaps, as it should have, was the effort to reform the tax administration system. He mentioned the Tax Administration Reform Commission report that has been coming out in volumes over the course of the past year. The final volume is out now.

We do support the effort to modernize tax administration or revenue administration in India. Setting up a modern revenue administration system could ensure that you can collect enough revenue at minimal cost to businesses. We think there is actually a win/win here that government can actually collect more revenue, and make it easier for people to pay taxes, and therefore, improve India's ranking on the doing business survey. So it's one of those cases where it's not a zero sum game. There's the win/win here.

MS. UTSUNOMIYA: Paul, Tom, do you want to add anything?

MR. CASHIN: Just one thing I might add is is to make sure that people are aware that the Managing Director, Christine Lagarde, will be visiting India soon. She'll be in Delhi on March the 16th, and the moving down to Mumbai on March the 17th. She'll have a couple of speeches and remarks and presentations at several events. So this will be an opportunity to see her and ask her questions on our view on the Indian economy at that time as well.

MR. RICHARDSON: One last thing. I think I would encourage people to look at the second volume of the Article IV consultation, the Selected Issues Papers. There are 12 reports. They're short, quick reads, but covering a whole set of issues that are important for India's long term and near term development. We tried to find a way of elucidating our views on a bunch of different issues. Happy to take questions on those reports after this and we'll try to find ways either in the form of IMF working papers or opinion pieces in the papers to throw those opinions out there for discussion more generally. So we are encouraging you to take a look at that as well.

MS. UTSUNOMIYA: We will conclude the conference call. Thank you.

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