India: Selected Issues

Publication Date: February 20, 2014
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Summary: EXECUTIVE SUMMARY The background papers for the 2014 Article IV explore key issues affecting the Indian economy, and implications for fiscal, monetary, structural, and financial sector policies. The first chapter uncovers the factors behind the unprecedented widening of India’s current account deficit in terms of the sectoral savings-investment balance. Persistently-high inflation is found to have depressed real returns, prompting a surge in gold imports and a marked deterioration in household financial savings. The second chapter investigates inward and outward spillovers to and from India. The results show that output shocks emanating in globally-systemic countries have important global effects, but their impact on India is limited. Shocks originating in India have relatively small global implications, but are very important for several South Asian economies. The third chapter investigates the role of monetary policy in the context of high and persistent food and fuel inflation. As the second-round effects on core inflation are large, in order to durably reduce inflation, monetary policy will need to maintain a tight stance for a prolonged period of time. In addition, progress on structural reforms to raise potential growth is critical to reduce the burden on monetary policy. The fourth chapter explores progress in poverty reduction and inclusive growth. Robust economic growth has been a major driver of poverty reduction and inclusiveness. Social expenditures, spending on education, and educational attainment rates are important for fostering inclusive growth; while macro-financial stability, with particular attention to inflation risks, is critical for sustaining inclusive growth. The fifth chapter explores the change in vulnerabilities of India’s non-financial corporates which has taken place since the global financial crisis (GFC). Based on four commonly-used indicators of financial strength, vulnerabilities of India’s corporate sector are found to be higher than at the trough of the GFC, and at their highest since the early 2000s. The sixth chapter examines the factors behind the recent investment slowdown in India. The results suggest that in addition to standard macro-financial variables, heightened uncertainty and deteriorating business confidence have played an important role. In contrast, the contribution of interest rates has been minor. The seventh chapter explores the likely impacts of product and labor market reforms. Analysis suggests that these reforms can increase employment, boost exports, and raise potential growth, thereby helping to harness India’s demographic dividend. A package of reforms would reinforce the gains, minimize short-term costs, and increase the acceptability of these politically-difficult reforms.
Series: Country Report No. 14/58
Subject(s): Spillovers | Current account deficits | Public investment | Public sector savings | Corporate sector | Economic growth | Poverty reduction | Monetary policy | Inflation | Selected issues | India

Publication Date: February 20, 2014
ISBN/ISSN: 9781484309001/1934-7685 Format: Paper
Stock No: 1INDEA2014002 Pages: 45
US$18.00 (Academic Rate:
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