## cr18254

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### Overview
- Key focus: macro-financial and structural policies to boost inclusive growth, including to harness the demographic dividend.
- Recent important reforms implemented: the inflation-targeting monetary policy framework, the Insolvency and Bankruptcy code (IBC), the goods and services tax (GST), and steps to liberalize foreign direct investment (FDI) flows and the ease of doing business.
- Policy priorities: further deepen and broaden structural reforms—especially financial sector reforms and simplifying and streamlining the GST—combined with a vigorous push for labor, land, and product market reforms.
- Political context: General elections will be held by May 2019; government policies have shifted mainly to accelerating implementation of ongoing reforms rather than initiating new ones, and budget pressures could increase in the coming months.
- Macroeconomic policy stance: broadly consistent with past Fund advice; monetary stance in FY2017/18 aimed at durably lowering sticky inflation expectations given temporary weakness in growth and headline inflation.
- Bank and corporate balance sheet measures underway; recent labor reforms include extension of fixed-term contracts beyond textiles and leather.

### Recent developments, outlook, and risks (FY2017/18 and near term)
Findings and recent macroeconomic developments (FY2017/18)
- GDP growth slowed to a 4-year low of 6.7 percent.
- Growth reached 7.7 percent in the quarter through March 2018 (y/y).
- Headline inflation averaged 3.6 percent, a 17-year low.
- Output gap narrowed to -0.3 percent of potential GDP (staff estimate).
- Core inflation: 6.2 percent in May (y/y); headline inflation in recent print: 4.9 percent.
- Current account deficit (CAD) widened to 1.9 percent of GDP.
- RBI intervened to limit INR appreciation to about 3.1 and 1.4 percent on average during 2017/18 in real and nominal effective terms (according to the IMF’s Information Notice System).
- Gross international reserves rose by US$54.6 billion during 2017/18 to US$424.5 billion (about 8 months of prospective imports of goods and services) in March 2018.
- Non-oil merchandise exports (US$ value) expanded by 12 percent in calendar year 2017.
- Bank credit growth recovered to 12.5 percent (y/y) in May.
- NPA ratio for the total banking sector increased to 11.6 percent in March 2018 compared to 9.6 percent a year ago.
- About 70 percent of the banking system’s assets are in Public Sector Banks (PSBs); 11 PSBs have been put under the prompt corrective action (PCA) framework effective April 2017.
- PSB recapitalization plan announced in October 2017 will add at least 0.8 percent of GDP to public debt (financed through recapitalization bonds); government expects PSBs to raise an additional 0.3 percent of GDP from the market over two years.
- PSBs raised INR 120 billion of the planned INR 580 billion in late FY2017/18 through the equity market and the sales of non-core assets.
- In the ten weeks since April 13 (2018), net portfolio outflows amounted to US$9.3 billion or about 0.3 percent of GDP; the rupee depreciated by about four percent vis-à-vis the U.S. dollar.
- From mid-April to mid-June 2018, foreign exchange reserves fell by about US$16 billion (from US$426 billion).

Outlook and projections
- Real GDP growth projected at 7.3 percent for FY2018/19, on strengthening investment and robust private consumption.
- Headline inflation projected to rise to 5.2 percent.
- CAD projected to widen to 2.6 percent of GDP.
- International oil prices projected to average US$72 per barrel in FY2018/19, up from US$62/barrel in the Spring 2018 IMF WEO.
- Baseline Text Table 1 entries:
  - Oil price (US$/barrel): 2017/18 52.87; 2018/19 71.86; 2019/20 67.5
  - Growth (percent): 2017/18 Baseline 6.7; 2018/19 Baseline 7.3; 2019/20 Baseline 7.5
  - Inflation (percent): 2017/18 Baseline 3.6; 2018/19 Baseline 5.2; 2019/20 Baseline 4.8
  - Current account (percent of GDP): 2017/18 Baseline -1.9; 2018/19 Baseline -2.6; 2019/20 Baseline -2.2
- Medium term: real GDP growth expected to rise to 7¾ percent reflecting private consumption, recovery in investment, progress in bank balance-sheet repair, improved credit growth, and on-going structural reforms.
- Potential growth estimated 0.5 percentage points lower than in the last Article IV consultation due to slower-than-previously-envisaged impact of structural reform and a downward revision to the historical GDP time series.

Risks (tilted to the downside)
- External: further increase in international oil prices; tightening global financial conditions intensifying capital flow reversals and external borrowing costs; retreat from cross-border integration or global trade conflict affecting exports.
- Domestic: tax revenue shortfalls related to GST implementation issues; delays in addressing twin balance sheet problems; slow progress in structural reforms.
- Given India’s relatively low trade openness, spillovers from a global trade conflict likely contained; outward spillovers likely limited to Nepal and Bhutan.

### Authorities’ near-term views
- Authorities expect recovery to strengthen with normal monsoon, expanding industrial output, and robust services growth.
- Supported by: pickup in bank credit, improving capacity utilization, and significant rise in infrastructure investment (notably road construction).
- Near-term risks identified by authorities: volatile oil prices and tightening global financial conditions.
- Authorities’ inflation forecast for FY2018/19: 4.6 percent (below staff’s projection); noted statistical impact of HRA is 0.35 percentage point on headline inflation.

### Key policy synthesis and macro-financial priorities
- With limited policy space and growing risks, priority is to:
  - step up supply-side measures to revive credit growth and promote inclusive growth;
  - continue fiscal consolidation to lower elevated public debt levels;
  - have the RBI gradually tighten policy further to build monetary policy credibility.
- Medium-term priorities:
  - revive bank credit and enhance efficiency of credit provision by accelerating cleanup of bank and corporate balance sheets;
  - decisive strengthening of PSB governance;
  - simplify and streamline the GST structure and broaden the tax base;
  - longer-term reforms: greater labor market flexibility, land reforms, and product market liberalization.
- Immediate priority reiterated: revive bank credit and enhance efficiency of credit provision.

### A. Fiscal Policy — Enhancing Sustainability
FY2017/18 fiscal developments
- Fiscal consolidation paused in FY2017/18; central government deficit remained at the FY2016/17 outturn of 3.5 percent of GDP (authorities’ presentation; provisional accounts) and above the budget target of 3.2 percent of GDP.
- IMF presentation estimates the deficit deteriorated by 0.3 percent of GDP relative to FY2016/17.
- Non-tax revenue declined sharply; tax revenue rose slightly; expenditures reduced mainly via lower capital spending.
- Lower-than-budgeted telecom spectrum sales, dividends from public sector enterprises, and profit transfers from the RBI reduced non-tax revenue receipts.

Selected fiscal items (Text Table 2, in percent of GDP)
- Total revenues: FY2016/17 Actual 9.3; FY2017/18 Actual 9.3; FY2018/19 Budget 8.8; FY2018/19 Actual 9.4
- Net tax revenues: FY2016/17 Actual 7.3; FY2017/18 Actual 7.4; FY2018/19 Budget 7.4; FY2018/19 Actual 7.9
- Non-tax revenues: FY2016/17 Actual 2.0; FY2017/18 Actual 1.9; FY2018/19 Budget 1.4; FY2018/19 Actual 1.5
- Total expenditure: FY2016/17 Actual 13.0; FY2017/18 Actual 12.9; FY2018/19 Budget 12.8; FY2018/19 Actual 13.0
- Capital expenditure: FY2016/17 Actual 1.9; FY2017/18 Actual 1.8; FY2018/19 Budget 1.6; FY2018/19 Actual 1.6
- Central government balance: FY2016/17 Actual -3.7; FY2017/18 Actual -3.5; FY2018/19 Budget -4.0; FY2018/19 Actual -3.6
- General government balance: FY2016/17 Actual -6.7; FY2017/18 Actual -6.5; FY2018/19 Budget -7.0; FY2018/19 Actual -6.6
- Fiscal deficit (authorities' definition) 1/: FY2016/17 3.5; FY2017/18 3.2; FY2018/19 3.5; FY2018/19 3.3
- Public debt: FY2016/17 68.9; FY2018/19 70.4; FY2018/19 68.7

FY2018/19 budget overview and staff advice
- Authorities’ presentation: reduction of about 0.2 percent of GDP in the headline fiscal deficit; IMF projects a reduction of 0.4 percent of GDP (0.3 percent of potential GDP in cyclically-adjusted terms).
- Net revenues budgeted to increase, roughly half from increased direct tax collections.
- Budget measures include: introduced long-term capital gains tax on equities at a 10 percent rate; raised custom duties on several items; lowered excise rates on petrol and diesel.
- Key unfunded initiative: offer farmers a MSP of 1.5 times production cost.
- Budget announced launch of a national healthcare scheme to cover 500 million potential beneficiaries.
- Establishment of an Affordable Housing Fund (0.2 percent of GDP, financed mostly off-budget).

FRBM Review Committee response
- Government accepted medium-term fiscal targets but with delayed timetable:
  - Fiscal deficit (operational target) to be reduced to 3.0 percent of GDP (authorities’ definition) by FY2020/21, two years later than recommended.
  - Central government debt to be brought down to 40 percent of GDP by FY2024/25, two years later than recommended.
  - Recommendation to set up a fiscal council was not approved.

Staff recommendations and scenarios
- Staff supports FY2018/19 budget targets but urges readiness to take corrective measures if slippages occur.
- Concerns: limited fiscal space, high interest burden, large states' deficits and debt, revenue risks from GST, and expenditure risks.
- Policy recommendations:
  - Enhance GST compliance by streamlining filing and refund mechanisms and simplifying the rate structure.
  - Strengthen tax administration; pursue fewer rates and a broader base.
  - Consider including petroleum products in the GST.
  - Limit fiscal cost of proposed increase in MSPs and avoid increasing fuel subsidies (or alternatively reduce fuel excise taxes).
  - Monitor rising interest rates which could pressure government’s interest burden.
- Staff recommends a more ambitious medium-term consolidation path than authorities envisage:
  - Alternative scenario targets general government debt of 60 percent of GDP by FY2022/23 via greater tax buoyancy and subsidy cuts.
  - Implied cumulative improvement in cyclically-adjusted primary balance of about 1.3 percent of potential GDP over 4 years.

Fiscal reporting and subnational fiscal management
- Staff encourages upgrading fiscal-reporting framework and harmonizing state budgetary processes; reduce reporting lags.
- Broaden coverage of expenditures to capture off-budget spending risks.

### B. Monetary and Exchange Rate Policy — Consolidating Credibility
Monetary stance and transmission
- Policy rate had been on hold since August 2017 at 6 percent; June rate hike raised policy rate to 6.25 percent.
- Staff assessment: monetary policy conditions broadly neutral based on staff estimates of the natural rate of interest (about 1.45 percent) and one-year ahead inflation expectations (4.8 percent).
- Headline and core inflation rising and forecast to be above the mid-point of the RBI’s medium-term inflation target band.
- Inflation risks tilted to the upside: higher oil prices, potential changes to MSPs, exchange rate depreciation, fiscal slippages, second-round effects from HRAs, and increased import duties.
- Tighter monetary policy will make reviving the credit cycle more challenging.
- To improve monetary transmission: enhance competition in banking, streamline credit pricing, address fragmentation of interbank markets, and continue communication improvements.

External position assessment
- External position assessed broadly consistent with fundamentals and desirable policy settings.
- External debt around 20 percent of GDP.
- Gross reserves at end FY2017/18: more than 160 percent and about 210 percent of the standard and capital flow measures-adjusted IMF metrics, respectively.
- Recommendation: consider further liberalization of portfolio inflows cautiously while weighing capital flow volatility risks.

### Exchange rate stance
- Recommendation: continue to rely on exchange rate flexibility; interventions should be two-way and limited to disorderly market conditions.
- In event of severe external pressures or higher oil prices: exchange rate flexibility complemented by tighter fiscal and monetary policies recommended.
- Negative balance sheet effects from rupee depreciation likely contained per Debt Sustainability Analysis and FSAP stress tests.

### Authorities’ views on monetary and exchange rate policy
- Authorities intend forward-looking monetary policy calibrated to achieve medium-term inflation target.
- Authorities’ forecast of headline inflation in FY2018/19: 4.6 percent.
- They would look through direct HRA effects; emphasized headline inflation is the official target.
- Authorities concurred external position broadly consistent with fundamentals and desirable settings, agreed with a CA norm of -2.5 percent of GDP, and felt a CAD above 3 percent of GDP may pose financing difficulties.
- Confirmed exchange rate flexibility would continue; interventions will smooth rupee movements and augment external buffers during inflows.

### C. Financial and Corporate Sector — Addressing the twin balance sheet problem
Initiatives and supervisory measures
- Initiatives: AQR, recognition of NPAs, new PCA framework, PSB recapitalization, RBI-directed referrals of large corporate accounts to IBC; referrals represented about 40 percent of PSBs’ outstanding NPAs by value.
- Five of the 12 accounts from the first referral batch are now resolved or nearing final stages.
- RBI introduced a new simplified framework for resolution of stressed assets; banks directed to resolve stressed assets of INR 20 billion and above within 180 days or approach IBC within 15 days.
- Banks reclassified restructured loans to NPAs (e.g., PSBs reduced restructured loans from 2.7 percent in September 2017 to 1.1 percent in March 2018), increasing NPA ratios and provisioning needs.
- Higher provisioning coverage: 40 percent required for NPAs versus 5 percent for restructured loans.

Staff recommendations on financial sector reforms
- Strengthen governance and accelerate implementation:
  - Speed up NPA resolution and complete PSB recapitalization.
  - Improve bank governance and reduce public sector role in financial system.
  - Enhance bank lending capacity and practices.
- Governance recommendations include removing RBI representatives from banks’ boards and better defining board members’ terms of reference.
- Promote private-sector alternatives and consider more aggressive PSB disinvestment and privatization.
- Gradually reduce SLR to deepen markets and encourage lending; reexamine priority sector lending (PSL) targets.
- Amend legal framework to provide RBI full regulatory and supervisory powers over PSBs per FSAP follow-up.

Authorities’ views on banking reforms
- Authorities stressed implementation focus; expect IBC to speed up NPA resolution and expect NPA ratio to peak within a year.
- Emphasized PSBs’ role in financial access; argued for gradual reduction of government presence in financial sector.
- RBI progressively reducing SLR; noted ratio currently not binding and banks maintain SLRs above requirement.

### Structural reforms — Boosting investment and inclusive growth
- Structural challenges: low income per capita, widening income disparities, small manufacturing sector due to rigidities in labor, land, and product markets.
- Reform priorities to raise productivity and sustain higher growth:
  - Labour market modernization (streamline laws into four Labor Codes; extend fixed-term contracts).
  - Land reforms to speed infrastructure and investment approvals.
  - Product market liberalization and trade liberalization.
  - Simplify and streamline the GST to boost formalization and internal trade.

Trade policy and WTO issues
- Trade barriers and cumbersome procedures remain significant; average most favored nation applied tariff rate was 13.4 percent as of 2016.
- Policy recommendations: reduce non-tariff barriers, stabilize and subsequently decrease tariffs, implement supply-side reforms to improve business climate.
- WTO issues: U.S. challenged India’s export subsidy schemes; U.S. questioned India’s methodology on market price support; authorities concerned about global trade-system fallout from U.S. tariffs.

Agriculture and rural reforms
- Sustained inclusive growth requires agricultural reforms to boost productivity and build integrated markets.
- MSPs could skew production, add to inflation, and enlarge fiscal burden; recommended use of MSPs be temporary and targeted.
- Recent initiatives: assured irrigation system, e-NAM, Gramin Agricultural Markets (GrAM), Agri-Market Infrastructure Fund (INR 20 billion corpus).
- Further actions: revamp procurement processes and PDS, restructure Food Corporation of India operations, check PDS leakages, continue subsidy streamlining through DBTs.

### Key macroeconomic projections and indicators (selected)
- Real GDP growth (at market prices):
  - 2017/18 (Est.): 6.7 percent
  - 2018/19 (Proj.): 7.3 percent
  - 2019/20 (Proj.): 7.5 percent
- General government debt (percent of GDP):
  - 2017/18 (Proj.): 70.4
  - 2018/19 (Proj.): 68.7
  - 2019/20 (Proj.): 67.2
- Current account balance (in billions of U.S. dollars):
  - 2017/18: -48.7
  - 2018/19 (Proj.): -70.6
  - 2019/20 (Proj.): -68.3
- Gross reserves (end-period, in billions of U.S. dollars):
  - 2017/18: 424.5
  - 2018/19 (Proj.): 420.4
  - 2019/20 (Proj.): 434.7

### External sector assessment and policy implications
- External position assessed broadly consistent with fundamentals and desirable policy settings.
- NIIP improved from -18.1 percent of GDP at end FY2014/15 to -17.3 percent of GDP as of end-2017.
- External debt about 20 percent of GDP; 48 percent denominated in U.S. dollars, 37 percent in Indian rupees; long-term external debt accounts for about 81 percent.
- Policy responses: increase non-debt creating capital flows (FDI); consider gradual liberalization of portfolio flows while monitoring reversal risks; maintain exchange rate flexibility with limited intervention for disorderly conditions.

### Boxes, stress tests, and fiscal diagnostics (selected)
- Box 1 (Demonetization): November 2016 withdrawal removed 87 percent of currency in circulation; RBI collected 99 percent of cancelled notes; remonetization largely complete.
- Box 2 (GST impact): GST effective July 1, 2017; transitional costs contributed to growth slowing to 6 percent (y/y) in first half of FY2017/18; features include four non-zero tax rate tiers and many exemptions.
- Box 3 (PSB Recapitalization): two-year recapitalization plan INR 2.1 trillion (1.3 percent of GDP) announced October 2017; composition and coverage detailed.
- Box 4 (Potential Output): potential growth estimated at 7.3 percent in FY2017/18; ongoing reforms likely to boost potential growth to around 7¾ percent over the medium term.
- Debt Sustainability Analysis: nominal gross public debt series and stress-test scenarios indicate baseline debt-to-GDP slightly above 70 percent; gross financing needs below 15 percent of GDP threshold.

### Appendices — Key policy actions and FSAP recommendations (selected)
Appendix I — Key Policy Actions 2017–18 (selected)
- Financial sector: Banking Regulation (Amendment) Act, 2017; RBI’s lists of defaulters and referrals to NCLT; PSB recapitalization plan INR 2.1 trillion; Revised Framework on NPA Resolution; regulatory forbearance on mark-to-market losses.
- Monetary policy: narrowed rate corridor; SLR reductions; policy repo rate raised to 6.25 percent in June 2018.
- Fiscal policy: GST rolled out July 1, 2017; tax policy changes in Budget 2018/19 (e.g., reduced corporate tax rate to 25 percent for MSMEs; long-term capital gains tax at 10 percent for amounts exceeding INR 0.1 million).
- Agriculture: Model Agricultural Produce and Livestock Marketing Act, 2017; MSP proposals; GrAMs and Agri-Market Infrastructure Fund.
- FDI policy: allowed 100 percent FDI under automatic route for several sectors (January 2018).

Appendix III — Main Recommendations of the 2017 FSAP (selected)
- Improve governance and financial operations of PSBs; conduct granular assessments of banks’ capital needs; redesign corporate debt restructuring mechanisms.
- Amend legal framework to provide RBI full supervisory powers over PSBs.
- Progressively reduce SLR; undertake diagnostic of PSL program; improve market infrastructure oversight and crisis management frameworks.

Appendix II — Risk Assessment Matrix (selected risks and policy responses)
- Delays in addressing twin balance sheet problems: Likelihood M; Impact H; policies: proceed with recapitalization and broader package for NPA resolution and governance reforms.
- Fiscal revenue shortfalls related to GST: Likelihood H; Impact H; policies: simplify GST, strengthen tax administration.
- Tighter global financial conditions: Likelihood H; Impact M; policies: rupee flexibility and monetary tightening; use reserves to prevent disorderly exchange rate movements.

### Capacity development and data issues
- IMF capacity development scaled up via SARTTAC: training and TA in national accounts, BOP/IIP statistics, PFM, and capital flow management; 235 Indian officials received training through SARTTAC to date.
- Statistical issues: timeliness and coverage gaps in some series (state fiscal data lags, limited coverage of other financial corporations in monetary statistics, trade data valuation issues). Improvements underway.

### Staff appraisal — policy stance and recommendations (summary)
- After transitory disruptions (demonetization, GST), activity has picked up; India is again one of the world’s fastest-growing economies.
- Risks tilted to the downside (oil, global financial conditions, trade tensions, domestic GST revenue and banking problems).
- Policy mix should emphasize supply-side measures to promote inclusive growth; limited policy space implies premium on prudent macroeconomic policies.
- Fiscal: continue consolidation, achieve FY2018/19 revenue targets, enhance GST compliance, adopt more ambitious medium-term consolidation to reach 60 percent of GDP general government debt by FY2022/23.
- Monetary: recent tightening appropriate; further gradual tightening needed; improve monetary transmission.
- Financial sector: accelerate resolution of stressed assets, complete PSB recapitalization, improve PSB governance, consider disinvestment/privatization, follow up on FSAP recommendations.
- Trade and capital flows: benefit from further liberalization; cautiously continue capital account liberalization.
- Structural: modernize labor regulations, address infrastructure bottlenecks and agricultural reforms, implement land reforms and market-integration measures.

_International Monetary Fund — Selected excerpts from the India 2018 consultation chapter (cr18254)._

### 2018. The team comprised Mr. Salgado (head), Mr. Almekinders, Mr.

### INDIA

### OVERVIEW
- A key focus of this consultation is macro-financial and structural policies to boost inclusive growth, including to harness the demographic dividend.
- While India has been one of the fastest-growing large economies in recent decades, investment growth has been comparatively modest and formal job growth insufficient, creating challenges for jobs for a young and growing population and sustaining inclusive growth.
- Important reforms implemented in recent years include the inflation-targeting monetary policy framework, the Insolvency and Bankruptcy code (IBC), the goods and services tax (GST), and steps to liberalize foreign direct investment (FDI) flows and the ease of doing business (Appendix I).
- Policy priorities: further deepen and broaden structural reforms—especially financial sector reforms and simplifying and streamlining the GST—combined with a vigorous push for labor, land, and product market reforms.
- General elections will be held by May 2019; government policies have shifted mainly to accelerating implementation of ongoing reforms rather than initiating new ones, and budget pressures could increase in the coming months.
- Macroeconomic policies have been broadly consistent with past Fund advice; monetary stance in FY2017/18 aimed at durably lowering sticky inflation expectations given temporary weakness in growth and headline inflation.
- The government did not achieve its FY2017/18 fiscal consolidation target, partly because of one-off factors including the introduction of the GST.
- Steps are being taken to address bank and corporate balance sheet problems and revive credit; recent labor reforms (extension of fixed-term contracts beyond textiles and leather) move in the direction of past Fund advice, but further reforms to labor laws, trade policies, infrastructure, and product markets are needed.

### RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

Findings and recent macroeconomic developments (FY2017/18)
- GDP growth slowed to a 4-year low of 6.7 percent.
- Growth reached 7.7 percent in the quarter through March 2018 (y/y) following recovery from demonetization and the July 2017 GST rollout.
- Headline inflation averaged 3.6 percent, a 17-year low.
- Output gap narrowed to -0.3 percent of potential GDP (staff estimate).
- Core inflation: 6.2 percent in May (y/y); headline inflation in recent print: 4.9 percent.
- Current account deficit (CAD) widened to 1.9 percent of GDP.
- RBI intervened to limit INR appreciation to about 3.1 and 1.4 percent on average during 2017/18 in real and nominal effective terms (according to the IMF’s Information Notice System).
- Gross international reserves rose by US$54.6 billion during 2017/18 to US$424.5 billion (about 8 months of prospective imports of goods and services) in March 2018.
- Non-oil merchandise exports (US$ value) expanded by 12 percent in calendar year 2017, a 6-year high.
- Bank credit growth recovered to 12.5 percent (y/y) in May.
- NPA ratio for the total banking sector increased to 11.6 percent in March 2018 compared to 9.6 percent a year ago.
- About 70 percent of the banking system’s assets are in Public Sector Banks (PSBs); 11 PSBs have been put under the prompt corrective action (PCA) framework effective April 2017.
- A plan to recapitalize PSBs, announced in October 2017, will add at least 0.8 percent of GDP to public debt (financed through recapitalization bonds); government expects PSBs to raise an additional 0.3 percent of GDP from the market over two years.
- PSBs raised INR 120 billion of the planned INR 580 billion in late FY2017/18 through the equity market and the sales of non-core assets.
- In the ten weeks since April 13 (2018), net portfolio outflows amounted to US$9.3 billion or about 0.3 percent of GDP; the rupee depreciated by about four percent vis-à-vis the U.S. dollar.
- From mid-April to mid-June 2018, foreign exchange reserves fell by about US$16 billion (from US$426 billion).

Outlook and projections
- Real GDP growth projected at 7.3 percent for FY2018/19, on strengthening investment and robust private consumption.
- Headline inflation projected to rise to 5.2 percent, above the mid-point of the RBI’s medium-term inflation target band (4 percent CPI inflation ± 2 percent).
- CAD projected to widen to 2.6 percent of GDP.
- International oil prices are projected to average US$72 per barrel in FY2018/19, up from US$62/barrel in the Spring 2018 IMF World Economic Outlook (WEO).
- Baseline Text Table 1 entries:
  - Oil price (US$/barrel): 2017/18 52.87; 2018/19 71.86; 2019/20 67.5
  - Growth (percent): 2017/18 Baseline 6.7; 2018/19 Baseline 7.3; 2019/20 Baseline 7.5
  - Inflation (percent): 2017/18 Baseline 3.6; 2018/19 Baseline 5.2; 2019/20 Baseline 4.8
  - Current account (percent of GDP): 2017/18 Baseline -1.9; 2018/19 Baseline -2.6; 2019/20 Baseline -2.2
- Over the medium term, real GDP growth is expected to rise to 7¾ percent reflecting continued private consumption, a recovery in investment, progress in bank balance-sheet repair, improved credit growth, and on-going structural reforms (notably GST effects).
- Potential growth is estimated 0.5 percentage points lower than in the last Article IV consultation due to a slower-than-previously-envisaged impact of structural reform and a downward revision to the historical GDP time series (Box 4).

Risks (tilted to the downside)
- External: further increase in international oil prices; tightening of global financial conditions that could intensify capital flow reversals and add to external borrowing costs; retreat from cross-border integration or global trade conflict affecting exports.
- Domestic: tax revenue shortfalls related to GST implementation issues; delays in addressing twin balance sheet problems could further deteriorate bank and corporate balance sheets; slow progress in structural reforms could weigh on investor sentiment, investment, and growth.
- Given India’s relatively low trade openness, spillover risks of a global trade conflict are likely contained, to the extent that it does not affect capital flows.
- India’s outward spillovers likely limited to neighboring economies Nepal and Bhutan, given trade ties and their currency pegs to the Indian rupee.

*Source: INDIA, INTERNATIONAL MONETARY FUND.*

### 11. The authorities broadly agreed with the staff’s assessment of the outlook and risks.

### 11. The authorities broadly agreed with the staff’s assessment of the outlook and risks.

### Outlook and near-term risks
- Authorities expected the economic recovery to continue to strengthen and be broad-based as:
  - agricultural output improves on the back of a predicted normal monsoon;
  - industrial output expands in line with growing domestic and external demand; and
  - services sector growth remains robust.
- Observed developments supporting the outlook:
  - strong pickup in credit from banks and other financing sources to the commercial sector compared to last year;
  - improving capacity utilization and credit uptake, supporting robust investment activity despite some recent tightening of financing conditions;
  - significant rise in infrastructure investment, particularly in road construction, with government focus on demand and job creation through spending on rural and labor-intensive infrastructure likely to support rural demand.
- Near-term risks identified by authorities:
  - volatile oil prices; and
  - tightening global financial conditions.
- Inflation views:
  - Authorities indicated their projections were lower than staff’s.
  - Noted statistical impact of the HRA is 0.35 percentage point on headline inflation and advised looking through that, arguing only the second-round impact is relevant for policy.
  - Substantial uncertainty regarding the inflationary impact of higher MSPs, pending the operationalization of the mechanism to set and pay the higher prices.

### Key policy issues (staff synthesis)
- With limited policy space, growing risks, and a recovering economy, priority is to:
  - step up supply-side measures to revive credit growth (including to businesses) and promote inclusive growth;
  - continue fiscal consolidation to lower elevated public debt levels and allow for easing of financial repression;
  - have the RBI gradually tighten policy further, in response to inflation pressures, to build monetary policy credibility.
- Financial sector reforms advice anchored by recent FSAP recommendations (Appendix III).

### Macro-financial and structural policy priorities
- Medium-term priorities to boost inclusive growth and harness demographic dividend:
  - revive bank credit and enhance efficiency of credit provision by accelerating cleanup of bank and corporate balance sheets;
  - decisive strengthening of PSB governance;
  - simplify and streamline the GST structure and broaden the tax base;
  - longer-term reforms: greater labor market flexibility, land reforms, and product market liberalization.
- Immediate priorities:
  - revive bank credit and enhance efficiency of credit provision.

### A. Fiscal Policy — Enhancing Sustainability
- FY2017/18 fiscal developments:
  - Fiscal consolidation paused in FY2017/18; planned reduction in central government deficit target did not materialize.
  - Central government deficit remained at the FY2016/17 outturn of 3.5 percent of GDP (authorities’ presentation; provisional accounts) and above the budget target of 3.2 percent of GDP.
  - IMF presentation estimates the deficit deteriorated by 0.3 percent of GDP relative to FY2016/17.
  - Relative to FY2016/17 outturn, non-tax revenue declined sharply, partly offset by a small increase in tax revenue and a reduction in expenditures, mainly lower capital spending.
  - Lower-than-budgeted telecom spectrum sales, dividends from public sector enterprises, and profit transfers from the RBI reduced non-tax revenue receipts; heightened enforcement helped boost tax revenue.
- Text Table 2 (selected items, in percent of GDP):
  - Total revenues: FY2016/17 Actual 9.3; FY2017/18 Actual 9.3; FY2018/19 Budget 8.8; FY2018/19 Actual 9.4
  - Net tax revenues: FY2016/17 Actual 7.3; FY2017/18 Actual 7.4; FY2018/19 Budget 7.4; FY2018/19 Actual 7.9
  - Non-tax revenues: FY2016/17 Actual 2.0; FY2017/18 Actual 1.9; FY2018/19 Budget 1.4; FY2018/19 Actual 1.5
  - Total expenditure: FY2016/17 Actual 13.0; FY2017/18 Actual 12.9; FY2018/19 Budget 12.8; FY2018/19 Actual 13.0
  - Capital expenditure: FY2016/17 Actual 1.9; FY2017/18 Actual 1.8; FY2018/19 Budget 1.6; FY2018/19 Actual 1.6
  - Central government balance: FY2016/17 Actual -3.7; FY2017/18 Actual -3.5; FY2018/19 Budget -4.0; FY2018/19 Actual -3.6
  - General government balance: FY2016/17 Actual -6.7; FY2017/18 Actual -6.5; FY2018/19 Budget -7.0; FY2018/19 Actual -6.6
  - Fiscal deficit (authorities' definition) 1/: FY2016/17 3.5; FY2017/18 3.2; FY2018/19 3.5; FY2018/19 3.3
  - Public debt: FY2016/17 68.9; FY2017/18 ...; FY2018/19 70.4; FY2018/19 68.7
  - 1/ Includes asset sales in receipts, and excludes certain non-tax revenue items.
- FY2018/19 budget overview:
  - Authorities’ presentation: reduction of about 0.2 percent of GDP in the headline fiscal deficit;
  - IMF projects a reduction of 0.4 percent of GDP (0.3 percent of potential GDP in cyclically-adjusted terms).
  - Net revenues budgeted to increase as a share of GDP, roughly half from an increase in direct tax collections.
    - Personal income taxes (PIT) boosted by base-broadening and enforcement measures.
    - Slight fall in corporate income taxes (CIT) following a modest tax rate cut for MSMEs.
    - Indirect tax revenue budgeted to rise mainly on improved GST compliance.
  - Budget measures:
    - introduced a long-term capital gains tax on equities at a 10 percent rate;
    - raised custom duties on several items;
    - lowered excise rates on petrol and diesel.
  - Expenditures budgeted to increase as a share of GDP, primarily reflecting higher subsidy payments, offset by lower interest expenses.
  - Key unfunded government initiative: offer farmers a MSP of 1.5 times production cost.
  - Budget announced launch of a national healthcare scheme to cover 500 million potential beneficiaries (about 100 million households); details yet to be finalized.
  - Establishment of a dedicated Affordable Housing Fund (0.2 percent of GDP, financed mostly off-budget).
- FRBM Review Committee recommendations and government response:
  - Government accepted medium-term fiscal targets but with delayed timetable.
  - Fiscal deficit (operational target) to be reduced to 3.0 percent of GDP (authorities’ definition) by FY2020/21, two years later than recommended.
  - Central government debt to be brought down to 40 percent of GDP by FY2024/25, two years later than recommended.
  - Recommendation to set up a fiscal council was not approved.
- Staff advice and risks:
  - Staff supports FY2018/19 budget targets but authorities should stand ready to take corrective measures if slippages occur.
  - Concerns:
    - India has limited fiscal space as debt is close to thresholds that increase likelihood of debt distress among emerging market economies (Appendix IV).
    - High interest burden and risks from rising yields necessitate continued focus on debt reduction.
    - States' aggregate deficits and debt are large; spending pressures pose risks (farm loan repayment waivers, UDAY scheme, Seventh Pay Commission recommendations).
    - Revenue risks mainly from GST, and expenditure risks may limit adjustment.
    - Higher-than-usual uncertainty surrounding GST revenue projections, given absence of historical data.
    - Center has guaranteed states’ annual revenue growth of 14 percent for 5 years; GST slippages could exacerbate central deficit through additional transfers to states.
  - Policy recommendations to support fiscal goals:
    - Enhance GST compliance by streamlining filing and refund mechanisms and simplifying the rate structure.
    - Strengthen tax administration; pursue fewer rates and a broader base.
    - Consider including petroleum products in the GST.
    - Limit fiscal cost of proposed increase in MSPs and avoid increasing fuel subsidies (or alternatively reduce fuel excise taxes).
    - Monitor rising interest rates which could pressure government’s interest burden.
- Staff recommends a more ambitious medium-term fiscal consolidation path than authorities envisage:
  - Center consolidation over last few years provides room for a more rapid deficit reduction.
  - Alternative scenario targets general government debt of 60 percent of GDP by FY2022/23 via greater tax buoyancy and subsidy cuts.
  - Implied cumulative improvement in cyclically-adjusted primary balance of about 1.3 percent of potential GDP over 4 years.
  - Faster consolidation would help cap long-term bond yields, reduce external and banking vulnerabilities, and improve market confidence.
- Staff growth-impact assessment:
  - Used IMF’s Flexible System of Global Models (FSGM) for scenario combining subsidy reductions and tax revenue increases.
  - Limited growth impact due to gradual nature of consolidation, use of relatively less distortionary instruments, and assumption of monetary easing relative to baseline to moderate domestic demand impact.
- Fiscal reporting and subnational fiscal management:
  - Staff encourages upgrading the fiscal-reporting framework.
  - Emphasized harmonizing state budgetary processes and reducing reporting lags (more-than-one-year lag).
  - Coverage of expenditures should be broadened to capture off-budget spending risks.
  - IMF staff providing background on international experiences and best practices related to subnational governments, including through SARTTAC (Appendix V).

### Authorities’ views (selected)
- Agreed on need to take corrective measures in event of slippages to FY2018/19 budget targets; believed any fresh slippages likely to be moderate given improving economy.
- Confident GST would be buoyant near-term, adding up to ½ percent of GDP in revenues in each of the next two years.
- GST expected to help boost direct taxes via improved compliance and record-keeping; e-way bill (required for inter-state goods transactions above INR 50,000, approximately US$750) seen as significant for GST compliance.
- Further GST reforms to focus first on base broadening before rationalizing rates; some rationalization already occurred by pruning items subject to top 28 percent tax rate.
- On base broadening, taxing aviation fuel and natural gas under GST considered relatively easy; petrol, diesel, and immovable property more challenging as key revenue sources for states.
- Noted difficulty in pruning exemptions in Indian context.
- Public financial management (PFM) reforms highlighted: advancing the budget calendar, reducing subsidy leakages through Direct Benefit Transfers (DBTs), and reducing project cost overruns have helped expenditure control.
- PFM System developed by Ministry of Finance is being implemented but needs strengthening to improve quality of expenditure and fiscal data reporting.
- FRBM committee recommendations including a formal debt anchor accepted and amendments to FRBM Act passed through Finance Act of 2018; authorities favored a gradual consolidation pace to support growth and development.
- On bank recapitalization accounting:
  - Authorities noted they followed international best practice in pricing government’s bond-financed equity stakes in PSBs.
  - Market prices were paid per applicable formula; recapitalization recorded below the line as a financing transaction.

### B. Monetary and Exchange Rate Policy — Consolidating Credibility
- Monetary policy stance:
  - Policy rate had been on hold since August 2017 at 6 percent.
  - June rate hike raised policy rate to 6.25 percent.
  - Staff assessment: monetary policy conditions broadly neutral based on staff estimates of the natural rate of interest (about 1.45 percent) and one-year ahead inflation expectations (4.8 percent).
  - Headline and core inflation are rising and forecasted to be above the mid-point of the headline inflation target band in the near and medium term, increasing probability that shocks could push headline inflation above the RBI’s target range and calling for a tighter stance.
  - Household inflation expectations were revised higher in the RBI’s latest survey.
  - Inflation risks tilted to upside, including from higher oil prices, potential changes to MSPs, exchange rate depreciation, possible fiscal slippages, second-round effects from state-level increases in HRAs, and recently-announced increased import duties.
  - Tighter monetary policy will make reviving the credit cycle more challenging.
- Monetary transmission and institutional steps:
  - To enable RBI achieve medium-term inflation target on a sustained basis, continued action to improve monetary transmission is needed.
  - Key steps: enhance competition in banking, encourage banks to streamline credit pricing, address fragmentation of interbank markets, and continue to enhance communication.
  - PSB governance reform and reducing government footprint in banking system would promote competition and market efficiency.
  - Addressing banks’ NPAs, operationalizing corporate debt restructuring processes, and agriculture sector reforms expected to stabilize food prices and contain household inflation expectations.
- External position assessment:
  - India’s external position assessed broadly consistent with fundamentals and desirable policy settings (Appendix VI).
  - External debt around 20 percent of GDP is moderate compared to other emerging market economies.
  - External financing looks sustainable but could be affected by domestic and external volatility.
  - Recent policy moves largely moved toward capital account liberalization; further liberalization of portfolio inflows should be considered while weighing capital flow volatility risks.
  - Gross reserves at end FY2017/18: more than 160 percent and about 210 percent of the standard and capital flow measures-adjusted IMF metrics, respectively, and appear adequate for precautionary purposes.

*Source: IMF staff report chapter titled "11. The authorities broadly agreed with the staff’s assessment of the outlook and risks."*

### 27. India should continue to rely on exchange rate flexibility.

### 27. India should continue to rely on exchange rate flexibility

### Exchange rate stance and policy recommendations
- Experience in other fast-growing emerging market economies suggests that the real effective appreciation of the rupee is mostly inevitable over the longer term.
- Overly restricting currency appreciation would lead to opportunity and sterilization costs from foreign exchange interventions and slow the development of the foreign exchange market, including for hedging instruments.
- Interventions should be two-way and limited to disorderly market conditions.
- In the event of severe external pressures or further increases in oil prices, continued exchange rate flexibility complemented by tighter fiscal and monetary policies would help ease the shock.
- Based on the Debt Sustainability Analysis and FSAP stress tests, negative balance sheet effects from a rupee depreciation would likely be contained.

### Authorities’ views on monetary and exchange rate policy
- The authorities indicated that forward-looking monetary policy will continue to be calibrated to achieve the medium-term inflation target.
- Considering inflation data available through April 2018, at the time of the consultation mission, their forecast of headline inflation in FY2018/19 was 4.6 percent, below that of staff, partly because the authorities had not yet factored in the upside risks from higher MSPs, state HRAs, and possible fiscal slippages.
- The authorities noted that monetary policy would look through the direct effect of the HRA, were confident that food inflation in the medium term would remain subdued, and emphasized that headline inflation is the official target.
- The authorities concurred that the external position is broadly consistent with fundamentals and desirable policy settings, agreed with a CA norm of -2.5 percent of GDP, and felt strongly that a CAD above 3 percent of GDP may pose financing difficulties.
- The authorities confirmed that exchange rate flexibility would continue, arguing for proactive rather than reactive intervention to prevent disorderly market conditions and noting that intervention should be assessed across a full capital inflow-outflow cycle.
- They planned to continue using foreign exchange interventions to smooth rupee movements and augment external buffers during episodes of sustained inflows to be used during outflows, which tended to occur in spurts.

### Financial and corporate sector — Addressing the twin balance sheet problem

- Initiatives taken: AQR, recognition of NPAs, implementation of the new PCA framework, PSB recapitalization, RBI-directed referrals of two batches of large corporate accounts (July and December 2017) representing about 40 percent of PSBs’ outstanding NPAs by value to the time-bound resolution process under the IBC.
- Five of the 12 accounts from the first batch are now resolved or nearing the final stages of resolution.
- Ongoing efforts to build institutional capacity for effective functioning of the IBC are welcome; could be complemented by designing an out-of-court regime offering a flexible, speedy, and low-cost alternative to the in-court process under the IBC.

### Recent supervisory and resolution measures
- RBI introduced a new, simplified framework for the resolution of stressed assets: a more proactive approach in identification, monitoring, and supervision of problem assets and their reference to the IBC process.
- Banks have begun to reclassify a large share of restructured loans (e.g., PSBs reduced these loans from 2.7 percent in September 2017 to 1.1 percent of total loans in March 2018) as NPAs, pushing up the NPA ratio further.
- Higher provisioning coverage will weigh on results: 40 percent required for NPAs compared to 5 percent for restructured loans, causing weaker PSBs to continue to report losses in the coming quarters.

### Staff recommendations on financial sector reforms
- Further strengthen governance and accelerate implementation as part of a broader package of financial reforms, including:
  - Speeding up NPA resolution and completing PSB recapitalization.
  - Improving bank governance and reducing the role of the public sector in the financial system.
  - Enhancing bank lending capacity and practices to reduce fiscal contingency risks arising from PSBs.
- Recommendations for governance reforms include removing the RBI representatives from banks’ boards and defining better the terms of reference for board members, including the Ministry of Finance representative, to strengthen the quality and independence of banks’ boards.
- More aggressive PSB disinvestment and privatization would address structural governance issues such as incentives and efficiency.
- Promote private-sector based alternatives to PSBs over the medium term: the recent successful IPO of a private bank that had started as a microfinance institution, vibrancy of non-bank financial corporations, and rapidly-developing fintech space illustrate market-based solutions.
- Government should continue to gradually reduce the SLR to deepen markets and encourage lending and reexamine priority sector lending (PSL) targets, which apply equally to private banks and distort resource allocation.
- Follow up on FSAP recommendations, including amending the legal framework to provide the RBI full regulatory and supervisory powers over PSBs to make banking regulation and supervision ownership-neutral.
- Vigilance by RBI supervisors on strong credit growth to households from private banks and non-bank finance companies to ensure underwriting standards are upheld.

### Authorities’ views on banking reforms
- Authorities agreed on the importance of focusing on implementation; expected IBC to contribute to speeding up NPA resolution and expected the banking sector’s NPA ratio to peak within a year.
- Banks’ provisioning is improving; early indications from some large IBC cases suggest provisioning requirements may be sufficient (e.g., lower-than-provisioned haircuts in the steel industry).
- PSB governance reform is integral to the recapitalization plan with a reporting framework to monitor progress; RBI reviewing supervisory processes to strengthen fraud prevention and assessment of operational risk.
- Authorities emphasized the key role played by PSBs in providing financial access to underserved populations and argued for a gradual pace of reducing the government’s presence in the financial sector.
- RBI has been progressively reducing the SLR; noted that: (i) the ratio was currently not binding, with banks maintaining SLRs well in excess of the requirement; and (ii) banks were allowed to use part of their qualifying assets to satisfy the liquidity coverage ratio.

### Structural reforms — Boosting investment and inclusive growth

- Structural challenges: income per capita remains relatively low, income disparities are widening, and manufacturing remains relatively small due to rigidities in labor, land, and product markets.
- Comprehensive reforms can raise productivity and reduce vulnerabilities, supporting higher and more sustainable growth.
- Labor market reforms could complement the GST in promoting the formal economy and creating fiscal space for social and infrastructure spending.
- Improving the business climate combined with trade liberalization would complement the GST in creating a more integrated domestic market and reduce external vulnerabilities.

### Trade policy issues
- Trade barriers remain significant; trade documentation and procedures are cumbersome and processing times are lengthy.
- India’s average most favored nation applied tariff rate was 13.4 percent as of 2016, higher than in some peer countries, with large differentiation between agricultural and non-agricultural products.
- Tariffs are being changed frequently, including in the FY2018/19 budget.
- Trade in services is also restricted; restrictions on foreign entry, barriers to competition, and lack of regulatory transparency are main obstacles.
- Policy recommendations: reduce non-tariff barriers, stabilize and subsequently decrease tariffs, implement supply-side reforms to improve the business climate; recent FDI liberalization is positive.

### WTO-related issues
- The United States has challenged India’s export subsidy schemes at the WTO as creating an uneven playing field; India has recently crossed the income threshold subjecting it to the prohibition on export subsidies.
- The United States questioned India’s methodology related to calculations of the market price support for wheat and rice at the WTO Committee on Agriculture.
- Following U.S. steel and aluminum tariffs, Indian authorities sought consultations on their consistency with WTO norms; direct impact on India’s exports likely relatively small, but authorities are concerned about possible impact on the global trade system.

### Labor market reforms
- Modernizing labor regulations is an important priority to increase formal employment and female employment.
- Labor laws remain numerous, outdated, and restrictive, including at sub-national levels; current laws number around 250 including both the center and states.
- Staff analytical work highlights linkage between labor rigidities and misallocation in manufacturing; reforms to the Industrial Disputes Act of 1947 and restrictive clauses under the Factories Act of 1948 are key.
- Reforms to streamline laws into four Labor Codes are underway; labor market rigidities depress female labor force participation, which is among the lowest in peer countries.
- Authorities noted that the recent extension of fixed-term labor contracts to all sectors should bring sufficient flexibility and that plans to increase healthcare coverage and welfare provisions could improve female labor force participation.

### Infrastructure, land, and product market reforms
- Address delays in infrastructure investment; supply-side strengthened through investments in airports, roads, telecom, and power, but infrastructure bottlenecks remain.
- Project Monitoring Group (PMG) empowered to speed approvals, but many projects still pending PMG approval; common delays include environmental clearances and land acquisition issues.
- Land reforms remain essential; staff welcomes initiatives like EPC schemes and Special Purpose Vehicles to acquire land and obtain permits, while recommending enhanced efforts to streamline land acquisition and simplify procedures.
- Strengthen the business climate: further measures could include contract enforcement and judicial reform, reduce administrative and regulatory burdens, improve governance, shorten approval timelines, and widen implementation of single-window clearance.

### Agricultural sector reforms
- Sustained inclusive growth requires agricultural reforms; productivity remains low.
- Staff analytical work highlights importance of reducing supply-side constraints, building integrated markets, boosting productivity, and addressing market distortions.
- MSPs could skew production, add to inflation, and enlarge fiscal burden; their use (backed by assured procurement) should only be temporary and limited to correcting market failures.
- Recent initiatives: assured irrigation system, common electronic trading platform for the National Agriculture Market (e-NAM), and development of Gramin Agricultural Markets (GrAM).
- Further actions: revamp government procurement processes and the public distribution system (PDS), restructure the role of the Food Corporation of India via outsourcing of cereal procurement and stocking operations, check leakages in the PDS, and continue streamlining agricultural subsidies through DBTs.

### Authorities’ views on structural reforms
- Authorities generally recognized the need for further comprehensive structural reforms and underscored a strong pick-up in infrastructure investment through the National Investment and Infrastructure Fund.
- They pointed to substantial advances in cross-country rankings on ease of doing business due to regulatory reforms and ongoing state-level reform efforts.
- On labor reform, authorities argued that recent extension of fixed-term contracts should provide flexibility and noted hopes that expanded healthcare and welfare provisions and enhanced paid maternity leave will improve female labor force participation.
- Authorities noted agricultural reforms are underway, including subsidy streamlining through DBT and building nationally-integrated markets through e-NAM and GrAM.

*International Monetary Fund — Selected excerpts from the India 2018 consultation chapter*

### 49. The authorities expressed strong support for the multilateral rules-based trade system

### 49. The authorities expressed strong support for the multilateral rules-based trade system

### Authorities' stance on trade
- Expressed strong support for the WTO dispute resolution mechanism and concern about a possible reversal of global trade integration.
- Noted that recent increases in some tariffs were:
  - Gradual on average;
  - Consistent with India’s WTO commitments;
  - Effected in response to developments in the domestic economy.
- Argued that India’s tariff rates were not substantially higher than in peer countries with similar income levels.
- Objected to the OECD’s services trade restrictiveness indicator on methodology and results.
- On export subsidy schemes, the authorities believe that an eight-year transition period should be applied for unwinding those schemes.

### Staff appraisal — macroeconomic outlook and growth
- After transitory disruptions, India is again one of the world’s fastest-growing economies.
- Factors behind recent dynamics:
  - Cash shortages after demonetization and transitional costs from GST exacerbated a growth slowdown in FY2017/18.
  - Activity picked up in recent quarters with robust contributions from private consumption and gross fixed capital formation.
  - Inflation is rising after moderating to a multi-year low earlier on subdued demand, low food prices, and currency appreciation.
- Projections:
  - Growth is projected to recover in FY2018/19 and strengthen in FY2019/20 as macroeconomic policies and structural reforms continue to bear fruit.
  - India stands to benefit from implementation of reforms including the inflation-targeting monetary policy framework, the IBC, the GST, and liberalization of FDI flows.

### Risks to the outlook
- Risks are tilted to the downside:
  - Rising international oil prices.
  - Tighter global financial conditions.
  - A retreat from cross-border integration, including spillover risks from a global trade conflict.
  - Rising regional geopolitical tensions.
  - Domestic risks: tax revenue shortfalls related to GST implementation issues and delays in addressing the twin balance sheet problems and other structural reforms.

### Policy stance and recommendations
- Policy mix should emphasize supply-side measures to promote inclusive growth; with a recovering economy, closing output gap, and rising inflation, policy space is limited, implying a premium on prudent macroeconomic policies.
- Fiscal policy:
  - Continued fiscal consolidation is needed to lower elevated public debt levels and allow easing of financial repression.
  - Immediate focus: achieve the ambitious revenue targets underpinning the FY2018/19 budget, while standing ready to take corrective measures if GST-related revenue risks or expenditure risks materialize.
  - Enhance GST compliance by streamlining filing and refund mechanisms and simplifying the rate structure to relieve smaller businesses and formalize economic activity.
  - Adopt a more ambitious medium-term fiscal consolidation path to reach the FRBM Review Committee’s 60 percent of GDP general government debt target by FY2022/23.
  - Harmonize state budgetary processes and make fiscal-data reporting timelier; broaden coverage of expenditures to improve general government fiscal reporting and capture off-budget spending risks.
- Monetary policy:
  - Recent tightening was appropriate; further gradual tightening will be needed as the output gap closes and inflation is forecast to be above the mid-point of the target band.
  - Improve monetary transmission to enable the RBI to achieve the medium-term inflation target; PSB governance reform and reducing government footprint in the banking system will help promote competition and market efficiency.
- Financial sector and PSBs:
  - Accelerate implementation of the simplified framework for resolution of stressed assets, the IBC-based time-bound resolution process, and PSB recapitalization.
  - Back reforms with a comprehensive plan to improve PSB governance, internal controls, and operations to reduce fiscal contingency risk, including considering more aggressive disinvestment and privatization.
  - Follow up on FSAP recommendations, including amending the legal framework to provide the RBI full regulatory and supervisory powers over PSBs and make banking regulation and supervision ownership-neutral.
- Trade and capital flows:
  - India would benefit from further liberalization of trade and reforms to facilitate trade and investment.
  - Continue capital account liberalization in a cautious manner: reduce administrative/regulatory burdens on FDI and consider further liberalization in portfolio flows while remaining vigilant to capital flow reversal risks.
  - As a strong advocate of the multilateral rules-based trade system, India is encouraged to play a bigger role in the world trade system.
- Other structural priorities:
  - Modernize labor regulations and other measures to increase formal employment and female labor force participation.
  - Address infrastructure bottlenecks and agricultural sector reforms, including land reforms to expedite infrastructure development and initiatives to build integrated markets to reduce production risk and improve competitiveness and transparency.

### External sector
- India’s external position is assessed to be broadly consistent with fundamentals and desirable policy settings.
- International reserves are adequate for precautionary purposes.
- Exchange rate flexibility should continue; foreign exchange intervention should be two-way and limited to disorderly market conditions.

### Recommendation for consultation cycle
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Boxed analyses and key statistics

- Box 1 — Demonetization and aftermath:
  - A surprise November 2016 announcement withdrew 87 percent of currency in circulation.
  - The RBI collected 99 percent of the cancelled notes.
  - Remonetization is largely complete; currency in circulation has risen above pre-demonetization level and appears to be growing slightly faster than the pre-demonetization trend.
  - Growth impact:
    - Growth slowed steadily by about 180 basis points from the announcement of demonetization to May 2017, compared to about 100 basis points projected in the previous Article IV staff report.
  - Tax compliance:
    - The Indian Ministry of Finance estimates that the growth of new taxpayers reached 45.3 percent in FY2016/17, compared to 25.1 percent in the previous fiscal year.

- Box 2 — Short-term economic impact of GST implementation:
  - GST came into effect on July 1, 2017; transitional costs related to GST led to a sharp slowdown.
  - Transitional effects contributed to growth slowing to 6 percent (y/y) in the first half of FY2017/18.
  - Growth recovered to 7.2 percent (y/y) in the third quarter of FY2017/18 as implementation issues were addressed.
  - GST features:
    - Uniform tax rates across states achieved, but the regime includes four non-zero tax rate tiers and a broad array of exemptions (e.g., alcohol and petroleum).
  - Support measures taken:
    - Extended deadlines for tax returns.
    - Composition scheme for businesses with turnover of Rs 15 million or less.
    - An e-wallet for advance refunds rolled out from April 1, 2018; issuance of GST refunds to exporters streamlined to a single authority.
    - Validity period of duty credit scrips increased to 24 months from 18 months and GST on their sale and purchase declined to 0 percent.

- Box 3 — PSB Recapitalization Plan:
  - The two-year recapitalization plan is INR 2.1 trillion (1.3 percent of GDP), announced in October 2017.
  - Initial allocation detailed in January 2018: 0.5 percent of GDP to 20 PSBs during FY17/18, 59 percent of which was slated for 11 weak PSBs under the RBI’s PCA framework.
  - The bulk of the first-year recapitalization was financed by recapitalization bonds.
  - The total capital injection envisaged is broadly in line with the FSAP estimate of capital needs: 0.75 to 1.5 percent of GDP.
  - Concerns and outcomes:
    - The roadmap lacked detailed measures to improve PSB governance and operations and did not specify milestones for tranche releases.
    - Unclear impact on credit provision; outcomes depend on NPA resolution needs, fraud-related stresses, and mark-to-market losses on government bond holdings.
    - Market response: PSB share prices fell to pre-announcement levels; majority trading at a discount to book value, some well below 0.5.
  - Recapitalization composition (percent of GDP):
    - FY17/18: Recapitalization bonds 0.5; Budget transfer 0.0; Capital-raising from the market 0.1; Total 0.6.
    - Total: Recapitalization bonds 0.8; Budget transfer 0.1; Capital-raising from the market 0.3; Total 1.3.

- Box 4 — Potential Output:
  - Potential growth for India is estimated at 7.3 percent in FY 2017/18.
  - Estimates derive from statistical and multivariate filters.
  - Recent acceleration in potential growth is largely due to improvements in total factor productivity (TFP) growth, offsetting a dwindling contribution from physical capital stock caused by prolonged subdued investment growth.
  - Ongoing reforms are likely to boost potential growth to around 7¾ percent over the medium term.

*Source: cr18254 - 49. The authorities expressed strong support for the multilateral rules-based trade system*

### introduction of the GST. Despite its

### cr18254 - introduction of the GST. Despite its

### Growth outlook and GST impact
- Despite a complicated GST structure, efficiency gains are anticipated to increase internal trade and boost growth in coming years.
- There remains considerable scope for potential output to increase even further—above 8 percent—though important additional reforms in the areas of land and labor would be needed, along with simplifying and streamlining the GST.
- Drawing on experiences of countries implementing GST and estimates from Van Leemput and Wiencek, “The Effect of the GST on Indian Growth,” the GST is expected to support growth moving forward. 1/

### Output gap and economic slack
- The output gap is small and closing.
- The estimated output gap for FY 2017/18 is about -0.3 percent.
- Following last year’s demonetization economic slack was assessed to have increased somewhat, though recent indicators, including elevated core inflation and expectations, suggest only limited slack remains.

### Investment dynamics and constraints
- Investment has seen an important reversal, but weak credit growth is holding back investment growth.
- A large amount of investment projects still awaits approval:
  - Projects approved and projects pending data are tracked by the Project Monitoring Group (PMG); stocks measured in trillions of Rupees (stock data at the end of reference period).
- Important additional reforms in land and labor could generate a rebound in investment.

### External position and vulnerabilities
- India’s external position remains strong.
- The current account deficit is gradually widening but from a low base, driven by a deterioration of the trade balance due to oil and other goods imports.
- Financial flows, led by FDI, have been sufficient to finance the current account deficits, though capital started flowing out of India in recent months.
- International reserves remain adequate.
- Selected balance of payments figures (April–March fiscal years):
  - Current account balance, 2017/18: -48.7 (in billions of U.S. dollars)
  - Current account balance (percent of GDP), 2017/18: -1.9 percent
  - Merchandise exports, 2017/18: 309.0 (in billions of U.S. dollars)
  - Merchandise imports, 2017/18: 469.0 (in billions of U.S. dollars)
  - Foreign exchange reserves (end-period), 2017/18: 424.5 (in billions of U.S. dollars); in months of next year's imports: 7.5

### Financial markets and capital flows
- Rupee appreciated somewhat during 2017 but has recently faced depreciation pressures; portfolio flows became more volatile in recent months.
- Over the past 12 months, India’s REER was 12 percent more appreciated than the average for 2010-15.
- Long-term government bond yields have risen since mid-2017 to a 3-year high.
- Portfolio flows (USD Billion, cumulative since the May 2013 Taper Tantrum) show equity and debt volatility.
- Credit Default Swap spreads and other market indicators recorded modest widening in recent months.

### Monetary developments and inflation
- Inflation has remained within the RBI’s target band but household expectations remain elevated.
- Core inflation has been in the band’s upper half.
- Food items comprise 43 percent of the CPI basket and remain quite volatile, especially vegetables and pulses.
- The share of items in the CPI basket that display high year-on-year price increases is on the rise again.
- The strengthening of monetary policy and low oil and food prices led to important disinflation gains in 2015-2017, but recent rupee weakening contributed to a loosening of overall monetary conditions.
- Inflation indicators:
  - Consumer prices (period average), 2017/18: 3.6 percent
  - Consumer prices (period average), 2018/19 (projection): 5.2 percent

### Fiscal developments and policy stance
- The government balance deteriorated in 2017/18 due to one-off factors; the authorities plan to resume fiscal consolidation in 2018/19.
- The FY2018/19 budget implies a small negative fiscal impulse.
- Current spending has been inching up and remains above the pre-crisis average; capital spending remains above the post-crisis average.
- Efforts are being made to raise direct and indirect taxes; food and fertilizer subsidies remain considerable while fuel subsidies have been contained.
- Central government overall balance (percent of GDP):
  - 2017/18 (Est.): -4.0
  - 2018/19 (Proj.): -3.6
- General government overall balance (percent of GDP):
  - 2017/18 (Est.): -7.0
  - 2018/19 (Proj.): -6.6

### Fiscal vulnerability and public debt profile
- India’s public debt is relatively large compared with other major emerging market economies:
  - General government gross public debt, 2017: 70.4 percent of GDP (Figure and table context)
- Debt roll-over risks are mitigated by the long average maturity of Indian debt and favorable debt dynamics.
- Currency risks affecting Indian public debt are minimal; exposure to non-resident investors is limited.

### Corporate and banking sector balance sheets
- The twin balance sheet problem persists in the corporate and banking sectors.
- Corporate sector deleveraging continued in 2017; corporate leverage ratios and debt repayment capacity suggest improvement but remain constrained.
- Banks’ asset quality deteriorated further, especially at public sector banks (PSBs), as more restructured loans are migrated to NPAs.
- Banking indicators (selected):
  - Gross NPA ratio (all banks), 2017/18: 11.6 percent (gross nonperforming assets as percent of outstanding advances)
  - Capital Adequacy Ratio (CAR), 2017/18: 13.8 percent (risk-weighted)
  - Return on assets, 2017/18 (all banks): -0.2 percent
  - Public sector banks: Return on assets, 2017/18: -0.9 percent; Gross NPA ratio, 2017/18: 15.6 percent

### Structural reform agenda and competitiveness
- Recent reform measures contributed to improved competitiveness, but more needs to be done.
- Doing business remains challenging: tax, labor, and product market regulations are burdensome.
- Regulatory quality could be further improved to support growth.
- Labor market regulations remain strict; India has fared poorly on gender-parity in labor force participation.
- Agricultural productivity needs improvement given the sector’s importance.
- Policy recommendation highlights:
  - Simplify and streamline the GST to realize efficiency gains.
  - Implement additional reforms in land and labor markets to boost investment and raise potential output above 8 percent.

### Key macroeconomic projections and indicators (selected)
- Real GDP growth (at market prices):
  - 2017/18 (Est.): 6.7 percent
  - 2018/19 (Proj.): 7.3 percent
  - 2019/20 (Proj.): 7.5 percent
- General government debt (percent of GDP):
  - 2017/18 (Proj.): 70.4
  - 2018/19 (Proj.): 68.7
  - 2019/20 (Proj.): 67.2
- Current account balance (in billions of U.S. dollars):
  - 2017/18: -48.7
  - 2018/19 (Proj.): -70.6
  - 2019/20 (Proj.): -68.3
- Gross reserves (end-period, in billions of U.S. dollars):
  - 2017/18: 424.5
  - 2018/19 (Proj.): 420.4
  - 2019/20 (Proj.): 434.7

_Italic: Source: IMF staff estimates and projections, India country report content (selected figures and tables)._

### Appendix I. Key Policy Actions 2017–18

### Appendix I. Key Policy Actions 2017–18

### Financial Sector
- Banking Regulation (Amendment) Act, 2017 (May 4, 2017): amended to provide special power to the RBI to issue directions to any banking company to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC).
- RBI’s First List of Defaulters (June 14, 2017): RBI sent a list of 12 defaulting companies to commercial banks with direction to send these cases to the National Company Law Tribunal (NCLT) under the IBC.
- RBI’s Second List of Defaulters (August 30, 2017): RBI sent a second list of 26 defaulters to commercial banks with instructions that accounts first be resolved through any of its schemes before December 13, 2017, failing which referred to NCLT under the IBC before December 31, 2017.
- Rupee Denominated Bonds Overseas (Masala Bonds) (June 7, 2017): RBI excluded issuances of Masala Bonds from the limit for investments by foreign portfolio investors in corporate bonds, effective from October 3, 2017.
- Financial Resolution and Deposit Insurance Bill, 2017 (August 10, 2017): introduced in Parliament; referred to a Joint Committee; seeks framework for resolving bankruptcy in financial firms such as banks and insurance companies.
- Public Sector Bank (PSB) Recapitalization (October 24, 2017): government unveiled INR 2.1 trillion PSB recapitalization plan; of INR 2.1 trillion to be funded over two years, recapitalization bonds INR 1.35 trillion; budgetary support INR 181.39 billion; expected market raising INR 103 billion.
- PSB Reforms (January 24, 2018): capital infusion plan for 2017/18 included INR 800 billion through recapitalization bonds and INR 81.39 billion as budgetary support; roadmap across six themes covering 30 action plans.
- Merger of Public Sector Insurance Companies (February 1, 2018): merge National Insurance Company, United India Assurance Company, and Oriental India Insurance Company into a single insurance entity and subsequently list it.
- Revised Framework on NPA Resolution (February 12, 2018): RBI withdrew multiple existing resolution schemes and discontinued Joint Lenders’ Forum. Banks directed to resolve stressed assets of INR 20 billion and above with board-approved strategies within 180 days; failing which mandated to approach IBC within 15 days.
- Letters of Understanding/Letters of Comfort Discontinued (March 13, 2018): RBI directed discontinuation after investigation of fraudulent misuse in trade credits.
- Regulatory Forbearance for Banks from Mark-to-Market losses (April 2, 2018): RBI allowed banks to spread bond-trading mark-to-market losses over four quarters (losses incurred in December 2017 and March 2018 quarters); advised banks to create an Investment Fluctuation Reserve from year 2018/19.
- Virtual Currency (April 6, 2018): RBI prohibited regulated entities from dealing in virtual currencies or facilitating persons dealing in virtual currencies; existing relationships to be exited within three months.
- Foreign Portfolio Investment (FPI) in Government securities and SDLs (April 27, 2018): permitted FPIs to invest in all maturities with condition that investment in residual maturity below one year shall not exceed 20 percent of total investment in that category. Allowed FPIs to invest in corporate bonds with minimum residual maturity of above one year.
- FPI rules (May 1, 2018):
  - Concentration Limit: (i) Long-term FPIs: 15% of the prevailing investment limit for that category; (ii) Other FPIs: 10% of the prevailing investment limit for that category.
  - Single/Group Investor-wise Limit in Corporate Bonds: (i) Any FPI shall not exceed 50% of any issue of a corporate bond; (ii) No FPI shall have exposure of more than 20% of its corporate bond portfolio to a single corporate (including related entities).
  - FPIs permitted to invest in corporate bonds with residual maturity below one year subject to amounts not exceeding 20% of total investment; FPIs permitted to invest in treasury bills issued by the Central Government.

### Monetary Policy
- Narrowing of the Monetary Policy Rate Corridor (April 6, 2017): RBI narrowed corridor around policy repo rate to +/-25 basis points from +/-50 basis points effective April 6, 2017.
- Reduction of the Statutory Liquidity Ratio (SLR) (June 7, 2017): SLR reduced from 20.5 percent of net demand and time liabilities (NDTL) to 20.0 percent effective June 24, 2017; further reduced to 19.5 percent effective October 14, 2017 — aimed at providing flexibility to comply with 100 percent liquidity coverage ratio (LCR) requirement effective January 1, 2019 (October 4, 2017).
- Reversal in Policy Rate (June 6, 2018): Monetary Policy Committee raised policy repo rate by 25 basis points to 6.25 percent (had previously lowered rate by 25 basis points on August 2, 2017).
- Increase in the LCR Carve-out from the SLR: RBI permitted banks to include an additional 2 percent of their NDTL under Facility to Avail Liquidity for Liquidity Coverage Ratio within mandatory SLR, raising total to 13 percent of NDTL. Scheduled commercial banks required to reach minimum LCR of 100 percent by January 1, 2019.

### Fiscal Policy
- Goods and Services Tax (GST) rolled out (July 1, 2017).
- Relief for Small and Medium Enterprises (GST Council 22nd meeting, October 6, 2017):
  - Inter-state service providers with annual turnover less than INR 2 million exempted from obtaining registration.
  - Small and medium businesses with annual turnover up to INR 15 million to file and pay taxes quarterly starting October–December 2017; registered buyers from such small taxpayers eligible to avail input tax credit monthly.
  - Reverse charge mechanism under Central GST Act, 2017 and Integrated GST Act, 2017 suspended till March 2018.
- e-Way Bills:
  - Introduced staggeredly from January 1, 2018 and nationwide from April 1, 2018 (GST Council 22nd meeting, October 6, 2017).
  - Nation-wide e-way bills for inter-state movement from April 1, 2018 (GST Council 24th meeting, December 16, 2017). States to choose timing for intra-State movement.
- Excise Duty on Petrol and Diesel Reduced (October 4, 2017): reduced excise duty by INR 2 per liter.
- Customs Duty on Electronics Goods Raised (December 16, 2017): raised customs duty on electronics by 5-10 percent.
- Tax Policy Changes in Budget 2018/19 (February 1, 2018):
  - Reduced corporate tax rate to 25 percent for micro, small and medium enterprises (accounts for almost 99 percent of companies filing tax returns).
  - Replaced existing three percent education cess with a four per cent “Health and Education cess” on income and corporate tax.
  - Imposed fresh long-term capital gains tax at 10 percent on amounts exceeding INR 0.1 million; gains up to January 31, 2018 grandfathered.
  - Raised customs duty on 46 line-items by 5-10 percent in sectors like food processing, electronics, auto components, footwear, and furniture.
  - Abolished education cess and secondary and higher education cess on imported goods; imposed social welfare surcharge of 10 percent on aggregate customs duties.
- Government Accepts Recommendations of the FRBM Committee (April 3, 2018):
  - Indicated acceptance to: (i) set medium-term target of debt-to-GDP ratio at 40 percent for the central government; (ii) adopt fiscal deficit as key operational target consistent with targeted debt ceiling.
  - Amended FRBM Act to require Central Government to achieve 40 percent debt-to-GDP ratio by financial year 2024/25; notified new rules to reduce fiscal deficit by 0.1 percent or more of GDP each financial year beginning 2018/19, and reach 3 percent of GDP target by 2020/21.
- Government Guarantee for Indian Railway Finance Corporation bonds Approved (March 26, 2018): Ministry of Finance approved government guarantee of INR 50 billion for IRFC bonds to be subscribed by Life Insurance Corporation (LIC) to allow LIC to subscribe beyond IRDA exposure limits.

### FDI Policy
- Changes to FDI Policy (January 10 & 23, 2018):
  1. Allowed 100 percent FDI under the automatic route for Single Brand Retail Trading (existing policy allowed 49 percent under automatic route; beyond 49 percent up to 100 percent through government approval).
  2. Foreign airlines allowed to invest up to 49 percent under approval route in Air India subject to (i) investment not exceeding 49 percent directly or indirectly; (ii) substantial ownership and effective control of Air India to continue vested in Indian nationals.
  3. Permitted 100 percent FDI under automatic route into real-estate broking service.
  4. Allowed 100 percent FDI into core investing companies through automatic route if registered with RBI and accordingly regulated.
  5. Foreign Institutional Investment/FPI allowed in power exchanges through the primary market up to 49 percent permitted limit under automatic route (existing policy restricted purchases to secondary market only).

### Agriculture Sector
- Model Agricultural Produce and Livestock Marketing Act, 2017 (April 24, 2017): provides reforms including private sector markets, direct marketing, farmer-consumer markets, de-regulation of fruits and vegetables, e-trading, single point levy of market fee, unified single trading license, declaring warehouses/silos/cold storage as market sub-yards, and Market Yards of National Importance; states/UTs encouraged to adopt.
- Pulses Exports (November 22, 2017): removed all restrictions on exports of all varieties of pulses.
- Import Duty on Pulses (December 21, 2017): imposed 30 percent import duty on Chana (Chickpeas) and Masoor (Lentils).
- Minimum Support Prices (MSPs) (February 1, 2018): proposed to set MSPs for all crops at one and half times of their production cost; NITI Aayog to put in place mechanism.
- Gramin Agricultural Markets (GrAMs) (February 1, 2018): proposed upgrade of existing 22,000 rural haats into GrAMs, electronically linked to e-NAM and exempted from Agricultural Produce Market Committees regulations.
- Agri-Market Infrastructure Fund (February 1, 2018): corpus of INR 20 billion for developing/upgrading agricultural marketing infrastructure in 22,000 GrAMs and 585 Agricultural Produce Market Committees.
- Minimum Export Price for Onion (February 2, 2018): permitted farmers to export onion without any minimum export price; earlier had imposed US$850 per ton effective November 23, 2017 and US$700 effective January 19, 2018.
- Import Duties Raised (February 6, 2018): raised import duty on raw and refined sugar to 100 percent; raised import duty on chick-peas to 40 percent from 30 percent.

### Trade Policy
- Restrictions on Gold Imports (October 18, 2017): fresh restrictions on four-star and five-star export houses with nominated agency certificates to import gold only for export purposes and not for domestic sale.
- Mid-Term Review of Foreign Trade Policy 2015-2020 (December 5, 2017):
  - Exports Zero Rated: option of refund of GST paid or exemption on submission of letter of undertaking/bond for finished goods exports.
  - Working Capital Blockage: exporters extended benefit of sourcing inputs/capital goods from abroad and domestic suppliers without upfront GST payment; 'E-wallet' scheme to be launched from April 1, 2018.
  - Merchant exporters allowed to pay nominal GST of 0.1 percent for procuring goods from domestic suppliers for export.
  - Duty Credit Scrips: validity increased from 18 to 24 months; GST rates on transfer/sale reduced to zero percent from 12 percent.
  - Specified Nominated Agency permitted to import gold without payment of Integrated GST.
  - Export Incentives: increases of 2 percent across the board for labor intensive MSME sectors.
  - Self-Assessment Based Duty-free Procurement of Inputs: new scheme for authorized economic operators to be expanded.

### Factor Markets
- Special Package for Employment Generation in Leather and Footwear Sector (December 15, 2017): totaling INR 26 billion to be spent over three financial years from 2017/18 to 2019/20.
- Proposed introduction of Fixed-term Employment under Sub Section (1) of section 15 of Industrial Employment (Standing Order) Act, 1946.
- Enhancing Scope of the Income Tax Act: allow deduction of thirty percent of additional wages paid to new regular workmen in a factory for three years from profit & loss account with minimum 150 days of employment in a year (instead of 240 days).
- Additional Employment Incentive: scheme to provide employers' contribution of 3.67 percent to employees' provident fund for all new employees in leather, footwear, and accessories sector enrolling within first 3 years of employment.
- Labor Policy (February 1, 2018): government proposed to contribute 12 percent of wages of new employees in employees' provident fund for all sectors for next three years.
- Fixed-term Employment Extended (March 16, 2018): extended to all sectors (previously applicable to apparel manufacturing sector only).

### Other Policies
- National Health Policy, 2017 (March 15, 2017): aims to achieve universal health coverage; proposes raising public health expenditure to 2.5 percent of GDP in a time bound manner.
- Maternity Benefit Program Extended (May 17, 2017): extend pilot program including INR 6,000 cash compensation for wage loss of pregnant women and lactating mothers across all districts.
- Affordable Housing (September 21, 2017): government proposed eight different models (two for private investments on private lands; six for private investments using government lands).
- Bharatmala Project (October 25, 2017): announced construction of 83,677 km of roads involving capex of INR 6.92 trillion to be completed in 5 years by 2021-22.
- National Health Protection Scheme (February 1, 2018): Ayushman Bharat—National Health Protection Mission to provide cover of INR 0.5 million per family per year to about 100 million families belonging to poor and vulnerable population.

### Appendix II. Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses
- Delays in addressing the twin balance sheet problems
  - Likelihood: M
  - Impact: H
  - Description: delays or protracted processes in addressing bank capitalization needs of PSBs, resolving asset quality problems, and repairing corporate balance sheets may deteriorate balance sheets and hinder lending.
  - Policies to minimize impact:
    - Proceed with announced recapitalization for PSBs as planned.
    - Make recapitalization part of broader package to speed NPA resolution, improve PSB governance, reduce public sector role, and enhance lending capacity and practices.
- Fiscal revenue shortfalls related to the GST
  - Likelihood: H
  - Impact: H
  - Description: protracted GST implementation issues could cause center’s revenue expenditure to rise more than budgeted, risking FY2018/19 deficit target, raising borrowing needs and financing costs, and crowding out private investment.
  - Policies to minimize impact:
    - Ease GST compliance through simplification of rate structure and streamlining filing and refund mechanisms.
    - Strengthen tax administration.
- Setbacks in the structural reform process
  - Likelihood: M
  - Impact: M
  - Description: difficulty in passing key bills (Labor Market and Land Acquisition) and slow progress on factor and product market reforms could weigh on investment and growth, add pressure on inflation, and dampen investor sentiment.
  - Policies to minimize impact:
    - Facilitate state-led reform initiatives, address supply bottlenecks including non-legislative measures, and strengthen business climate.
- Tighter or more volatile global financial conditions
  - Likelihood: H
  - Impact: M
  - Description: abrupt change in global risk appetite (e.g., higher-than-expected U.S. inflation) could increase interest rates, tighten global financial conditions, and correct market valuations.
  - Policies to minimize impact:
    - Rupee flexibility and monetary policy tightening.
    - Given adequate international reserves, provide foreign currency liquidity to prevent disorderly exchange rate movements.
    - Enhance environment for attracting stable non-debt creating capital flows, particularly FDI.
- Retreat from cross-border integration
  - Likelihood: M
  - Impact: M
  - Description: U.S. tightening on imports could affect India’s exports; India’s protectionist measures could be contractionary, reduce output, investment, and employment, and lower incentives for competition and efficiency.
  - Policies to minimize impact:
    - Facilitate trade liberalization, reduce trade barriers, advance export sophistication and quality, and further supply-side reforms to improve business climate.
- Structurally weak growth in key advanced economies
  - Likelihood: H
  - Impact: M
  - Description: low productivity in advanced economies could undermine outlook for India’s trading partners, clouding sustainability of India’s recovery and prospects for exports and investment.
  - Policies to minimize impact:
    - Structural reforms to strengthen domestic growth sources, support export competitiveness, and attract foreign investment.
- Rising regional geopolitical tensions
  - Likelihood: M
  - Impact: M
  - Description: cross-border tensions with China and Pakistan may damage confidence, elevate economic and political pressures, trigger financial market pressures, reduce capital inflows, and tighten financial conditions.
  - Policies to minimize impact:
    - Continue exchange rate flexibility as main shock absorber.
    - Given adequate international reserves, provide foreign currency liquidity to prevent disorderly exchange rate movements.

- Note on RAM: “L”=Low; “M”=Medium; “H”=High. The RAM shows events that could materially alter the baseline path. Relative likelihood: low = probability below 10 percent; medium = between 10 and 30 percent; high = between 30 and 50 percent. Short term (ST) = within 1 year; medium term (MT) = within 3 years.

*Source: Appendix I. Key Policy Actions 2017–18 (cr18254).*

### Appendix III. Main Recommendations of the 2017 FSAP

### Appendix III. Main Recommendations of the 2017 FSAP

### Policies to address vulnerabilities
- Improve the governance and financial operations of PSBs and develop a strategic plan for their consolidation, divestment, and privatization.  
  - Authority: MoF  
  - Time frame: S
- Conduct granular assessments of banks’ capital needs and require additional provisions and swift recapitalization and restructuring.  
  - Authority: RBI, MoF  
  - Time frame: S
- Redesign the corporate debt restructuring mechanisms to make them more flexible.  
  - Authority: RBI  
  - Time frame: S

### Financial sector oversight framework

System‐wide oversight and macroprudential policies
- Retain regulators’ role in collecting firm‐level data.  
  - Authority: MoF  
  - Time frame: M

Banking supervision
- Review loan classification and provisioning rules in the context of IFRS, and with respect to special loan categories.  
  - Authority: RBI  
  - Time frame: S
- Amend the legal framework to provide the RBI with full supervisory powers over PSBs and clarify its legal independence.  
  - Authority: Government  
  - Time frame: M

Insurance supervision
- Introduce a risk‐based solvency regime and risk‐based supervision.  
  - Authority: IRDAI  
  - Time frame: S

Securities regulation
- Transfer legal authority over public‐listed company reporting to SEBI and introduce a risk‐based review of company disclosures.  
  - Authority: Government, SEBI  
  - Time frame: M
- Adopt a strategy to unify regulation of commodities trading markets.  
  - Authority: Government, SEBI  
  - Time frame: S

Financial markets infrastructure oversight
- Improve stress testing scenarios and methodologies.  
  - Authority: CCIL  
  - Time frame: S

Crisis management framework
- Resolution legislation should preserve RBI’s full supervisory authority over going concern banks, and promote equal treatment of domestic and foreign creditors.  
  - Authority: Government  
  - Time frame: S
- Improve the frameworks for emergency liquidity assistance, deposit insurance, and crisis preparedness.  
  - Authority: RBI, Government  
  - Time frame: M

Market integrity
- Subject domestic politically‐exposed persons to adequate due diligence and qualify domestic tax evasion as predicate offense to money laundering.  
  - Authority: MoF  
  - Time frame: S

### Market development
- Progressively reduce the SLR to help deepen markets and encourage lending.  
  - Authority: RBI  
  - Time frame: S
- Undertake a cost‐benefit and gap diagnostic of the PSL program and develop a plan to reduce its scope and ensure it targets underserved segments.  
  - Authority: RBI, MoF  
  - Time frame: M

- S = short term, M = medium term.

*India — Appendix III. Main Recommendations of the 2017 FSAP*

### 7.    Elevated vulnerabilities in the heat map stem from a high baseline debt-to-GDP

### 7.    Elevated vulnerabilities in the heat map stem from a high baseline debt-to-GDP ratio

### Key finding: baseline vulnerability
- Debt-to-GDP is slightly above 70 percent, breaching the baseline threshold and causing the heat map for the debt level to be red.
- Gross financing needs are below the 15 percent of GDP threshold and do not deteriorate in shock scenarios.
- Risks from market perception (measured by EMBI global spreads) and external financing requirements (defined as the current account balance and amortization of short term external debt) are limited.

### Baseline public debt and financing indicators (selected figures, in percent of GDP unless otherwise indicated)
- Nominal gross public debt: 70.4 (2016), 68.9 (2017), 70.4 (2018), 69.2 (2019), 67.8 (2020), 66.4 (2021), 65.1 (2022), 63.9 (2023), 62.8 (projection labeled Sovereign Spreads EMBIG (bp) 3/478)
- Public gross financing needs: 12.4 (2016), 11.1 (2017), 11.7 (2018), 11.1 (2019), 10.8 (2020), 10.4 (2021), 10.2 (2022), 10.0 (2023), 8.7 (projection)
- Real GDP growth (in percent): 7.4 (2016), 7.1 (2017), 6.7 (2018), 7.3 (2019), 7.5 (2020), 7.7 (2021), 7.7 (2022), 7.7 (2023), 7.7 (projection)
- Inflation (GDP deflator, in percent): 6.0 (2016), 3.5 (2017), 3.1 (2018), 4.2 (2019), 4.3 (2020), 4.2 (2021), 3.8 (2022), 3.7 (2023), 3.7 (projection)
- Nominal GDP growth (in percent): 13.8 (2016), 10.8 (2017), 10.0 (2018), 11.8 (2019), 12.2 (2020), 12.3 (2021), 11.9 (2022), 11.9 (2023), 11.9 (projection)
- Effective interest rate (in percent) 4/: 7.6 (2016), 7.8 (2017), 8.0 (2018), 7.9 (2019), 8.1 (2020), 7.9 (2021), 7.8 (2022), 7.8 (2023), 7.8 (projection)
- Ratings: Moody's Baa2 / Baa2; S&Ps BBB- / BBB-; Fitch BBB- / BBB-

### Contributions to change in gross public sector debt (selected lines, percent of GDP)
- Change in gross public sector debt: -0.8 (2016), -0.7 (2017), 1.5 (2018), -1.2 (2019), -1.4 (2020), -1.4 (2021), -1.2 (2022), -1.2 (2023), cumulative -7.6
- Identified debt-creating flows: -1.2 (2016), -0.3 (2017), 0.1 (2018), -1.2 (2019), -1.3 (2020), -1.3 (2021), -1.2 (2022), -1.0 (2023), cumulative -6.9
- Primary deficit: 3.1 (2016), 1.9 (2017), 2.1 (2018), 1.8 (2019), 1.7 (2020), 1.7 (2021), 1.6 (2022), 1.5 (2023), cumulative 9.8
- Primary (noninterest) revenue and grants: 19.4 (2016), 20.8 (2017), 20.8 (2018), 21.2 (2019), 21.2 (2020), 21.2 (2021), 21.3 (2022), 21.3 (2023), cumulative 127.5
- Primary (noninterest) expenditure: 22.6 (2016), 22.6 (2017), 22.9 (2018), 22.9 (2019), 22.9 (2020), 22.9 (2021), 22.8 (2022), 22.9 (2023), cumulative 137.2
- Automatic debt dynamics 5/: -3.9 (2016), -1.9 (2017), -1.2 (2018), -2.5 (2019), -2.5 (2020), -2.6 (2021), -2.4 (2022), -2.3 (2023), -2.2 (projection), cumulative -14.6
  - Interest rate/growth differential 6/: -3.9 (2016), -1.9 (2017), -1.2 (2018), -2.5 (2019), -2.5 (2020), -2.6 (2021), -2.4 (2022), -2.3 (2023), -2.2 (projection), cumulative -14.6
  - Real interest rate contribution: 0.7 (2016), 2.6 (2017), 2.9 (2018), 2.1 (2019), 2.1 (2020), 2.1 (2021), 2.2 (2022), 2.2 (2023), cumulative 12.9
  - Real GDP growth contribution: -4.6 (2016), -4.5 (2017), -4.2 (2018), -4.6 (2019), -4.6 (2020), -4.7 (2021), -4.6 (2022), -4.5 (2023), cumulative -27.4
- Other identified debt-creating flows: -0.4 (2016), -0.3 (2017), -0.7 (2018), -0.4 (2019), -0.4 (2020), -0.4 (2021), -0.3 (2022), -0.3 (2023), cumulative -2.1
- Residual, including asset changes 8/: 0.3 (2016), -0.3 (2017), 1.4 (2018), -0.1 (2019), -0.1 (2020), -0.1 (2021), -0.1 (2022), -0.2 (2023), cumulative -0.8

### Underlying assumptions (baseline and alternative scenarios, selected)
- Baseline real GDP growth: 7.3 (2018), 7.5 (2019), 7.7 (2020), 7.7 (2021), 7.7 (2022), 7.7 (2023)
- Baseline inflation: 4.2 (2018), 4.3 (2019), 4.2 (2020), 3.8 (2021), 3.7 (2022), 3.7 (2023)
- Baseline primary balance: -1.8 (2018), -1.7 (2019), -1.7 (2020), -1.6 (2021), -1.5 (2022), -1.5 (2023)
- Effective interest rate (baseline): 7.9 (2018), 8.1 (2019), 7.9 (2020), 7.8 (2021), 7.8 (2022), 7.8 (2023)
- Historical scenario real GDP growth: 7.3 (2018), 7.0 (2019), 7.0 (2020), 7.0 (2021), 7.0 (2022), 7.0 (2023)
- Constant Primary Balance scenario primary balance: -1.8 (2018 through 2023)
- Composition of public debt charts show gross nominal public debt series and public gross financing needs projections from 2016 through 2023 (charts provided in source).

### Stress tests and scenario outcomes (selected)
- Primary Balance Shock scenario: Real GDP growth and inflation paths show deviations; primary balance moves to -2.2 (2019) and -2.2 (2020) with effective interest rate remaining ≈ 7.9–8.1.
- Real GDP Growth Shock scenario: Real GDP growth path shows 5.8 (2019) and 6.0 (2020) with primary balance moving to -2.1 (2019) and -2.6 (2020).
- Real Interest Rate Shock scenario: Effective interest rate rises to 8.2 (2019), 8.3 (2020), 8.4 (2021), 8.6 (2023) in the shock.
- Real Exchange Rate Shock scenario: Inflation spikes to 13.3 in 2019 in that shock instance.
- Combined Macro-Fiscal Shock: effective interest rate path shows 8.6 (2019), 8.7 (2020), 8.8 (2021), 9.0 (2022), 9.1 (2023); primary balance moves to -2.2 (2019) and -2.6 (2020).
- Contingent Liability Shock: primary balance hits -6.6 in 2019 in that scenario.
- Stress-test charts show gross nominal public debt (in percent of GDP and in percent of revenue) and public gross financing needs under baseline and shocks for 2018–2023 (charts provided in source).

### External debt sustainability (selected findings and indicators)
- Baseline external debt (percent of GDP): 20.8 (2013), 20.6 (2017), 20.3 (2018), 20.2 (2019), 20.4 (2020), 20.6 (2021) (table and projections provided).
- Change in external debt (percent of GDP): 1.6 (2013), -0.8 (2014), -0.2 (2015), -2.3 (2016), -0.4 (2017), 0.4 (2018), -0.2 (2019), -0.2 (2020), -0.1 (2021), 0.2 (2022), 0.2 (2023)
- Identified external debt-creating flows: -0.6 (2013), -4.4 (2014), -1.6 (2015), -3.2 (2016), -2.5 (2017), -1.0 (2018), -1.5 (2019), -1.7 (2020), -1.6 (2021), -1.4 (2022), -1.3 (2023)
- Current account deficit, excluding interest payments (percent of GDP): 1.3 (2013), 0.9 (2014), 0.6 (2015), 0.1 (2016), 1.4 (2017), 1.9 (2018), 1.4 (2019), 1.3 (2020), 1.4 (2021), 1.7 (2022), 1.8 (2023)
- Net non-debt creating capital inflows (negative): -1.4 (2013), -3.5 (2014), -1.5 (2015), -1.9 (2016), -2.0 (2017), -2.2 (2018), -2.3 (2019), -2.4 (2020), -2.4 (2021), -2.4 (2022), -2.5 (2023)
- Automatic debt dynamics (external) 1/: -0.4 (2013), -1.8 (2014), -0.6 (2015), -1.3 (2016), -1.9 (2017), -0.7 (2018), -0.6 (2019), -0.6 (2020), -0.7 (2021), -0.7 (2022), -0.7 (2023)
  - Contribution from nominal interest rate: 0.4 (2013), 0.4 (2014), 0.5 (2015), 0.6 (2016), 0.5 (2017), 0.7 (2018), 0.8 (2019), 0.8 (2020), 0.8 (2021), 0.7 (2022), 0.7 (2023)
  - Contribution from real GDP growth: -1.4 (2013), -1.6 (2014), -1.8 (2015), -1.5 (2016), -1.2 (2017), -1.4 (2018), -1.4 (2019), -1.4 (2020), -1.4 (2021), -1.4 (2022), -1.4 (2023)
- Gross external financing need (in billions of US dollars): 219.1 (2013), 216.1 (2014), 215.5 (2015), 216.8 (2016), 252.8 (2017), 301.2 (2018), 329.1 (2019), 365.7 (2020), 411.3 (2021), 451.9 (2022), 512.2 (2023)
- Gross external financing need (in percent of GDP): 11.8 (2013), 10.6 (2014), 10.3 (2015), 9.5 (2016), 9.7 (2017), 10.9 (2018), 10.8 (2019), 10.9 (2020), 11.1 (2021), 11.1 (2022), 11.5 (2023)
- External debt-to-exports ratio (in percent): 94.8 (2013), 100.0 (2014), 115.3 (2015), 106.1 (2016), 105.1 (2017), 101.5 (2018), 100.2 (2019), 99.5 (2020), 99.2 (2021), 101.0 (2022), 102.9 (2023)
- Stress tests shown (interest rate shock, CA shock, combined shock, real depreciation shock) with baseline and scenario trajectories for external debt (charts provided).

### Realism checks and predictive densities
- Figures show realism of baseline assumptions and evolution of predictive densities of gross nominal public debt (percentiles 10th–25th, 25th–75th, 75th–90th) for 2016–2023 under baseline and alternative distributional restrictions (symmetric and restricted asymmetric distributions).

### Capacity development (Appendix V) — recent and planned IMF CD with India
- The Fund’s capacity development activities with India have been scaled up in recent years, supporting: introduction of the inflation targeting framework; banking sector stress testing; modernization of the insolvency regime; design of the Goods and Services Tax (GST) and the fiscal responsibility framework; and strengthening of macroeconomic statistics.
- South Asia Regional Training and Technical Assistance Center (SARTTAC), inaugurated February 2017, is the focal point for IMF CD to India and South Asia.
- In FY2018, SARTTAC provided training and TA in core areas including national accounts (June 2017, November 2017, April 2018), BOP/IIP statistics (July 2017), strengthening budget institutions (September 2017), public financial management (June 2017), government finance statistics workshop (September 2017), and a course on managing capital flows (September 2017).
- To date, 235 Indian officials received training through SARTTAC.

*Source: IMF staff.*

### 3.    In line with the Fund’s CD strategy,

### 3.    In line with the Fund’s CD strategy,

### Capacity Development (CD) activities and collaboration
- Recent activities and collaboration with Indian authorities have improved targeting to country needs.
- At the request of the 15th Finance Commission, APD and FAD have planned a pipeline of TA missions to provide the Fund’s analysis and assistance on fiscal federalism issues, including:
  - constraints on state budgets,
  - achieving vertical fiscal balance,
  - incentivizing greater fiscal discipline among states, including through market discipline.
- An APD/SARTTAC monetary policy workshop is being planned to provide a forum for knowledge sharing on evolving monetary policy frameworks in India, Nepal, and Bhutan.
- CD activities have been further integrated with surveillance and IMF policy advice:
  - Based on FSAP recommendations, LEG conducted a workshop jointly with the Insolvency and Bankruptcy Board of India to discuss practical and operational challenges under the new Insolvency and Bankruptcy regime, including insolvency of enterprise groups and cross-border insolvency.
  - SARTTAC has started working bilaterally with the Reserve Bank of India (RBI), with possible workshops and TA on:
    - accounting of NPLs under the IFRS,
    - an early warning exercise.
  - A customized training on External Sector Assessment was delivered for the RBI in October 2017 to support IMF surveillance on exchange rate assessments.
  - Statistics TA provided through both SARTTAC and IMF headquarters is benefiting surveillance and supports the authorities’ CD needs.

### External position, NIIP, and external debt
- Background:
  - NIIP improved from -18.1 percent of GDP at end FY2014/15 to -17.3 percent of GDP as of end-2017.
  - Gross foreign assets and liabilities were 24 and 42 percent of GDP, respectively, at end-2017.
  - The bulk of assets are in the form of official reserves and FDI; liabilities include mostly FDI and portfolio equity.
- Assessment:
  - With current account (CA) deficits of about 2½ percent of GDP projected for the medium term, the NIIP-to-GDP ratio is expected to slightly deteriorate.
  - External debt is about 20 percent of GDP.
  - Composition of external debt:
    - 48 percent denominated in U.S. dollars,
    - 37 percent denominated in Indian rupees.
  - Debt maturity profile: long-term external debt accounts for about 81 percent of the total.
  - The ratio of short-term external debt to foreign exchange (FX) reserves is low.

### Overall external sector assessment and policy implications
- Overall assessment:
  - The external sector position in 2017/18 is broadly consistent with fundamentals and desirable policy settings.
  - India’s low per capita income, favorable growth prospects, demographic trends, and development needs justify running CA deficits.
  - External vulnerabilities remain but were reduced since 2013; key risks include volatile global financial conditions, oil price volatility, and a retreat from cross-border integration.
  - Progress on FDI liberalization has been made; portfolio flows remain controlled.
  - India’s trade barriers remain significant.
- Potential policy responses:
  - Increase non-debt creating capital flows through FDI to improve CA financing mix and contain external vulnerabilities.
  - Consider gradual liberalization of portfolio flows while monitoring reversal risks.
  - Maintain exchange rate flexibility as the main shock absorber, with intervention limited to addressing disorderly market conditions.
  - Continue vigilance given potential external shocks.
  - Advance structural reforms to revamp the business climate, ease domestic supply bottlenecks, and facilitate trade and investment liberalization to improve competitiveness, attract FDI, and boost exports.

### Current account (CA) developments and assessment (FY2017/18)
- Background:
  - CA deficit estimated at -1.9 percent of GDP in FY2017/18, up from -0.7 percent of GDP in the previous year.
  - Imports surged by 19 percent in FY2017/18; export growth picked up to 10 percent in FY2017/18 from 5 percent in FY2016/17.
  - Over the medium term, the CA deficit is expected to increase to about 2½ percent of GDP on the back of strengthening domestic demand.
- Assessment (EBA and staff estimates):
  - Actual CA: -1.9
  - Cyclically-adjusted CA: -2.3
  - EBA CA Norm (FY2017/18): -3.2
  - EBA CA Gap: 0.9
  - Staff Adj.: 0.7
  - Staff CA Gap: 0.2
  - The EBA regression norm of -3.2 percent with a standard deviation of 0.5 percent implies an EBA gap of 0.9 percent.
  - Staff judgment: a CA deficit of about 2.5 percent of GDP is a more appropriate norm and consistent with the External Sustainability approach.
  - Global markets cannot be counted on to reliably finance a CA deficit above 3 percent of GDP given historical cash flows and capital flow restrictions.
  - FDI increases are insufficient to cover CA deficits; portfolio flows are highly volatile and subject to global risk appetite shifts (e.g., the Taper Tantrum).
  - Based on staff-assessed CA norm, the CA gap is in the range of -0.8 to +1.2 percent of GDP.
  - Positive policy contributions to the CA gap (negative credit gap, larger-than-desirable FX intervention, relatively closed capital account) are offset by a negative unexplained residual likely capturing underlying competitiveness problems.

### Real exchange rate (REER)
- Background:
  - Average REER in 2017 appreciated by about 4.3 percent over its 2016 average.
  - As of April 2018, the REER depreciated about 3 percent relative to its 2017 average.
- Assessment:
  - EBA Index REER and Level REER regression approaches estimate gaps of +10.2 and +8.5 percent for the 2017 average REER, respectively, but these approaches have large estimation errors for India.
  - Based on the CA gap, the REER is assessed to be in line with fundamentals with the range of -7 to +5 percent for FY2017/18.

### Capital and financial accounts, flows, and policy measures
- Background:
  - Sum of net FDI, portfolio, and financial derivatives flows estimated at 1.9 percent of GDP in FY2017/18, slowing from 2.3 percent in FY2016/17.
  - Net FDI flows moderated to 1.2 percent of GDP in FY2017/18, from 1.6 percent in FY2016/17.
  - Portfolio inflows into government and corporate securities were strong in 2017, almost fully exhausting ceilings on non-resident investment; some portfolio outflows occurred in 2018.
- Assessment:
  - Portfolio debt flows have been volatile and the exchange rate has been sensitive to these flows and changes in global risk aversion.
  - Attracting more stable sources of financing is needed to reduce vulnerabilities.
  - Implementation of structural reforms to improve the business climate would help attract FDI.

### FX intervention and international reserves
- Background:
  - Exchange rate regime is generally consistent with a floating arrangement.
  - Spot foreign exchange intervention was US$28 billion (1.1 percent of GDP) and net forwards increased by US$28.5 billion in 2017.
  - International reserves reached $424.5 billion at end-March 2018, increasing by about $55 billion since March 2017.
  - Reserves declined to about $412 billion as of end-May 2018.
  - Reserve coverage is about 16.3 percent of GDP and about 7.5 months of prospective goods and services imports.
- Assessment:
  - Reserve levels are adequate for precautionary purposes relative to various criteria.
  - International reserves represent about 190 percent of short-term debt and more than 160 percent of the IMF’s composite metric.
  - Technical note: Reserves stand at about 210 percent of the metric adjusted for capital controls (see technical background).

### Statistical and data-related issues affecting surveillance
- General:
  - Data provision is broadly adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series.
  - India subscribed to the SDDS on December 27, 1996 and started posting metadata on October 30, 1997. It is currently in observance of the SDDS, using flexibility options for:
    - timeliness of data on general government operations,
    - periodicity and timeliness of labor market data.
- National accounts and employment:
  - CSO released a new national accounts series in January 2015 with base year 2011/12 and implemented the 2008 System of National Accounts.
  - Supply-side data are deemed better quality than expenditure-side data.
  - Weaknesses: sales-tax-based extrapolation of trade turnover, deflation methods (use of WPI instead of PPI), large revisions to historical series, short time span of revised series, discrepancies between GDP by activity and by expenditure.
  - Employment data cover only the formal sector and are available with substantial lag.
- Price statistics:
  - Revised all-India CPI with base 2009/10 released in early 2011; CPI weights updated in early 2015 using 2011/12 expenditure data and revised from January 2015.
  - Multiple CPIs exist; some series use weights over ten years old.
  - WPI rebased to 2011/12; PPI under development.
  - RBI producing residential property price indexes; geographic coverage limited and commercial real estate data not available.
  - Rural wage series started by the RBI; economy-wide wage data are scant.
- Government finance statistics:
  - MoF compiles and disseminates GFS; India reports annual Budgetary Central Government data to STA.
  - Central government cash flow statement disseminated within one month after the reference month; stock of liabilities within one quarter after the reference quarter.
  - State-level fiscal performance data are annual and subject to considerable lag.
  - Data on general government operations exclude extra-budgetary funds, local governments, and social security funds and are not internationally comparable.
  - Under SDDS, India disseminates annual general government data within 3 quarters after the reference year using the timeliness flexibility option.
- Monetary and financial statistics:
  - RBI publishes a wide array of monetary and financial statistics and started publishing a weighted-average lending interest rate and other lending rates at annual frequency in 2011.
  - The RBI reports monetary data to STA with substantial delays and in non-standard format; "test" data do not contain sufficient detail to construct a complete, analytically useful picture per the Monetary and Financial Statistics Manual.
  - Data reported cover depository corporations only; other financial corporations (insurance corporations, pension funds, investment funds) are not covered.

*Source: IMF staff report material (cr18254 - 3.    In line with the Fund’s CD strategy).*

### 7.      Financial sector statistics: As for reporting of financial soundness indicators (FSIs), al

### 7.      Financial sector statistics: As for reporting of financial soundness indicators (FSIs), al

### Financial sector statistics (FSIs)
- 12 core and 11 encouraged FSIs for deposit takers as well as three FSIs for real estate markets are reported on a quarterly basis.
- FSIs for other financial corporations, nonfinancial corporations, and households are not reported.

### External sector statistics — data quality and dissemination
- Concepts and definitions broadly in line with the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).
- Trade data suffer from valuation, timing, and coverage problems:
  - Imports of goods in the balance of payments are registered in c.i.f. prices while BPM6 requires f.o.b. pricing.
  - Data on trade in goods prices, volumes, and composition are not regularly available on a timely basis.
- External debt statistics:
  - Available on a quarterly basis with a one quarter lag.
  - Estimates of short-term external debt are presented on an original maturity basis.
  - Short-term maturity attribution on a residual maturity basis is only available annually (and excludes residual maturity of medium- and long-term nonresident Indian accounts).
- International Investment Position (IIP) statistics:
  - Cover the sectors prescribed in BPM6.
  - Quarterly IIP data are disseminated within three months of the reference period.
  - Note: The IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences.
- India disseminates monthly the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS.
- More up-to-date reserve variables (total foreign reserve assets, foreign currency assets, gold, SDRs) are available on a weekly basis via an RBI weekly statistical supplement.

### Key macroeconomic performance and outlook
- Growth:
  - GDP grew by 8.2 per cent in 2015-16.
  - GDP grew by 7.1 per cent in 2016-17.
  - Growth in 2017-18 is estimated at 6.7 percent.
  - The economy grew at 7.7 per cent in Q4 of 2017-18.
  - Gross fixed capital formation (GFCF) growth has accelerated for three consecutive quarters up to Q4 of 2017-18.
  - Credit growth: 12.8 per cent year-on-year as on June 22, 2018 as against 5.6 per cent a year ago.
  - Total flow of resources, including those from non-bank sources, had increased to 27.4 per cent in 2017-18.
  - India’s GDP growth outlook for 2018-19 is expected to be broadly in line with the IMF staff projection of 7.3 per cent.
- Inflation and monetary policy:
  - Policy (repo) rate increased to 6.25 per cent in June 2018 to preserve a neutral stance.
  - RBI projects CPI inflation at 4.8-4.9 per cent in H1 and 4.7 per cent in H2 for 2018-19, with risks tilted to the upside.
  - Medium-term target of headline inflation: 4 percent.

### Fiscal policy and GST
- Central government finances:
  - Gross fiscal deficit (GFD) was brought down to 3.5 per cent in 2016-17.
  - 3.2 percent GFD was budgeted for FY 2017-18, revised upwards to 3.5 percent.
  - Government budgeted a lower order of GFD of 3.3 percent for FY 2018-19.
  - Government target: 3 percent GFD by 2020-21.
- Goods and Services Tax (GST):
  - Effective from July 01, 2017; subsumed many central and state indirect taxes.
  - Authorities cite robust implied buoyancy of GST of 1.2.
  - Authorities expect tax proceeds could be expected to add up to ½ percent of GDP in revenues in each of the next two years.
  - Authorities object to staff’s characterization of domestic revenue risks related to GST implementation.

### External sector — reserves, CAD, trade policy
- Foreign exchange reserves:
  - India’s foreign exchange reserves stood at US$ 405.8 billion as of July 6, 2018.
- Current account:
  - CAD to GDP ratio was 0.7 per cent in 2016-17.
  - CAD ratio increased to 1.9 percent for FY 2017-18.
- Exchange rate policy:
  - Interventions are meant to prevent disorderly market conditions; under normal circumstances the exchange rate can move flexibly.
- Trade policy and tariffs:
  - Average MFN applied rate for all commodities was 13.1 per cent in 2016.
  - Applied MFN rate for non-agricultural commodities was 9.8 per cent in 2016.
  - Authorities note tariffs are within bound rates and changes are infrequent according to their view.
- Services and FDI policy:
  - Authorities object to assessments based on OECD STRI and World Bank STRI, citing methodological concerns.
  - 100 percent FDI allowed under the automatic route in several sectors.
  - Authorities assert India is among the most open economies for FDI.

### Foreign direct investment and ease of doing business
- FDI inflows:
  - Gross FDI inflows during FY 2017-18 stood at US$ 60.97 billion.
  - FY 2016-17: US$ 60.22 billion.
  - FY 2015-16: US$ 55.56 billion.
  - FY 2014-15: US$ 45.15 billion.
- Doing Business:
  - World Bank Doing Business Report, 2018 ranked India 100 among 190 countries, up from 130 in DB 2017.
- Institutional measures:
  - Single window portal for FDI applications; inter-ministerial joint quarterly reviews; e-filing and online processing.

### Financial sector reforms and banking system
- Insolvency framework:
  - Insolvency and Bankruptcy Code (IBC), 2016 enacted; SARFAESI and Debt Recovery Tribunal Acts amended.
  - IBC provides a market-determined, time-bound process for orderly resolution; rules for voluntary corporate liquidation established by IBBI.
  - NCLT and NCLAT are functional and operational for case resolution.
- Bank balance-sheet management:
  - Banks’ provisioning is improving; early indications from some large IBC cases suggest provisioning requirements may be sufficient.
  - Smaller public sector banks (PSBs) have been advised to reduce their corporate loan exposures by a minimum of 15 per cent by March 2019 and put in place board-approved policies to ensure appropriate loan exposure mix.
  - Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill) envisages a Resolution Corporation to protect consumers; intended to complement IBC.
  - Authorities committed to governance reforms in PSBs, monitored through a reporting framework; recapitalization packages include governance reforms and action plans.

### Agriculture, rural economy, and social programs
- Rural and agriculture measures:
  - Increased allocation for livelihoods and rural infrastructure in central budget 2018-19.
  - Measures to double farmers’ incomes by 2022 through price support, better marketing infrastructure, thrust on exports, and enhanced private investments.
  - Proposal to set up an Agri-Market Infrastructure Fund to develop and upgrade agricultural marketing infrastructure.
  - MSP system plays an important role in supporting farmer incomes.
- Social protection and health:
  - Modernization and digitization initiatives for the Public Distribution System (PDS), including End-to-End Computerization of PDS Operations, digitization of ration cards, online allocation, computerization of supply chain, transparency portals, and online grievance redressal.
  - Seeding AADHAR with digitized ration cards/beneficiary database is underway.
  - National Health Protection Scheme (budget FY 2018-19):
    - Will cover 100 million poor and vulnerable families, or about 500 million beneficiaries.
    - Defined benefit cover of Rs. 0.5 million per family per year for secondary and tertiary care hospitalization.
  - RISE (Revitalizing Infrastructure and Systems in Education by 2022):
    - Total investment of Rs.1000 billion in next four years envisaged to step up investments in research and related infrastructure in premier educational institutions, including health institutions.

### Infrastructure financing and asset monetization
- National Infrastructure and Investment Fund (NIIF) formed to attract equity capital from international and domestic sources for commercially viable infrastructure projects.
- Budget 2018-19 emphasized innovative monetizing structures:
  - Toll-Operate-Transfer (TOT), Infrastructure Investment Trusts (InvITs), and Public Sector Asset Monetization (PSAM).
  - Asset recycling strategy proposed across infrastructure sectors.
  - Asset Recycling Model and 100 percent FDI in construction expected to attract foreign investment and help tackle stressed assets in the banking sector.

### Labor market reforms
- Four Labor Codes drafted: Wages; Industrial Relations; Social Security and Welfare; Occupation Safety, Health and Working Conditions — simplifying, amalgamating, and rationalizing central labor laws.
- Amendment to allow ‘fixed term employment’ for all sectors.
- Measures expected to remove structural rigidities, reduce informality, encourage firm expansion and productivity gains.
- Female labor force participation:
  - Lower participation may partly reflect higher engagement in learning and education.
  - Recent expansions in healthcare coverage, welfare provisions for the informal sector, and enhanced paid maternity leave of 26 weeks under the Maternity Benefit (Amendment) Act 2017 expected to improve female participation.

### Conclusion — authorities’ policy stance
- Authorities pursue a balanced policy agenda combining macroeconomic stability, fiscal prudence, financial robustness, and a sustainable external sector.
- Long-term objectives: building infrastructure, rural development, dynamic labor market promoting job growth with gender equity.
- Welfare and social protection priorities are being addressed, including a major digitization initiative.
- Authorities are confident this agenda will facilitate rapid, stable, sustainable and equitable growth over the long term.

*Statement by Subir Gokarn, Executive Director for India and Himanshu Joshi, Senior Advisor to Executive Director, July 18, 2018*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18254.pdf_