## 1. Growth and Investment ## Source details **Canonical URL:** [1. Growth and Investment](https://www.imf.org/-/media/files/publications/cr/2019/1indea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1indea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1indea2019001.pdf.json) --- ### Overview - Growth has been strong in recent years but not associated with broad-based formal job gains; relatively low food prices have contributed to rural distress. - Labor market concerns: unemployment is high while labor force participation has decreased, particularly for females. - Government’s renewed large Parliamentary majority provides opportunity to reinvigorate reforms to boost inclusive and sustainable growth. - Medium-term vision in the July 5 Budget Speech focuses on: - boosting investment, supporting the rural economy, boosting infrastructure spending, - streamlining the Goods and Services Tax (GST), reforming direct taxes, and pursuing a business-friendly policy agenda. - Implementation of past Fund advice: mixed — monetary and exchange rate policies broadly consistent; fiscal consolidation not achieved at the PSBR level; incomplete progress on PSB governance and reduced government role in banking. - Structural reform progress (transportation infrastructure, electrification, digitization, ease of doing business) important but slower than previous Fund advice recommended. ### Recent developments - GDP growth slowed to a five-year low of 6.8 percent in FY2018/19 (April 2018-March 2019). - Growth in Q1 FY2019/20 slipped to 5.0 percent amid a sharp deceleration of investment and private consumption. - Output gap has turned negative. - Headline inflation averaged 3.4 percent in FY2018/19, an 8-year low. - Headline inflation fell to 2.0 percent (y/y) in January then rose to 3.2 percent in August. - CPI inflation excluding food and fuel was 4.2 percent, down from a recent peak of 6.4 percent in June 2018. - RBI medium-term target band mid-point for headline inflation is 4 percent CPI inflation ± 2 percent. - External developments: - CAD widened to 2.1 percent of GDP in FY2018/19. - FDI financed about half of the CAD in FY2018/19. - Rupee depreciated by about 3.4 and 5.9 percent on average in real and nominal effective terms in FY2018/19. - Non-oil merchandise exports (U.S. dollar value) expanded by 6.6 percent in FY2018/19. - Gross reserves declined by US$12 billion during FY2018/19 to US$413 billion (7 months of imports). - Net forward position fell by US$34 billion in FY2018/19. - Gross reserves rose to US$429 billion through end-August (renewed portfolio inflows). - Reserves adequacy: about 149 percent and 187 percent of the standard- and capital flow management measures-adjusted IMF metrics, respectively. - External debt at 19 percent of GDP. - External position assessment (data/projections through end-2018): - Current account gap for 2018 in range of -1.0 to +1.0 percent of GDP. - Staff-assessed REER gap of -6 to +6 percent. ### Macro‑financial developments - Banking sector: - Public sector banks (PSBs) account for 61 percent of the banking system’s assets. - Banking system NPA ratio declined by 2.2 percentage points to 9.3 percent in March 2019 (after peaking in March 2018). - PSBs’ risk-weighted capital adequacy ratio (CAR) improved to 12.2 percent; one PSB remained below the 9 percent threshold, in addition to one private bank. - Five of 11 PSBs exited the Prompt Corrective Action (PCA) framework in early 2019. - Government announced additional and front‑loaded recapitalization of 0.37 percent of GDP and plan to merge some PSBs, reducing their number to 12. - Credit growth: - Bank credit growth peaked at 14.3 percent (y/y) in December 2018. - Credit growth slowed to 10 percent in August. - Private sector banks averaged 21 percent credit growth during the past five years. - NBFC sector: - Liquidity pressures emerged in 2018Q4 following defaults by IL&FS starting in June 2018. - NBFC sector balance sheet about one sixth of the banking system; aggregate CAR 19.3 percent and NPA 6.6 percent. - HFCs face continuing liquidity/solvency concerns for some institutions. - Corporate sector: deleveraging continued gradually; debt repayment capacity and profitability improving but remain below historical averages. ### Outlook and risks - Baseline projections: - Projected growth: 6.1 percent in FY2019/20 (lowest in 7 years) and rebound to 7.0 percent in FY2020/21. - Investment and private consumption expected to firm in the second half of the fiscal year. - Headline inflation projected to remain around 3.4 percent. - CAD projected to narrow marginally to 2.0 percent of GDP. - Balance of payments expected to return to surplus on returning capital inflows. - External risks: rise in protectionism and retreat from multilateralism; recent retaliatory response to U.S. measures noted. - Domestic risks: persistence of macro-financial vulnerabilities; market sentiment affected by pressures at small financial institutions. - Growth-at-Risk (GaR) result: - With a US$10 per barrel increase in oil prices, there is about a 17 percent chance that growth would drop below 5 percent in FY2019/20, compared to a 5 percent chance in the baseline. ### Scenarios, policy tradeoffs, and medium‑term outlook - Two scenarios: Baseline and Reform scenario. - Baseline scenario: - Growth rises to medium-term potential of 7.3 percent on productivity-enhancing effects of recent reforms (including GST) and continuation of recent fiscal policies and gradual reforms. - Inflation remains within target band and CAD at manageable levels. - FRBM fiscal consolidation targets not achieved; labor market gains remain subdued. - Reform scenario (comprehensive reform package with three pillars) would boost inclusive growth and offset negative growth impact of a more ambitious fiscal consolidation: - Pillar 1: Complement banking sector cleanup with decisive strengthening of PSB governance and regulation and oversight of NBFCs. - Pillar 2: Medium-term fiscal consolidation anchored by FRBM Review Committee recommendation to reduce general government debt toward 60 percent of GDP. Consolidation would rely on: - Expenditure savings from rationalizing subsidies. - Revenue gains from expanding the tax base, especially on personal income. - Address crowding out and financial repression caused by high PSBR which exceeds net household financial saving (6.6 percent of GDP). - Even with proposed measures, debt-to-GDP projected to be 62.4 percent by FY 2024/25; additional measures to offset estimated revenue loss from recent CIT rate reduction would be needed to achieve FRBM debt target by FY2024/25. - Example measures: expanding property taxation, increasing the coal cess, enacting equal tax treatment of agricultural income with that from other sources. - Pillar 3: Labor, product market, land, and other reforms to increase labor market flexibility, reduce duality between formal and informal sectors, improve employment opportunities, enhance competition, and reduce scope for corruption. ### Fiscal consolidation details and macro impacts (from Table 1 and notes) - Recommended cumulative fiscal consolidation of 1.8 percent of GDP from 2020/21 to 2023/24 vs. 0.7 consolidation in baseline fiscal projection implies marginal recommended consolidation of 1.1 percent of GDP. - Recommended consolidation features: - Additional expenditure savings of about 0.5 percent of GDP (reducing subsidies: food, petroleum, fertilizers). - Tax revenue increases: GST ≈ 0.1 percent of GDP; personal income taxes ≈ 0.4 percent of GDP. - Personal-income-tax revenue gains could be achieved by eliminating exemptions (tax payers currently have no liability on income below about $7,000 USD). - India’s personal income tax top rate is 30 percent. - Interest savings from lower debt account for remaining 0.1 percentage point of consolidation. - Growth effects (memo items in Table 1): - Fiscal consolidation growth impact: -0.2, -0.1, -0.1, 0.0, 0.0. - Labor and product market reforms growth impact: -0.2, 0.3, 0.5, 0.6, 0.7. - Selected projections (Est./Proj. columns from Table 1): - Real GDP growth: 6.8 6.1 7.0 7.4 7.4 7.4 7.3 6.7 7.6 7.8 8.0 8.0 - Potential output growth: 7.1 7.1 7.1 7.2 7.3 7.3 7.3 7.1 7.6 7.8 7.9 8.0 - Fiscal deficit (percent of GDP): 6.2 7.4 7.1 6.9 6.8 6.7 6.7 6.7 6.2 5.9 5.7 5.6 - Primary balance (percent of GDP): -1.2 -2.2 -2.0 -2.1 -2.1 -2.1 -2.1 -1.7 -1.5 -1.2 -1.2 -1.2 - Public debt (percent of GDP): 69.1 69.8 69.1 68.1 67.1 66.3 65.5 68.9 67.4 65.6 63.9 62.4 - Investment (percent of GDP): 24.5 24.7 25.3 25.7 26.1 26.6 26.9 25.4 25.9 26.5 27.3 28.0 - Notes: - Almost ½ percentage point reduction in medium-term potential growth compared to the 2018 staff report reflects structural weakening primarily owing to weakness in investment, but assumes some benefit from GST and recent CIT rate cut. - Owing to a favorable growth-interest rate differential, debt is projected to remain sustainable, including under stress scenarios. Public debt is primarily denominated in domestic currency and held by residents. - Cumulative GDP level effect of additional fiscal consolidation (1.1 percent of GDP) estimated to be about 0.5 percent. ### Key policy priorities and recommendations - Boost inclusive and sustainable growth through: - Front-loaded, bolder structural reforms; acceleration would raise medium-term growth beyond baseline. - Strengthen PSB governance decisively and enhance regulation and oversight of NBFCs. - Pursue medium-term fiscal consolidation anchored by FRBM Review Committee recommendation to reduce general government debt toward 60 percent of GDP. - Rationalize subsidies (food, petroleum, fertilizers) and expand tax base, especially personal income taxation (eliminate exemptions; increase contributions of top earners). - Consider expanding property taxation, increasing the coal cess, and enacting equal tax treatment of agricultural income with other sources to offset revenue losses (e.g., from CIT rate reduction). - Labor, land, product market reforms to increase labor market flexibility, reduce formality/informality duality, and improve employment opportunities. - Improve efficiency of the financial system, reduce PSBR crowding out, strengthen regulatory framework and rule of law to reduce corruption. - Policy sequencing: - Complement bank balance sheet cleanup with governance reforms and NBFC oversight. - Implement fiscal consolidation measures that minimize adverse growth impacts and address crowding out. - Pursue structural reforms to boost productivity and labor market outcomes to offset temporary consolidation headwinds. ### Risks to the outlook (Appendix I highlights) - Domestic risks: - Tax revenue shortfalls beyond those anticipated in the baseline. - Delays in strengthening balance sheets of PSBs and corporates, and other structural reforms. - Credit growth could remain subdued due to increased risk aversion and PSB consolidation implementation. - External risks: - Oil price volatility. - A sharp rise in risk premia in global financial markets. - Rising protectionism. - Risk matrix excerpts and recommended actions: - Fiscal revenue shortfalls related to GST: Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. Recommended: enhance GST compliance, simplify rate structure, streamline filing and refunds. - Public banks, corporates, and NBFCs remain weak: Relative Likelihood: M; Time Horizon: ST, MT; Expected Impact: M. Recommended: speed up NPL resolution, improve PSB governance, strengthen NBFC oversight. - Setbacks in structural reform process: Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. Recommended: facilitate state-led reforms, address supply bottlenecks, strengthen business climate. ### Monetary and exchange rate policy (findings and recommendations) - Monetary policy actions and stance: - Recent easing moved policy rate closer to the natural rate; staff’s midpoint estimate of the natural rate is 1.2 percent with a range of 0.7 to 1.7 percent. - In October, the RBI’s Monetary Policy Committee cut the policy rate by 25 bps to 5.15 percent, for a cumulative reduction of 135 bps since February 2019. - Recommendation: monetary policy should maintain an easing bias at least until the projected recovery takes hold. - Improving monetary transmission: - Enhance competition in the banking system. - Encourage banks to streamline credit pricing and reference lending rates to external benchmarks. - Reduce banks’ funding costs by passing through changes in policy rates to administered interest rates (e.g., on NSSF certificates). - Staff welcomes planned reduction in the SLR to 18 percent by April 2020. - Exchange rate and capital flows: - Continue exchange rate flexibility; intervention should be two-way and limited to disorderly market conditions. - Reserve coverage simulations: adequate even for a sustained 30 percent oil price increase, but severe scenarios with capital outflows could test reserves. - Consider costs/benefits of foreign-currency sovereign bond issuance and entering global bond indexes. ### Financial and corporate sector — progress and remaining reforms - Progress: - IBC implementation resolved around 120 cases with an average recovery rate of 43 percent; provisioning coverage improved to 60.6 percent (without write-off adjustment) in March 2019. - PSBs’ CAR improved; capital injections of INR 881 billion in FY2017/18 and raised capital injection in FY2018/19 from INR 650 billion to INR 1.06 trillion; additional INR 700 billion budgeted for FY2019/20. - Staff recommendations: - PSB mergers should be accompanied by deep operational restructuring, far‑reaching governance reform, and safeguards to maintain soundness. - Improve risk management and operations of PSBs to improve efficiency of credit allocation. - Strengthen regulation and monitoring of NBFCs and HFCs; transfer of HFC supervision to RBI welcomed. - Consider an asset quality review for the NBFC sector and enhance timely, granular data availability. - Amend legal framework to enable RBI effective governance of PSBs and subject PSBs fully to banking and corporate laws applied to private banks. - Government actions: - Announced PSB mergers reducing number of PSBs from 21 to 12; three PSBs merged in March; majority stake sale of a PSB to LIC; plans to merge 10 PSBs into 4 PSBs. ### Modernizing labor regulations, female labor force participation, and structural reforms - Labor reforms and female participation: - Priority: modernize labor regulations and increase formal employment, especially for women. - Key measures: update and streamline labor laws, amend gender-specific labor laws, invest in gender-targeted skills training, strengthen females’ land inheritance rights and financial literacy. - Drafting of four Labor Codes: Code on Wages Act notified in August; Code on Occupational Safety, Health, and Working Conditions introduced in July; Codes on industrial relations and on social security and welfare in pre-legislative stage. - Digital technologies: - Leverage JAM trinity and digital platforms (e.g., Mahila e-Haat) and job-matching platforms to improve female access to finance, markets, and employment. - Infrastructure and agriculture: - New target to invest Rs. 100 trillion (about US$1.4 trillion) over the next six years. - Bottlenecks: land acquisition delays, environment/forest clearances, stressed private balance sheets, overreliance on bank lending. - Financing solutions: institutional investment (pension, insurance, sovereign wealth funds), brownfield asset monetization, Toll Operate Transfer, Infrastructure Investment Trusts. - Agricultural actions: ease land acquisition law, compile full digital land registry, simplify regulatory approvals, implement Agricultural Export Strategy approved in late-2018. ### Fiscal reporting and transparency (recommendations) - Improve coverage and comprehensiveness of fiscal reports; states should report intra-year fiscal data at the general government level. - Authorities committed to providing general government fiscal data on a quarterly basis by the G20 deadline of 2021. - Recommendations: - Establish clear obligations for states to report fiscal data to the Union on a shared calendar and template. - Align Chart of Accounts across tiers of government. - Further integrate central and state IT financial management systems. - Set medium-term strategy for shift to accrual accounting anchored by explicit objectives and milestones. - IMF available to provide capacity development (CD) and Fiscal Transparency Evaluation based on IMF’s Fiscal Transparency Code. ### External sector assessment (key points) - Overall: external sector position in 2018 broadly in line with fundamentals and desirable policies. - Key 2018 figures (% GDP): - NIIP: –15.9 - Gross Assets: 22.2 - Res. Assets: 14.5 - Gross Liab.: 38.1 - Debt Liab.: 18.3 - Current account: - CA deficit increased to 2.1 percent of GDP in FY2018/19 from 1.8 percent in prior year. - EBA CA Norm: –3.4 percent of GDP; EBA CA Gap: 1.4 percent. - Staff-assessed CA gap: 0.5 percent. - CA deficit projected to remain about 2½ percent of GDP over medium term and financeable at about 2½ percent. - External debt dynamics and stress tests: - External debt baseline trajectory: 2019: 19.1; 2024: 20.0 (percent of GDP). - A permanent 1/4 standard deviation shock to the non-interest current account balance would increase external debt to about 23 percent of GDP by FY2024/25. - A 30 percent depreciation in FY2020/21 would raise external debt to around 26 percent of GDP in FY2020/21, rising to about 27 percent by FY2024/25. - Gross external financing needs remain sizable (examples: 2019: $292.9 billion, 10.4 percent of GDP; 2024: $524.8 billion, 11.3 percent of GDP). ### Capacity development and IMF engagement - IMF CD activities scaled up; examples include: - Introduction of the inflation targeting framework. - Banking sector stress testing. - Modernization of insolvency regime. - Design of the GST and fiscal responsibility framework. - Strengthening macroeconomic statistics. - SARTTAC delivered training/TA; 678 Indian officials received training in FY2019 (up from 377 in FY2018). Italic: Source: IMF staff report — “1. Growth and Investment” (excerpt provided). ### 1. Growth and Investment ______________________________________________________________________ 30 ### 1. Growth and Investment ### Overview - Growth has been strong in recent years but not associated with broad-based formal job gains; relatively low food prices have contributed to rural distress. - Labor market concerns: unemployment is high while labor force participation has decreased, particularly for females. - The government’s renewed large Parliamentary majority provides an opportunity to reinvigorate reforms to boost inclusive and sustainable growth. - Medium-term vision in the July 5 Budget Speech focuses on boosting investment, supporting the rural economy, boosting infrastructure spending, streamlining the Goods and Services Tax (GST), reforming direct taxes, and pursuing a business-friendly policy agenda. - Implementation of past Fund advice has been mixed: monetary and exchange rate policies broadly consistent; fiscal consolidation not achieved at the PSBR level; progress on PSB governance and reduced government role in banking remains incomplete. - Structural reform progress (transportation infrastructure, electrification, digitization, ease of doing business) has been important but slower than previous Fund advice recommended. ### Recent developments - GDP growth slowed to a five-year low of 6.8 percent in FY2018/19 (April 2018-March 2019). - Growth in Q1 FY2019/20 slipped to 5.0 percent amid a sharp deceleration of investment and private consumption. - Output gap has turned negative. - Headline inflation averaged 3.4 percent in FY2018/19, an 8-year low. - Headline inflation fell to 2.0 percent (y/y) in January then rose to 3.2 percent in August. - CPI inflation excluding food and fuel was 4.2 percent, down from a recent peak of 6.4 percent in June 2018. - RBI medium-term target band mid-point for headline inflation is 4 percent CPI inflation ± 2 percent. - External developments: - CAD widened to 2.1 percent of GDP in FY2018/19. - FDI financed about half of the CAD in FY2018/19. - Rupee depreciated by about 3.4 and 5.9 percent on average in real and nominal effective terms in FY2018/19. - Non-oil merchandise exports (U.S. dollar value) expanded by 6.6 percent in FY2018/19. - Gross reserves declined by US$12 billion during FY2018/19 to US$413 billion (7 months of imports). - Net forward position fell by US$34 billion in FY2018/19. - Gross reserves rose to US$429 billion through end-August (renewed portfolio inflows). - Reserves adequacy: about 149 percent and 187 percent of the standard- and capital flow management measures-adjusted IMF metrics, respectively. - External debt at 19 percent of GDP. - External position (data/projections through end-2018) assessed broadly consistent with fundamentals and desirable policy settings: - Current account gap for 2018 in range of -1.0 to +1.0 percent of GDP. - Staff-assessed REER gap of -6 to +6 percent. ### Macro-financial developments - Banking sector improvements but some institutions still face difficulties. - PSBs account for 61 percent of the banking system’s assets. - RBI steps to improve NPA recognition and strengthen regulatory/supervisory framework. - Capital injections from the government budget over the past two years and IBC implementation have improved PSB capacity to extend credit. - Banking system NPA ratio declined by 2.2 percentage points to 9.3 percent in March 2019 (after peaking in March 2018). - PSBs’ risk-weighted capital adequacy ratio (CAR) improved to 12.2 percent; one PSB remained below the 9 percent threshold, in addition to one private bank. - Five of 11 PSBs exited the Prompt Corrective Action (PCA) framework in early 2019. - In July and August 2019, the government announced: - Additional and front-loaded recapitalization of 0.37 percent of GDP. - Plan to merge some PSBs, reducing their number to 12, along with further governance reforms. - Credit growth: - Bank credit growth peaked at 14.3 percent (y/y) in December 2018. - Credit growth slowed to 10 percent in August (year not explicitly restated in supplied excerpt). - Private sector banks averaged 21 percent credit growth during the past five years, especially to the household sector. - NBFC sector: - Liquidity pressures emerged in 2018Q4 following defaults by an NBFC group, IL&FS, starting in June 2018. - HFCs face continuing liquidity/solvency concerns for some institutions. - NBFC sector balance sheet about one sixth of the banking system; aggregate CAR 19.3 percent and NPA 6.6 percent. - Corporate sector deleveraging continued gradually; debt repayment capacity and profitability improving but remain below historical averages. ### Outlook and risks - Macroeconomic outlook subdued vs. recent years: - Projected growth: 6.1 percent in FY2019/20 (lowest in 7 years) and rebound to 7.0 percent in FY2020/21. - Investment and private consumption expected to firm in the second half of the current fiscal year (supported by lagged monetary easing, measures to facilitate monetary policy transmission, recent CIT rate reduction, and rural support programs). - Headline inflation projected to remain around 3.4 percent. - CAD projected to narrow marginally to 2.0 percent of GDP. - Balance of payments expected to return to surplus on returning capital inflows. - External risks: rise in protectionism and retreat from multilateralism could affect India via trade channel and confidence/financial market effects; recent retaliatory response taken to U.S. measures noted. - Domestic risks: persistence of macro-financial vulnerabilities; market sentiment affected by pressures at small financial institutions. ### Scenarios, policy tradeoffs, and medium-term outlook - Two scenarios presented: Baseline and Reform scenario. - Baseline scenario: - Growth rises to medium-term potential of 7.3 percent on productivity-enhancing effects of recent reforms (including GST) and continuation of recent fiscal policies and gradual reforms. - Inflation remains within target band and CAD at manageable levels. - FRBM fiscal consolidation targets not achieved; labor market gains remain subdued. - Reform scenario (comprehensive reform package with three pillars) would boost inclusive growth and offset negative growth impact of a more ambitious fiscal consolidation: - Pillar 1: Complement banking sector cleanup with decisive strengthening of PSB governance and regulation and oversight of NBFCs. - Pillar 2: Medium-term fiscal consolidation anchored by FRBM Review Committee recommendation to reduce general government debt toward 60 percent of GDP. Consolidation would rely on: - Expenditure savings from rationalizing subsidies. - Revenue gains from expanding the tax base, especially on personal income. - Address crowding out and financial repression caused by high PSBR which exceeds net household financial saving (6.6 percent of GDP). - Even with proposed measures, debt-to-GDP projected to be 62.4 percent by FY 2024/25; additional measures to offset estimated revenue loss from recent CIT rate reduction would be needed to achieve FRBM debt target by FY2024/25. - Example measures: expanding property taxation, increasing the coal cess, enacting equal tax treatment of agricultural income with that from other sources. - Pillar 3: Labor, product market, land, and other reforms to increase labor market flexibility, reduce duality between formal and informal sectors, improve employment opportunities, enhance competition, and reduce scope for corruption. - Fiscal consolidation details and macro impacts (from Table 1 and notes): - Recommended cumulative fiscal consolidation of 1.8 percent of GDP from 2020/21 to 2023/24 vs. 0.7 consolidation in baseline fiscal projection implies marginal recommended consolidation of 1.1 percent of GDP. - Recommended consolidation features additional expenditure savings of about 0.5 percent of GDP (reducing subsidies: food, petroleum, fertilizers) and tax revenue increases (GST ≈ 0.1 percent of GDP; personal income taxes ≈ 0.4 percent of GDP). - Personal-income-tax revenue gains could be achieved by eliminating exemptions (tax payers currently have no liability on income below about $7,000 USD). - India’s personal income tax top rate is 30 percent. - Interest savings from lower debt account for remaining 0.1 percentage point of consolidation. - Growth effects (memo items in Table 1): - Fiscal consolidation growth impact: -0.2, -0.1, -0.1, 0.0, 0.0 (years as in table columns). - Labor and product market reforms growth impact: -0.2, 0.3, 0.5, 0.6, 0.7 (years as in table columns). - Selected projections and figures from Table 1 (Est./Proj. columns): - Real GDP growth: 6.8 6.1 7.0 7.4 7.4 7.4 7.3 6.7 7.6 7.8 8.0 8.0 - Potential output growth: 7.1 7.1 7.1 7.2 7.3 7.3 7.3 7.1 7.6 7.8 7.9 8.0 - Fiscal deficit (percent of GDP): 6.2 7.4 7.1 6.9 6.8 6.7 6.7 6.7 6.2 5.9 5.7 5.6 - Primary balance (percent of GDP): -1.2 -2.2 -2.0 -2.1 -2.1 -2.1 -2.1 -1.7 -1.5 -1.2 -1.2 -1.2 - Public debt (percent of GDP): 69.1 69.8 69.1 68.1 67.1 66.3 65.5 68.9 67.4 65.6 63.9 62.4 - Investment (percent of GDP): 24.5 24.7 25.3 25.7 26.1 26.6 26.9 25.4 25.9 26.5 27.3 28.0 - Memo: PSBR exceeds net household financial saving (6.6 percent of GDP). - Notes: - The almost ½ percentage point reduction in medium-term potential growth compared to the staff report for the 2018 Article IV consultation reflects a structural weakening primarily owing to weakness in investment in recent years, but still assumes some benefit from ongoing structural reforms including the GST and the recent CIT rate cut. - Owing to a favorable growth-interest rate differential, debt is projected to remain sustainable, including under stress scenarios (see DSA, Appendix V). Risks further mitigated because public debt is primarily denominated in domestic currency and held by residents. - Growth effects of the fiscal consolidation scenario assessed using IMF’s Flexible System of Global Models (FSGM). Cumulative GDP level effect of additional fiscal consolidation (1.1 percent of GDP) estimated to be about 0.5 percent. ### Key policy priorities and recommendations - Boost inclusive and sustainable growth through: - Front-loaded, bolder structural reforms; acceleration would raise medium-term growth beyond baseline. - Strengthen PSB governance decisively and enhance regulation and oversight of NBFCs. - Pursue medium-term fiscal consolidation anchored by FRBM Review Committee recommendation to reduce general government debt toward 60 percent of GDP. - Rationalize subsidies (food, petroleum, fertilizers) and expand tax base, especially personal income taxation (eliminate exemptions; increase contributions of top earners). - Consider expanding property taxation, increasing the coal cess, and enacting equal tax treatment of agricultural income with other sources to offset revenue losses (e.g., from CIT rate reduction). - Labor, land, product market reforms to increase labor market flexibility, reduce formality/informality duality, and improve employment opportunities. - Improve efficiency of the financial system, reduce PSBR crowding out, strengthen regulatory framework and rule of law to reduce corruption. - Policy sequencing: - Complement bank balance sheet cleanup with governance reforms and NBFC oversight. - Implement fiscal consolidation measures that minimize adverse growth impacts and address crowding out. - Pursue structural reforms to boost productivity and labor market outcomes to offset temporary consolidation headwinds. *Source: IMF staff report — “1. Growth and Investment” (excerpt provided).* ### 9. Risks to the outlook are tilted to the downside (Appendix I). Domestic risks include tax ### 1indea2019001 - 9. Risks to the outlook are tilted to the downside (Appendix I) ### Risks to the outlook - Domestic risks: - Tax revenue shortfalls beyond those anticipated in the baseline. - Delays, compared to the gradual pace of reforms assumed in the baseline, in strengthening the balance sheets of PSBs and corporates, and other structural reforms. - Credit growth could remain subdued due to a perception of increased risk aversion among banks and implementation of the recently announced PSB consolidation diverting focus and weighing on near-term credit growth. - External risks: - Oil price volatility. - A sharp rise in risk premia in global financial markets. - Rising protectionism. - Growth-at-Risk (GaR) result: - With a US$10 per barrel increase in oil prices, there is about a 17 percent chance that growth would drop below 5 percent in FY2019/20, compared to a 5 percent chance in the baseline. ### Authorities’ views on the outlook - Authorities were more optimistic than staff: - Expected a relatively strong recovery in the second half of FY2019/20 aided by the recent CIT rate reduction and sector-specific measures supporting the automotive, real estate, and export sectors as well as micro, small, and medium-sized enterprises (MSMEs). - Expected lagged effects of monetary easing, support to NBFCs, and front-loaded bank recapitalization to boost credit provision. - Noted provisional national accounts estimates for the first quarter of the fiscal year were based on benchmark indicators and may change significantly in the revised estimates to be released in 2020. - Confident that efforts to boost infrastructure investment and reforms to improve the business climate and streamline labor market regulations would support activity and raise India’s potential growth. ### Staff’s macroeconomic policy advice (Key policy issues) - Overall guidance: - Policies to address cyclical weakness should be focused on monetary policy and broad-based macro-structural reforms. - Fiscal stimulus should be avoided given fiscal space at risk. - Immediate focus: make revenue projections more realistic and enhance fiscal transparency and budgetary coverage to support adoption of a credible medium-term fiscal consolidation path that reduces crowding out and achieves the government’s medium-term 60 percent debt-to -GDP target. - Reforms to improve the efficiency of the financial system anchored by the 2017 FSAP recommendations (Appendix II). - If more severe slowdown occurs: - Any fiscal stimulus should be temporary, focusing on measures to boost near-term growth such as immediate investment expensing, or public infrastructure spending. ### Fiscal consolidation and transparency (findings and projections) - FY2018/19 and FY2019/20 fiscal assessments: - Central government broadly adhered to its headline fiscal deficit objective in FY2018/19, achieved through substantial on-budget revenue-expenditure compression and financing some obligations off budget. - In the government’s own accounting, the debt stock in FY2018/19 was revised upward by ½ percent of GDP in its July budget relative to its initial ‘revised’ estimate released in February. - States’ aggregate fiscal deficit expected to have improved materially in FY2018/19—to about 2.4 percent of GDP—largely due to (capital) expenditure shortfalls. - The PSBR remains high and suggests fiscal policy has been more accommodative than implied by the path of the general government deficit. - FY2019/20 budget envisages a reduction in the headline central government fiscal deficit of 0.1 percent of GDP (a reduction by 0.2 percent of GDP in the structural primary balance, both IMF definition). - Over-optimism regarding revenue targets, compounded by the recent CIT rate reduction for which no offsetting revenue or expenditure measures have been announced, makes achieving the budget targets increasingly unlikely. - Specific revenue and expenditure numbers and projections: - Relative to provisional actual outturns for FY2018/19, corporate and personal tax revenues are budgeted to increase by 15.4 and 23.2 percent (y/y). - Budgeted GST revenue growth target: 14.1 percent. - Rural farm income support scheme expected to add about 0.3 percent of GDP to spending in FY2019/20. - Staff projects central government net tax revenues at 6.7 percent of GDP in FY2019/20 versus 7.9 percent of GDP in the July budget estimates (staff projects a revenue depression by about 0.5 percent of GDP from the lowering of CIT rates). - Staff expects both income tax and GST revenues to decline (as a share of GDP) relative to FY2018/19 estimated outturns. - Staff expects some compression of on-budget expenditure to accommodate revenue shortfall; authorities’ narrow fiscal-deficit target likely to be missed by 0.5 percentage points. - Possible interim RBI dividend and greater disinvestment proceeds could provide slight revenue boosts (latter only in the authorities’ deficit presentation). - Longer-term concerns: - Achievement of an interim fiscal-deficit target of 3.0 percent has been delayed multiple times; initial debt target of 40 percent by FY2023/24 has been pushed out. - Increased use of off-budget financing renders adherence to the headline deficit target less meaningful and entails a less-favorable debt-reduction trajectory. - Staff assesses India as having fiscal space at risk and sees no scope to provide fiscal stimulus at this juncture. - Staff recommends holding constant its extended notion of the central government deficit at 5.4 percent of GDP in FY2019/20 (headline deficit plus NSSF loans to PSUs and fully serviced bonds). - Staff recommends a more ambitious medium-term consolidation path to avoid pushing general government debt to a 10-year high of 69 percent of GDP by end-March 2020 (in the absence of offsetting measures after the CIT cut). - Government interest payments stood at 4.9 percent of GDP in FY2018/19. ### Staff’s fiscal consolidation recommendations (anchors of consolidation scenario) - Gradual reduction of subsidy spending on food, fuel, and fertilizers, supported by increased direct-benefit-transfers to farmers (including through PM KISAN). - Increases in revenue collections through: - GST reforms: increase compliance (streamline filing and refund mechanisms), broaden the base (e.g., include electricity and petroleum products), and simplify the rate structure—adopting fewer rates. - Personal income tax reforms: eliminate exemptions, reduce the minimum threshold for taxpayers, and increase contributions of top earners (recent surcharge on top earners noted as a positive step). - Consolidation scenario assumes no further additions to off-budget financing of expenditure. ### Fiscal reporting and transparency recommendations - Enhance fiscal reporting and strengthen fiscal transparency, including: - Improve accessibility and interpretability of the budget documentation. - Improve timeliness and comprehensiveness of fiscal data collected by the central government to support better fiscal policymaking. - Invest in public financial management processes and systems for timely fiscal data collection at all levels, stronger Ministry of Finance coordination, and sounder fiscal reporting. - To comply with the G20 commitment to publish general government fiscal data on a quarterly basis in line with GFSM 2014, the Ministry of Finance should lead collection of fiscal data from each state government according to a shared calendar and template. - IMF stands ready to provide further capacity development (CD) and proposes requesting FAD to conduct a Fiscal Transparency Evaluation based on the IMF’s Fiscal Transparency Code. ### Authorities’ views on fiscal measures and data - Authorities broadly agreed with staff on the importance of medium-term fiscal consolidation and progress in reducing the central-government fiscal deficit. - Emphasized fiscal deficit definition under the FRBM Act and the relevance of liabilities recorded in the Public Account and financial liabilities of entities owned or controlled by the government. - Argued that current fiscal year revenue projections were achievable, citing: - Surcharge on top income earners (a 37 percent surcharge levied on the tax liability of those earning more than about US$700,000). - Levy on share buy-backs of listed companies (20 percent of the difference between issue and buy-back price). - Faceless assessment approach to tax administration and greater use of digitization. - Nudge program and real-time tax databases to support GST compliance. - Dispute resolution scheme for legacy taxes subsumed by the GST could boost revenues this fiscal year. - RBI surplus capital transfer treated above the line in government accounts providing about ¼ percent of GDP vis-à-vis the July budget estimate. - On CIT reductions: - Authorities expect lower rates to boost compliance and spur economic activity by encouraging incorporation of new manufacturing firms, lowering cost of doing business, and easing tax compliance, and thus to increase the corporate tax base over time, offsetting short-term revenue losses. - Authorities envisioned no need for additional revenue-boosting or expenditure-reducing measures at this time. - Data commitments: - Authorities reiterated commitments in the second phase of the G-20 Data Gaps Initiative, intending to provide general government fiscal data on a quarterly basis by the G20 deadline of 2021. ### Monetary and exchange rate policy (findings and recommendations) - Inflation targeting (IT) outcomes: - IT has contributed to macroeconomic stability, better anchored inflation expectations, and improved the economic wellbeing of low-income households. - Since the foundation for adoption of IT in February 2015, gains have been made in bringing down inflation and inflation expectations; inflation in India has broadly converged to the level in G20 peers. - Staff analysis suggests inflation expectations in India have become better anchored since adoption of IT. - Policy credibility and implementation: - Building monetary policy credibility is gradual and cumulative; continued commitment to the IT regime and clear central bank communication are important as the economy experiences shocks. - Staff welcomes RBI steps to enhance capacity to monitor and forecast food prices to improve IT implementation. - Recent policy action: - In August, the RBI cut the policy rate by 35 basis points (bps), a change from traditional 25 bps increments. - Staff notes predictability and meaningful size of policy-rate increments can help market participants form expectations; forward guidance accompanied by market development can be effective. *1indea2019001 - 9. Risks to the outlook are tilted to the downside (Appendix I).* ### 25. Recent monetary loosening has been largely appropriate, and there could be room for ### 25. Recent monetary loosening has been largely appropriate, and there could be room for ### Monetary policy stance and outlook - Recent easing in August moved the policy rate closer to the natural rate of interest; staff’s midpoint estimate of the natural rate is 1.2 percent with a range of 0.7 to 1.7 percent reflecting model standard errors. - Consensus inflation expectations slightly below 4 percent. - In October, the RBI’s Monetary Policy Committee cut the policy rate by 25 bps to 5.15 percent, for a cumulative reduction of 135 bps since February 2019. - The cumulative easing of 135 basis points this year is sizeable and would support the economy amid the negative output gap, but effects will take time given monetary policy lags. - Recommendation: monetary policy should maintain an easing bias at least until the projected recovery takes hold. ### Improving monetary transmission - Key measures to improve transmission: - Enhance competition in the banking system. - Encourage banks to streamline credit pricing. - Ensure recently-mandated referencing of lending rates to external benchmarks allows market-based pricing of credit risks. - Reduce banks’ funding costs by passing through changes in policy rates to administered interest rates (e.g., on NSSF certificates). - Staff welcomes the planned further reduction in the SLR to 18 percent by April 2020. - On liquidity management, staff recommends: - Review findings of the liquidity management framework. - Manage any balance sheet risks from long-maturity foreign exchange swaps contracted by the RBI earlier this year. ### RBI Economic Capital Framework (Bimal Jalan Committee) - The expert panel laid out new guidelines for transfer of RBI profits and “excess capital.” - Staff welcomes the report’s emphasis on the RBI’s resilience to support the needs of a large emerging market economy. - Revaluation balances are treated only as risk buffers against market risks and unrealized valuation gains are not distributed. - Implementation of the transfer will have implications for the RBI’s balance sheet and liquidity management; these implications need clear communication with market participants. ### Exchange rate flexibility and capital flows - De jure and de facto restrictions hold back capital inflows, though authorities recently eased various CFMs (raising limits for FPI in government securities and external commercial borrowing; expanding automatic route for FDI to more sectors). - Staff projections: reserve coverage would remain adequate even with higher oil prices, but simultaneous capital outflows would pose a test. - In 2018/19, faced with external pressures, the RBI allowed exchange rate depreciation while intervening in spot and forward FX markets (about 1.8 percent of GDP) and easing various CFMs; intervention sales were of similar magnitude to net purchases of the previous year, illustrating two-way intervention. - Staff simulations: - Reserve coverage would remain adequate in case of a sustained 30 percent oil price increase. - In a more severe scenario with higher oil prices accompanied by one year of moderate capital outflows, reserves coverage would fall below 100 percent of the ARA metric by the end of the six-year forecast horizon. - Recommendations on exchange rate policy: - Continue exchange rate flexibility to deepen and broaden exchange markets and hedging instruments. - Intervention should be two-way and limited to disorderly market conditions. - In event of severe external pressures (including from higher oil prices), combine continued exchange rate flexibility with tighter fiscal and monetary policies to contain the shock. - On foreign-currency sovereign bond issuance and FPI limits: - Foreign currency issuance can help benchmarking and diversify investor base, but costs, risks, and benefits need assessment. - Consideration could be given to entering global bond indexes for some bonds and facilitating clearance and settlement for nonresident investors. ### Authorities’ views (monetary and external) - Authorities concurred that continued commitment to the IT framework is important for monetary credibility and macro-stability. - Given the negative output gap and low food prices, inflation pressures expected to be well-contained and below the RBI’s medium-term inflation target midpoint. - The lagged impact of the cumulative easing of 135 basis points is being closely monitored to decide on additional easing. - Authorities noted limitations in using estimates of the natural rate in an emerging market context due to imprecision. - Authorities indicated a need to calibrate rate adjustment sizes (25 bps or multiples may not always be consistent). - Authorities agreed on need to further improve monetary transmission and emphasized linking bank lending rates to external benchmark rates to help transmission. - On the external position: - Authorities view external position as broadly consistent with fundamentals and policy settings. - Agreed with assessment of the current account norm of -2.5 percent of GDP and noted higher deficits can pose financing challenges. - Confirmed commitment to two-way exchange rate flexibility; interventions intended only to smooth excessive volatility. - Noted recent use of longer-term foreign exchange swaps aimed to expand durable liquidity management tools beyond open-market operations; risks to the RBI balance sheet remain limited given the size of operations. ### Financial and corporate sector — progress and remaining reforms - Resolution and recovery under IBC helped lower gross NPA ratio; provisioning coverage improved to 60.6 percent (without write-off adjustment) in March 2019. - PSBs’ capital positions improved following government’s two-year recapitalization program; expected further enhancement by this fiscal year’s additional recapitalization, planned to be frontloaded to revive lending capacity. - IBC implementation has resolved around 120 cases with an average recovery rate of 43 percent; backlog and process duration remain challenges; steps to increase National Company Law Tribunal capacity are being taken. - RBI released new guidelines on Resolution of Stressed Assets in June 2019 reducing reliance on court procedures and allowing more flexibility for resolution plans outside IBC, with disincentives (additional provisioning requirements) for resolution delays. - Staff findings and recommendations: - Cross-country analysis suggests scope to improve efficiency of Indian banks, especially PSBs. - Government’s PSB reform plan (metrics: responsible banking, financial inclusion, credit offtake, digitization) and more arm’s-length PSB management selection are welcome. - Government should step up efforts to improve risk management and operations of PSBs to improve efficiency of credit allocation. - PSB mergers should be accompanied by deep operational restructuring, far-reaching governance reform, and safeguards to maintain soundness; without these, mergers may not address underlying needs and could create larger, potentially weaker banks. - While mergers reduce number of PSBs to 12, large government presence in banking system will remain unchanged. ### NBFCs, HFCs, and sectoral oversight - Strengthening of regulation and monitoring of NBFCs, including HFCs, is welcomed. - Funding conditions appear to have eased for some NBFCs with greater market differentiation by firm performance. - Government announced temporary and partial guarantee to PSBs for purchase of high-quality assets from solvent NBFCs in the July Budget. - RBI enhanced monitoring/reporting of systemically-important NBFCs and introduced more granular liquidity management requirements. - Transfer of regulatory authority over HFCs from NHB to RBI welcomed; expected to reduce regulatory arbitrage. - Recommendation: separate promotion/financing of housing finance from supervision of HFCs to avoid conflict of interest. - Continued vigilance warranted on spillovers and systemic implications; staff urges authorities to enhance availability of more timely and granular data (including to the public). - Consideration of an asset quality review for the sector. ### Governance, resolution frameworks, and FSAP follow-up - Staff recommends far-reaching governance reforms to improve risk management and credit allocation: - Strengthen quality and independence of banks’ Boards. - Remove RBI officials from PSB Boards. - More aggressively pursue PSB privatization and/or allow PSBs to operate independently with accountability to government. - Make legal changes to formally enable the RBI to ensure effective governance of PSBs and subject PSBs fully to banking and corporate laws that apply to private banks. - Progress made on implementing IFRS 9 and strengthening insurance and securities supervision and regulation. - Need to establish a mechanism for resolution of financial institutions and improve frameworks for emergency liquidity assistance (ELA), deposit insurance, and crisis preparedness. ### Authorities’ views (financial sector) - Authorities agreed on importance of governance reform and improving PSB risk management; emphasized progress in capital adequacy and NPA ratios. - Noted PSB mergers and reforms (including allowing chief risk officers at market-based salaries) expected to lead to efficiency gains and enhanced lending capacity. - Authorities stressed importance of priority sector lending (PSL) and PSBs’ role in reaching underserved segments. - Authorities noted RBI’s supervisory power over banks is agnostic to ownership and did not agree on need for legal changes to formally provide RBI full supervisory powers over PSBs. - Regarding ELA, authorities value constructive ambiguity and flexibility of current framework and do not publish internal guidelines to avoid moral hazard. - Authorities highlighted effectiveness of measures addressing NBFC stress: improved liquidity conditions, enhanced regulatory and supervisory powers, and transfer of HFC regulation to RBI. *Source: IMF staff report excerpt (India). * ### 41. An important priority is modernizing labor regulations and other measures to help ### 1indea2019001 - 41. An important priority is modernizing labor regulations and other measures to help ### Modernizing labor regulations and female labor force participation - Priority: modernize labor regulations and other measures to help increase formal employment, especially of women. - Key reform areas: - Update and streamline labor laws, including to reduce restrictive employment protection and not discriminate by enterprise size. - Amend and strengthen implementation of gender-specific labor laws. - Invest in gender-targeted skills training programs to increase female employment in better quality jobs in the formal sector. - Strengthen implementation and awareness of females’ land inheritance rights and financial literacy programs to address constraints to female usage of financial services. - Rationale: - Restrictive rules provide disincentives for firms to expand to their optimal size, stifling productivity growth and formal sector job creation. - More flexible labor market regulations at the state level have demonstrated benefits (as illustrated in the latest Economic Survey). - Reforms would allow India to reap the full benefits from a more integrated national market due to the implementation of the national GST. - Past analysis: - Selected Issues Papers suggest a multi-dimensional approach—using a range of fiscal, legal, and structural measures—could maximize long-run economic gains and promote greater economic participation of women. ### Digital technologies to improve female labor force participation - Opportunities identified: - Build on the success of the JAM trinity (the initiative to link Jan Dhan (bank) accounts, Mobile numbers, and Aadhaar unique identify numbers). - Leverage the rapid increase in bank account ownership and mobile phone availability to enhance access to and lower costs of financial services for women. - Use digital marketing platforms (including Mahila e-Haat) to connect women entrepreneurs in remote areas with markets to sell produce and goods. - Promote job-matching platforms to improve labor market information flows, cut time for job search, and improve labor market efficiency—benefiting people in remote areas and those seeking part-time work. ### Infrastructure and product market reforms - Government plan and target: - New target to invest Rs. 100 trillion (about US$1.4 trillion) over the next six years; this would involve more than a doubling of infrastructure investment from the pace of the last five years. - Implementation bottlenecks to address: - Delays in land acquisition. - Environment and forest clearances. - Stressed balance sheet of private companies involved in infrastructure investment. - Overdependence on bank lending for financing of infrastructure. - Financing and institutional solutions: - Promote institutional investment into infrastructure from pension, insurance, and sovereign wealth funds. - Use modalities including brownfield asset monetization with Toll Operate Transfer and Infrastructure Investment Trusts. - Need to redouble efforts to address sources of delays to achieve sustained increases in investment. ### Agricultural sector reforms and land reforms - Objectives: - Reduce supply-side constraints, build more integrated markets, boost productivity, and address market distortions. - Support reallocation of labor to manufacturing and services while improving rural living standards. - Enablers and evidence: - Gains from rural electrification (e.g., cold storage) and rural road expansion. - Staff analysis indicates infrastructure development is associated with increased integration of wholesale agriculture markets. - States liberalizing land leasing and computerizing land records have benefitted from stronger increases in agricultural productivity. - Policy actions: - Ease land acquisition by reforming the land acquisition law. - Compile full digital land registry at state level and simplify regulatory approval processes for environmental and other clearances. - Implement the Agricultural Export Strategy approved in late-2018 to expand agriculture exports; a stable regulatory environment (including regarding tariffs and restrictions) will be key. ### Authorities’ views on reforms and governance - Authorities concurred comprehensive reforms are needed to make growth stronger, more inclusive, and sustainable. - Recognized the need for continued labor, land, infrastructure, and product-market reforms. - Acknowledged the decline in labor force participation rate, noting part is due to the young population spending more years in education and skills training. - Steps taken to increase women’s economic participation included: - Recent amendments to the Maternity Benefit Act 2017. - Child-care subsidies. - Schemes to support education, women’s safety, and infrastructure. - Governance and ease of doing business: - Drive to introduce faceless tax assessment and refund processes to limit direct interactions between tax officers and payers. - Noted improvements visible in India’s improved global ease of doing business ranking. - Labor law legislative progress (footnote): - Steps taken to draft four Labor Codes aiming to simplify, amalgamate, and rationalize central labor laws. - The Code on Wages Act was notified in August. - The Code on Occupational Safety, Health, and Working Conditions was introduced in parliament in July. - Codes on industrial relations and on social security and welfare are in the pre-legislative stage. ### Statistics and capacity development - Assessment: - Macroeconomic statistics adequate for Fund surveillance, but further capacity development (CD) warranted. - Key statistical improvements suggested: - New producer price index under development could improve deflators used to calculate GDP. - A recently-conducted survey of services could help measurement of the informal sector at the time of the next rebasing. - Authorities should re-consider how revisions were made to the back-casted series for 2004/05-2011/12. - Fund support: - The Fund stands ready to intensify support for improving statistical systems through CD. - Fund’s CD activities with India have been scaled up in recent years (Appendix VII referenced). ### Macroeconomic outlook, risks, and policy recommendations - Recent performance: - Growth slowed to a six-year low in the first half of 2019 after rapid expansion in recent years. - Weakness driven by losses in momentum in consumption and investment, weak income growth, and stresses in the non-bank financial sector; corporate and environmental regulatory uncertainty may have impacted business and investment decisions. - Weak demand and continued low food prices contributed to a further moderation of inflation to a multi-year low. - Outlook: - More subdued than in recent years; investment and private consumption expected to firm in the second half of the fiscal year. - Medium-term growth expected to benefit from productivity-enhancing effects of recent reforms and gradual macro-financial and structural reforms. - Risks tilted to the downside: - Domestic risks: tax revenue shortfalls; delays in strengthening PSBs and corporate balance sheets; weak lending and structural reform delays. - External risks: oil price volatility; a sharp rise in risk premia in global financial markets; rising protectionism. - Near-term policy guidance: - Focus on monetary policy and broad-based macro-structural reforms to address cyclical weakness. - Fiscal stimulus should be avoided given limited policy space. - The FY2019/20 budget envisages a small reduction in the fiscal deficit, but overly optimistic revenue targets and the recent reduction in CIT rates make achieving the budget targets increasingly unlikely. - Medium-term reform agenda: - Comprehensive reform package to achieve the government’s goal of a US$5 trillion economy in five years. - Complement medium-term fiscal consolidation and financial sector reforms with continued labor, product market, land, and other reforms to increase labor market flexibility, enhance competition, and reduce corruption. - Aim to harness India’s demographic dividend by creating more and better jobs and enhancing female labor force participation. ### Fiscal consolidation and public debt targets - Recommendation: - A credible medium-term fiscal consolidation path more ambitious than currently envisaged is needed to reduce debt, free up resources for private investment, and reduce the interest bill. - Target and measures: - Aim to bring general government debt down to the officially-adopted target of 60 percent of GDP. - Consolidation should be driven by subsidy-spending rationalization and tax-base enhancing measures. - Revenue projections should be more realistic; fiscal transparency and budget coverage should be enhanced. - Hold an extended notion of the government’s fiscal envelope (including NSSF loans to central government PSUs and fully serviced PSU bonds, in addition to the headline fiscal deficit) constant this fiscal year, and resume fiscal consolidation on this metric in FY2020/21. ### Monetary, banking, and financial sector recommendations - Monetary policy: - The loosening of monetary policy has been largely appropriate; further easing could be warranted to maintain an easing bias until recovery takes hold. - To enable the RBI to achieve medium-term inflation targets, improve the monetary transmission mechanism by: - Enhancing competition in the banking system, including through PSB governance reforms. - Reducing the government’s footprint in the banking system. - Encouraging banks to streamline credit pricing. - Reducing banks’ funding costs by passing through changes in policy rates to administered interest rates (e.g., on NSSF certificates). - Banking sector reforms: - More progress needed on the twin balance sheet problem, resurrecting PSBs’ financial intermediation, and restoring confidence in NBFCs. - Capital injections from the government budget and IBC implementation have improved PSBs’ capital position and asset quality. - The PSB merger plan should be accompanied by deep operational restructuring and far-reaching governance reforms; consider more aggressive disinvestment and privatization. - Authorities encouraged to follow up on FSAP recommendations, including amending the legal framework to provide the RBI full regulatory powers over PSBs. - Enhance availability of timely and granular data to help restore confidence in the NBFC sector. ### Trade, capital flows, and external position - Capital account and trade policy: - India’s CFM framework is moving toward capital account liberalization. - Most FDI is now allowed under the automatic route, but scope remains to reduce administrative and regulatory burdens and improve governance. - Further liberalization in portfolio flows could be considered while remaining vigilant to capital flow reversal risks. - India is encouraged to play a bigger role in the world trade system and support the multilateral rules-based trade system. - External position: - Assessed to be broadly consistent with fundamentals and desirable policy settings; international reserves adequate for precautionary purposes. - Exchange rate flexibility has helped to weather external pressures and should continue, with foreign exchange intervention being two-way and limited to disorderly market conditions. *Source: 1indea2019001* ### 65. It is recommended that the next Article IV consultation take place on the standard 12- ### 1indea2019001 - 65. It is recommended that the next Article IV consultation take place on the standard 12- ### Growth and Investment - Growth and investment have slowed; growth has slowed, falling below potential. - Private consumption and investment decelerated in the April-June quarter. - Investment growth was weak in the last two quarters; domestic demand weakness is reflected in non-oil imports. - Indicators: - Real GDP Growth (Figure caption): data shown for Jun-08 through Jun-19 (series: GDP, GVA (Basic Prices), Real GDP Growth (In percent, Year-on-Year)). - Real Gross Fixed Capital Formation: series show large declines through Jun-19 (Percent change, Year-on-Year). ### External Developments - The current account deficit (CAD) widened to 2.1 percent of GDP in FY2018/19. - CAD widening was mostly due to the increase in India’s net oil import bill. - Financial flows: - Financial flows, led by FDI, have typically been sufficient to finance the CAD, but 2018 saw net portfolio outflows; in recent months inflows of equity and debt capital resumed. - Reserves and exposures: - Foreign exchange exposures of corporates are limited. - International reserves remain adequate. - Key numbers (Table 3 and related): - Current account balance (2018/19): -57.2 (in billions of U.S. dollars) and shown as -2.1 (percent of GDP) in Table 3. - Merchandise exports (2018/19): 337.2 (billions of U.S. dollars). - Merchandise imports (2018/19): 517.5 (billions of U.S. dollars). - Gross reserves (end-period, 2018/19): 412.9 (billions of U.S. dollars); months of next year's imports: 7.4 (as of 2018/19, Table 3). ### Financial Markets and Conditions - Emerging markets sell-offs in 2018 affected financial market conditions and volatility. - The Indian rupee came under downward pressure but recovered from November 2018 amid volatile portfolio equity and debt flows. - Stock market: maintained upward momentum through May but subdued growth is now being felt. - Long-term bond yields recently eased on resumption of capital inflows and easing of monetary policy. - Real effective exchange rate: During FY2018/19, India’s REER was 7 percent more appreciated than the average for 2010-15. - Indicators: - FII Flows (Equity and Debt): series in USD billions (monthly). - Sovereign and bank CDS: SBI used as proxy for Government of India. ### Monetary Developments and Inflation - Headline inflation began to rise on firming food inflation even as core inflation is easing on softer overall activity. - Household inflation expectations remain elevated despite recent moderation. - Food items comprise 43 percent of the CPI basket; food prices have risen from recent lows and have increased the share of CPI items displaying high year-on-year increases. - Monetary conditions: - Strengthening of monetary policy and low oil and food prices supported disinflation in 2015-2019. - Strengthening of the rupee contributed to tightening of overall monetary conditions. - Key numbers: - CPI (Combined) series and Core-Core measure (excludes food, energy, petrol and diesel) are shown for Aug-09 through Aug-19. - Inflation in India and G20 peers: comparative series presented (G20 peer group includes Brazil, Russia, China, South Africa, Indonesia, and Turkey). ### Fiscal Developments - On-budget general government balance improved in FY2018/19 but some current spending was executed off-budget. - General government debt rose to a three-year high of 68.1 percent of GDP. - Revenue-to-GDP ratio retreated somewhat in FY2018/19. - On-budget current spending has been inching down; capital spending remains at the post-crisis average. - Subsidies: - The declining trend in government subsidies of the last several years was reversed in FY2018/19; food subsidies were partly effected off-budget. - Key numbers (Table 2, Table 5, Table 6): - General government debt (2018/19): 69.1 (percent of GDP) in Table 2 (and general government debt noted as rising to 68.1 percent in figure caption). - Central government overall balance (2018/19): -3.8 (percent of GDP) (Table 2). - General government overall balance (2018/19): -6.2 (percent of GDP) (Table 2). - Central government revenue (2018/19 RE): 8.4 (percent of GDP); taxes 6.9 (percent of GDP) (Table 5). - Central government net lending / borrowing (overall balance) 2018/19: -3.6 (percent of GDP) (Table 5). - General government expenditure 2018/19: 26.0 (percent of GDP); interest (2018/19): 5.0 (percent of GDP) (Table 6). ### Fiscal Vulnerability Indicators - India’s public debt is relatively large compared with major emerging market economies; the general government fiscal deficit is also large relative to peers. - Debt roll-over risks are mitigated by long average maturity of Indian debt and favorable debt dynamics. - Currency risk is minimal and exposure to non-resident investors is limited. - Key numbers: - Average government debt maturity (as of June 2019): India shown at approximately the middle of peer maturities (Figure). - Government debt held by non-residents (As of 2018): India shown relative to peers (percent of total). - Projected interest-growth differential, 2018-23: India (Baa2) plotted among peers. ### Corporate and Banking Sector - Twin balance sheet problem in corporate and banking sectors is being addressed. - Corporate bank borrowing growth improved from the FY2017/18 low but remains subdued; corporates increasingly rely on local bonds and commercial paper. - Debt repayment capacity and profitability appear to have bottomed out but remain below historical averages. - Banks’ asset quality has started to improve, but recognition of non-performing assets has weighed on capitalization and profitability. - Key numbers: - Outstanding corporate debt in India (in trillions of Indian Rupees) series Dec-13 through Mar-19. - Outstanding corporate debt composition (Mar-12 to Sep-18): ECBs, Bank Credit, Local bonds & CPs (percent of total corporate funding). - Banks' Gross NPA ratio and restructured loan ratio series for public, private, foreign banks and all banks (2014/15–2018/19). - Capital Adequacy Ratio series and Return on Assets series for banks (2014/15–2018/19). ### Labor Market, Gender, and Social Indicators - Job generation has lagged population growth; the unemployment rate is higher than in peer countries. - Structural transformation: falling share of agriculture and rising share of services sector jobs; manufacturing job generation remains inadequate to absorb new labor entrants. - Employment in the informal sector is declining gradually. - Gender: - Female labor force participation rate is relatively low and continued to decline; gender disparity widened further. - Educational attainment (Female-Male ratio, at least completed primary, population 25+ years): India shown relative to EMDE Median, Asia-Pacific Median, and G20 Median (latest data points specified). - Key social and economic indicators (Table 2): - Nominal GDP (2018/19): 2,719 (billions of U.S. dollars). - GDP per capita (IMF staff est., 2018/19): 2,038 (U.S. dollars). - Population total (2018/19): 1.33 (billions). - Urban population (percent of total, 2018/19): 34.0. - Headcount ratio at $1.90 a day (2011): 21.2 (percent of population). - Undernourished (2015): 15.3 (percent). - Life expectancy at birth (years, 2015/16): 68.3. - Gini index (2011): 35.7. - Growth (Real GDP at market prices): 2015/16: 8.0; 2016/17: 8.2; 2017/18: 7.2; 2018/19: 6.8; 2019/20 (Est.): 6.1; 2020/21 (Proj.): 7.0 (Table 2). ### Macroeconomic Framework and Projections - Growth and macro projections (Table 7 highlights): - Real GDP (at market prices) projections: 2019/20: 6.1; 2020/21: 7.0; 2021/22: 7.4; 2022/23: 7.4; 2023/24: 7.4; 2024/25: 7.3. - Potential GDP: 7.3 (percent). - Output gap series and Prices (Consumer prices) period averages: 2018/19: 3.4; 2019/20: 3.4; 2020/21: 4.1. - Current account balance projections (in billions of U.S. dollars): 2019/20: -57.8; 2020/21: -73.5; later years widening further (Table 7). - Gross reserves (end-period) projections: 2019/20: 474.5; 2020/21: 505.9; later years rising to 573.9 (billions of U.S. dollars). ### Risks, Vulnerabilities, and Recommended Policy Actions - Risk Assessment Matrix identifies key risks, likelihood, horizon, impact, and recommended actions (excerpted): - Fiscal revenue shortfalls related to the GST - Location: Domestic; Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. - Main impacts: Protracted GST implementation issues could jeopardize the FY2019/20 deficit target, raise borrowing needs, market interest rates, and crowd out private investment. - Recommended actions: Enhance GST compliance including through further rate structure simplification, streamlining filing and refund mechanisms and strengthening tax administration. - Public banks (PSBs), corporates, and NBFCs remain weak for longer - Location: Domestic; Relative Likelihood: M; Time Horizon: ST, MT; Expected Impact: M. - Recommended actions: Speed up NPL resolution processes, improve PSBs’ governance—with a reduced role of the public sector—and strengthen NBFC oversight. - Setbacks in the structural reform process - Location: Domestic; Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. - Recommended actions: Continue to facilitate state-led reform initiatives, address long-standing supply bottlenecks, and strengthen the business climate. - Rising protectionism and retreat from multilateralism - Location: External; Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. - Recommended actions: Enhance integration into global value chains by facilitating trade liberalization, reducing barriers to trade, and advancing export sophistication and quality; broader structural reforms (labor, land, product markets) to increase benefits from trade liberalization. - Sharp tightening of global financial conditions - Location: External; Relative Likelihood: M; Time Horizon: ST; Expected Impact: M. - Recommended actions: Enhance environment for attracting stable non-debt creating capital flows, particularly FDI; rupee flexibility and monetary policy tightening. - Large swings in energy prices - Location: External; Relative Likelihood: M; Time Horizon: ST, MT; Expected Impact: M. - Recommended actions: Improve targeting of transfers to shelter the most vulnerable; accelerate reform of remaining fuel subsidies; intervene to prevent disorderly currency movements. - Intensification of security risks - Location: External; Relative Likelihood: H; Time Horizon: ST, MT; Expected Impact: M. - Recommended actions: Continue exchange rate flexibility as shock absorber; with adequate reserves, provide foreign exchange liquidity to prevent disorderly currency movements. *Source: IMF staff compilation and analysis from the India staff report materials (selected figures, tables, and Risk Assessment Matrix).* ### Appendix I. Risk Assessment Matrix 1/ ### Appendix I. Risk Assessment Matrix 1/ ### Policies to Address Vulnerabilities - Recommendation: Improve the governance and financial operations of PSBs and develop a strategic plan for their consolidation, divestment, and privatization. - Authority: MoF - Time frame: S - Status: Under Implementation: - The January 2018 Banking Reforms Roadmap lists six “reform themes”, including strengthening PSBs; increasing credit supply; and deepening financial inclusion and digitalization. A first assessment of reform progress was released in February 2019. - More leadership posts were created at PSBs by separately appointing non-Executive Chairpersons alongside the post of CEO/Managing Director. The Banks Board Bureau (BBB), established by the government in 2016 as an autonomous recommendatory body, is now responsible for advising the government, including on the selection and appointment of Board of Directors in PSBs; matters relating to appointments, confirmation or extension of tenure and termination of services of the Board of Directors, and suitable training and development programmes for management personnel in PSBs. - Plans announced in August involve enhancing PSBs’ management accountability to the Board. PSBs can now recruit Chief Risk Officers from the market. The terms of directors on the Board’s Management Committee will be extended to strengthen their contributions, the loan sanction thresholds for approval by Management Committee of Board (MCB) were raised to enable more focused attention to higher-value loan proposals, and a mandate was given to Boards for training directors and evaluate their performances annually. - The number of PSBs will be reduced from 21 to 12. Three PSBs were merged in March. A majority stake in a PSB was sold to the state-owned Life Insurance Corporation of India. Finally, in August, it was announced that 10 PSBs would be merged into 4 PSBs. - Recommendation: Conduct granular assessments of banks’ capital needs and require additional provisions and swift recapitalization and restructuring. - Authority: RBI, MoF - Time frame: S - Status: Under Implementation: - A recapitalization plan was announced in October 2017, with a view to clean up legacy NPAs, support credit growth, and have PSBs meet regulatory capital requirement. - INR 881 billion was infused in FY2017/18. - The capital injection in FY2018/19 was raised from INR 650 billion to INR 1.06 trillion. - An additional INR 700 billion is budgeted for FY2019/20, of which bank-wise capital infusion for 10 PSBs, totaling INR 552.5 billion, has already been announced based on granular assessment of capital requirements. - Since the third quarter of 2018, the BBB conducts quarterly assessments of PSB capital requirements. These are reported to the Government and the RBI. - Recommendation: Redesign the corporate debt restructuring mechanisms to make them more flexible. - Authority: RBI - Time frame: S - Status: Implemented: - The Prudential Framework for Resolution of Stressed Assets issued by the RBI on Jun 7, 2019 lays out the principles underlying the new regulatory approach, including early recognition and reporting of default; discretion of lenders to design and implement resolution plans (RPs); and a system of disincentives for delays in implementation of RPs. - It eliminated mandatory referral (under the previous circular of February 2018) of stressed accounts under the Insolvency and Bankruptcy Code (IBC), but puts the onus on banks to devise a suitable RP. - RPs can be tailored to specific requirements of the borrower and the respective commercial considerations of the lenders, subject to certain boundary conditions to establish implementation of a resolution plan as well as certain prudential requirements to ensure that only viable resolution plans are implemented. - Wherever necessary, the RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults. ### Financial Sector Oversight Framework - Recommendation: System-wide oversight and macroprudential policies - Retain regulators’ role in collecting firm-level data. - Authority: MoF - Time frame: M - Status: Implemented: - The provision of direct collection of data from regulated entities has been dropped from the draft Financial Data Management Centre (FDMC) Bill, and the regulators’ role in collecting data from the regulated entities has been retained. However, data may be collected directly by FDMC only when regulators are not able to provide data. - Banking supervision recommendations: - Review loan classification and provisioning rules in the context of IFRS, and with respect to special loan categories. - Authority: RBI - Time frame: S - Status: Under Implementation: - Indian Accounting Standards (Ind AS) was planned to be implemented by Scheduled Commercial Banks (SCBs), excluding Regional Rural Banks (RRBs) from April 1, 2018, vide RBI Circular dated February 11, 2016. However, the implementation was deferred for the second time in March 2019, till further notice, pending necessary legislative amendments. Once amendment is carried out, loan classification and provisioning requirements under the Ind-AS norms are planned to follow. - Amend the legal framework to provide the RBI with full supervisory powers over PSBs and clarify its legal independence. - Authority: Government - Time frame: M - Status: Not implemented: No amendments have been made to the legal framework. - Insurance supervision: - Recommendation: Introduce a risk-based solvency regime and risk-based supervision. - Authority: IRDAI - Time frame: S - Status: Under Implementation: - 10-member Steering committee was formed in Sep 2017 to implement risk-based capital (RBC) regime. - Consultancy Evaluation Committee (CEC) has been formed and is in process of finalizing request for proposal document to be issued to the consultants shortlisted. - A project committee of IRDAI submitted a report in November 2017. An Implementation Committee was formed in January 2018, which submitted its interim report in June 2018. - IRDAI circulated its intention of moving towards RBS Framework circulated to insurance companies in October 2018. - Central Points of Contact (CPoC) were designated for 5 insurance companies on a pilot basis in November 2018, and expression of interest was released in March 2019 for consultancy services for development and implementation of RBS Framework. - Securities regulation: - Recommendation: 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 - Status: Under implementation: - The Companies Act 2013 (CA-13) provides minimum requirements for company with respect to preparation, circulation, filing and review of various disclosures through specified reports/returns. It provides for constitution of National Financial Reporting Authority (NFRA) as an independent regulator for audit to ensure complete independence, thoroughness and accountability on the part of auditors. - Arrangements for information sharing between the Ministry of Corporate Affairs (MCA) and SEBI exist, which is simultaneous, and timely disclosure of information is required on the exchange platforms by the companies. - SEBI has specified additional sectoral requirements for listed companies through various regulations. SEBI issued a circular in May 2018 to further streamline the procedures relating to non-compliance with all relevant provisions of Listing Obligations and Disclosure Requirements (LODR) and a dedicated division monitors the compliance. - SEBI is also in the process of developing a smart aggregator of financial and other publicly available information filed by listed companies. - Recommendation: Adopt a strategy to unify regulation of commodities trading markets. - Authority: Government, SEBI - Time frame: S - Status: Under Consideration: - An Expert Committee to study and promote creation of an operational and legal framework to integrate spot market and derivatives market for commodities trading was set up on June 13, 2017. It submitted its report along with recommendations on February 12, 2018, many of which have already been implemented by RBI/ SEBI. - Financial markets infrastructure oversight: - Recommendation: Improve stress testing scenarios and methodologies. - Authority: Clearing Corporation of India (CCIL) - Time frame: S - Status: Implemented: - CCIL revised its credit stress test model in July 2017 to include some hypothetical scenarios along with the historical scenarios. - CCIL revised its reverse stress test model since December 2018 to incorporate more realistic scenarios. - The stress testing scenarios and methodologies are reviewed by CCIL on an ongoing basis. In addition, a comprehensive review of the stress testing processes and methodologies in CCIL is done every year by external experts. - Crisis management framework: - Recommendation: 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 - Status: In Process: - The Financial Resolution and Deposit Insurance (FRDI) Bill, which would accommodate the recommendations on crisis management framework, was introduced in the Lok Sabha in August 2017 and subsequently referred to a Joint Committee of Parliament. However, the Bill was withdrawn from Parliament in August 2018. It is under examination and reconsideration. - Recommendation: Improve the frameworks for emergency liquidity assistance, deposit insurance, and crisis preparedness. - Authority: RBI, Government - Time frame: M - Status: - In Process: - The issues relating to duplication of supervisory authority in the pre-resolution phase, strengthening of resolution tools and safeguards, recovery and resolution plans, treatment of domestic and foreign liability holders, and matter of crisis preparedness are expected to be adequately accommodated in the ongoing reconsideration of the Bill, in consultation with the RBI. - Not Implemented: Emergency liquidity assistance. The RBI has a Board-approved lender of last resort (LOLR) policy in place, that incorporates constructive ambiguity and flexibility that would help limit risk of moral hazard. - Deposit Insurance: At present DICGC functions primarily as a pay box entity. The FRDI Bill 2017 contained a provision of government grants, in addition to the Resolution Corporation’s (RC) power to charge a premium for providing deposit insurance. - Under Implementation: Crisis preparedness. Under the Financial Stability and Development Council framework, it has recently been decided to further strengthen the ‘Early Warning Group (EWG)’ and the frequency of EWG meetings has also been increased from once in three months to at least every two months. - Market integrity: - Recommendation: 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 - Status: Not implemented: - The definition of politically-exposed persons remains as those who have been entrusted with public functions in a foreign country, including Indians serving in high positions in a foreign country. - Tax evasion through foreign income and assets is a predicate offence to money laundering (Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015). While domestic tax evasion qualifies as a tax crime in the Indian context, it has not yet been made a predicate offence to money laundering. ### Market Development - Recommendation: Progressively reduce the SLR to help deepen markets and encourage lending. - Authority: RBI - Time frame: S - Status: Implemented: - The SLR has been reduced from 22.5 percent in June 2014 to 18.75 percent currently. - A further reduction is planned to reach 18 percent by April 2020. - The RBI intends to continue its reduction in a calibrated manner to align the SLR with the Liquidity Coverage Ratio (LCR). - Recommendation: 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 - Status: In Process: - The PSL program is being reviewed regularly and is still considered important to provide finance to the underserved. S = short term, M = medium term. *Source: Appendix I. Risk Assessment Matrix 1/ (extracted content).* ### 6. The sensitivity of interest rates to changes in public sector borrowing in the domestic ### 6. The sensitivity of interest rates to changes in public sector borrowing in the domestic market—and hence the likely growth-enhancing crowding-in effects of efforts to contain public sector borrowing—has been on display on several occasions ### Interest rate sensitivity and market response - Yields on 10-year government bonds declined considerably in response to the recent budget announcement about a possible foreign sovereign bond issuance. - A similar decline in yields occurred when a more-backloaded-than-expected borrowing calendar was announced in March 2018. - Government bond yields shown (In percent): 3-month, 3-year, 10-year (Oct-14 to Oct-19). Source: Bloomberg Financial Markets LP. ### Enhancing fiscal reporting and fiscal transparency (Appendix IV) - Staff recommends improving coverage and comprehensiveness of India’s fiscal reports. - States are responsible for more than half of total expenditure, yet there is currently no reporting of intra-year fiscal data at the general government level. - Authorities confirmed intention to start compiling and disseminating such data on a quarterly basis, in line with GFSM 2014, by 2021 in the context of the G20 Data Gaps Initiative. - Very little fiscal information is collected about state-level PSUs or about lower tiers of government (municipalities, panchayats). - India mostly operates under a cash accounting basis; absence of nonfinancial asset registers and limited monitoring of multiyear commitments are significant gaps. - These shortcomings place India behind the majority of G20 economies in terms of institutional coverage, frequency and comprehensiveness of fiscal reports. - Staff recommends investments in processes and systems to support sounder fiscal reporting in fiscal federalism: - Establish clear obligations for States to report fiscal data to the Union regularly, according to a shared calendar set by the center. - Possibly set financial incentives for states to report on a timely basis. - Fully align the Chart of Accounts across all tiers of government to facilitate consolidation at the central level. - Further integrate central and state-level IT financial management systems to facilitate timely data exchanges. - Set a medium-term strategy for the shift to accrual accounting at both the Union and state levels, anchored by explicit objectives and milestones. - These reform areas are part of the scope of the work of the 15th Finance Commission, as set by its terms of reference. - Fiscal reports should enable better understanding of the government’s actual fiscal stance: - More information is available publicly on entities other than the budgetary central government (e.g., extra-budgetary resources, RBI report on state finances), but information is scattered across many documents and websites. - Very few published forward-looking analyses of fiscal risks borne by the Union and state governments due to absence of proper monitoring processes. - Recent assumption by state governments of liabilities from the DISCOM highlights need for deeper oversight of state-level PSUs by both Union and state governments. - Union and state governments should consider providing more user-friendly and forward-looking information and narratives, alongside or ahead of their budgets (for example as part of a fiscal strategy statement). - Budget document contents should be standardized across the Union and state governments to ensure equal access to fiscal information for citizens in all states. ### Public Debt Sustainability (Appendix V) - High-level assessment: - India’s debt is high, but favorable debt dynamics and financial repression make the debt path sustainable—the statutory liquidity requirement creates a captive domestic market for debt which limits the interest cost of debt. - Public debt is denominated in domestic currency and predominantly held by residents. - Under the baseline, the public debt-to-GDP ratio would decline from about 69 percent in 2018/19 to about 66 percent of GDP by 2024/25. - Gross financing needs would decline from 11.4 percent to 9.4 percent of GDP. - The primary risk to debt sustainability stems from shocks to real GDP growth and fiscal slippages. - India’s external debt, at about 19 percent of GDP, remains sustainable. - Key projections and parameters: - India’s debt-to-GDP ratio is high at about 69 percent of GDP. - Over the medium term debt is projected to decline to around 66 percent of GDP driven by favorable debt dynamics. - Nominal GDP growth is projected to increase from about 10 percent to just below 12 percent over the medium term. - Effective interest rates are projected to remain close to 8 percent. - Inflation over the medium term is forecast to be stable around 4 percent. - India’s debt-stabilizing primary deficit is calculated at 2.6 percent of GDP. - Macroeconomic assumptions: - Growth assumptions: Growth is projected to be 6.1 percent in 2019/20 and rise gradually to 7.3 percent in the medium term. - Robust medium-term growth will be driven by a moderate pickup in investment associated with the recent CIT rate cut, and increases in intra-Indian trade because of efficiency gains from the GST. - The medium-term growth forecast has been revised downward compared to the last DSA because of somewhat slower than projected complementary land and labor reforms. - Fiscal assumptions: The central government fiscal deficit was estimated to be 3.8 percent in FY 2018/19 (IMF presentation), as on-budget revenue expenditure was curtailed (moved off budget) to accommodate a shortfall in both direct tax and GST revenues. - This value was unchanged in the IMF presentation, relative to the previous FY. - A deterioration (0.7 percentage points) is expected in FY 2019/20 amidst substantial economic weakness and the recently announced CIT rate reduction. - Fiscal risks: - The center has committed to fill the gap potentially arising from GST-related revenue shortfalls in states, guaranteeing states’ annual revenue growth at 14 percent for a period of 5 years from the implementation of GST. GST revenue slippages would affect the central government budget through higher transfers to the states. - State fiscal deficits have frequently breached the 3 percent limit recommended by the 14th Finance Commission, largely due to the assumption of DISCOM debt. - Going forward, risks remain substantial and stem from announcements of farm loan waivers in several states, and the taking on of operating losses from electricity generation corporations as stipulated in the UDAY scheme. - Assessing these risks is complicated by the lag in availability of data on states’ fiscal positions. - Debt profile and financing: - Nearly 95 percent of debt—covering the central and state governments’ debt—has a medium and long-term maturity. - Debt is largely held by residents. - Foreign-currency-denominated debt is negligible. - The composition of debt is set to remain the same over the projection period with the bulk of financing needs met by issuance of medium and long-term debt denominated in domestic currency and held by residents. - The interest bill is substantial with gross financing needs equivalent to about 11.4 percent of GDP. - As fiscal consolidation resumes, these needs will decline by around 2 percent of GDP over the medium term. - The statutory liquidity requirement creates a captive domestic market for debt which limits the interest cost of debt. - Projections and stress tests: - Projections over the medium term are reasonable according to the assessment in the template. Assumptions on fiscal consolidation are within the median for surveillance countries and are expected to be met. - Past forecast errors in projecting real GDP growth and the primary balance are reasonable with a percentile rank around 50 percent for each. - Relative to past projections, the debt-to-GDP ratio is expected to decline more slowly, owing to weaker tax revenue collections. - The primary risk to India’s debt sustainability is low growth. - The stress test corresponding to a growth shock yields a deteriorating debt path with debt-to-GDP reaching a peak of about 71 percent of GDP and gross financing needs reaching a peak of about 12 percent of GDP. - The combined macro-fiscal shock pushes debt up to 72 percent of GDP, though its path would stabilize by 2022—the growth impact (5.7 percent in FY 20/21) in this scenario broadly mimics the tail risk growth outcome (with 10 percent probability) discussed in the GaR analysis (Appendix VIII). - Vulnerabilities are well-contained in the heat map despite high baseline debt-to-GDP ratio. - Under most shocks, debt sustainability metrics are contained, thanks largely to relatively strong nominal GDP growth in the baseline scenario. - Risks stemming from market perception (measured by EMBI global spreads), external financing requirements (defined as the current account balance and amortization of short-term external debt) are the lone cases where the 70 percent threshold is breached, under the shock and baseline scenarios, respectively. ### External Debt Sustainability - India’s external debt has stabilized at a moderate level. - External debt declined to 19 percent of GDP at end-FY2018/19. - Of which, about a half was denominated in US dollars and another 36 percent in Indian rupees. - Long-term external debt accounted for about 80 percent of the total. - Short-term external debt on a residual maturity basis stood at 43 percent of total external debt and 55.8 percent of foreign exchange reserves. - Compared with other emerging market economies, India’s external debt remains moderate. *Source: 1indea2019001 - 6. The sensitivity of interest rates to changes in public sector borrowing in the domestic market (IMF).* ### 9. External debt sustainability is robust to interest rate and GDP shocks, but is more ### 9. External debt sustainability is robust to interest rate and GDP shocks, but is more sensitive to current account and exchange rate shocks ### Main findings on external debt vulnerability - External debt is more sensitive to current account and exchange rate shocks than to interest rate and GDP shocks. - A permanent 1/4 standard deviation shock to the non-interest current account balance would increase external debt to about 23 percent of GDP by FY2024/25. - A 30 percent depreciation in FY2020/21 would raise external debt to around 26 percent of GDP in FY2020/21, followed by a gradual increase to 27 percent of GDP by FY2024/25. - Scenario and bound-test summaries (Figure 6 and Table 1) show: - Interest-rate and growth shocks produce relatively limited increases in external debt compared with current account and exchange rate scenarios. - Combined shocks and a large one-time real depreciation have the largest impacts on external debt trajectories. ### Baseline external debt trajectory and key external statistics (selected, Table 1) - External debt (in percent of GDP), selected years: - 2014: 23.3 - 2015: 23.1 - 2016: 20.6 - 2017: 20.0 - 2018: 18.9 - 2019: 19.1 - 2020: 19.1 - 2021: 19.1 - 2022: 19.4 - 2023: 19.7 - 2024: 20.0 - Change in external debt (selected row 2): - 2014: -0.8 - 2015: -0.2 - 2016: -2.5 - 2017: -0.6 - 2018: -1.1 - 2019: 0.2 - 2020: 0.1 - 2021: 0.0 - 2022: 0.3 - 2023: 0.3 - 2024: 0.3 - Identified external debt-creating flows (row 3): - 2014: -4.4 - 2015: -1.6 - 2016: -3.3 - 2017: -2.7 - 2018: 0.0 - 2019: -0.4 - 2020: -0.3 - 2021: -0.5 - 2022: -0.4 - 2023: -0.4 - 2024: -0.4 - Current account deficit, excluding interest payments (row 4), selected years: - 2014: 0.9 - 2015: 0.6 - 2016: 0.1 - 2017: 1.4 - 2018: 1.5 - 2019: 1.4 - 2020: 1.8 - 2021: 1.8 - 2022: 1.9 - 2023: 1.7 - 2024: 1.8 - Exports and imports (in percent of GDP), selected baseline values: - Exports: 2014: 23.3; 2019: 18.7; 2024: 18.5 - Imports: 2014: 26.6; 2019: 22.7; 2024: 22.3 - Net non-debt-creating capital inflows (row 8), selected years: - 2014: -3.5 - 2015: -1.5 - 2016: -1.9 - 2017: -2.0 - 2018: -1.0 - 2019: -1.3 - 2020: -1.4 - 2021: -1.5 - 2022: -1.5 - 2023: -1.5 - 2024: -1.6 - Automatic debt dynamics (row 9), selected years: - 2014: -1.8 - 2015: -0.7 - 2016: -1.5 - 2017: -2.1 - 2018: -0.4 - 2019: -0.5 - 2020: -0.7 - 2021: -0.8 - 2022: -0.8 - 2023: -0.6 - 2024: -0.6 - Gross external financing need (in billions of US dollars and percent of GDP): - 2014: $216.1 billion (10.6 percent of GDP) - 2015: $216.5 billion (10.3 percent of GDP) - 2016: $212.1 billion (9.3 percent of GDP) - 2017: $254.0 billion (9.6 percent of GDP) - 2018: $282.9 billion (10.4 percent of GDP) - 2019: $292.9 billion (10.4 percent of GDP) - 2020: $340.9 billion (10.9 percent of GDP) - 2021: $382.4 billion (10.-Year) [value formatting in source] - 2022: $416.4 billion (10.6 percent of GDP) - 2023: $466.7 billion (10.9 percent of GDP) - 2024: $524.8 billion (11.3 percent of GDP) ### Stress-test scenarios and illustrative impacts - Individual shocks applied include permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance; and a one-time real depreciation of 30 percent in 2020 for the real exchange rate shock. - Reported scenario outcomes (Figure 6 and Table 1): - Non-interest current account shock: external debt around 23 percent of GDP by FY2024/25. - Real depreciation shock (30 percent in FY2020/21): external debt around 26 percent of GDP in FY2020/21, rising to about 27 percent of GDP by FY2024/25. - Combined shock and other stress tests produce larger increases relative to baseline than single interest-rate or growth shocks. ### Risk assessment and financing vulnerabilities (high-level) - Gross external financing needs remain sizable in baseline projections (see listed billions and percent of GDP). - The stress-test framework highlights the greater sensitivity of external debt to current account and exchange rate shocks than to interest-rate or growth shocks. - Bound and heat-map tests (Figure 5 and Figure 6) indicate that large depreciations and current account widenings are the primary adverse scenarios for external debt dynamics. ### Policy-relevant observations from uptake of previous IMF advice (Appendix VI) - Implementation of past Fund advice has been mixed: - Monetary and exchange rate policies were broadly consistent with Fund advice: two policy rate hikes in summer 2018 were consistent with anchoring inflation expectations; subsequent loosening responded to cyclical weakness. - Fiscal consolidation targets for FY2018/19 were not met; increasing reliance on off-budget spending contributed to a rise in general government debt despite favorable debt dynamics. - Important steps have been taken to address bank and corporate balance sheet problems (recognition and resolution of non-performing assets, recapitalizing PSBs), but little progress on restructuring PSBs or improving their governance, including reducing the government’s role in the banking sector. - Progress on liberalization of trade and reforms to facilitate trade and investment has been mixed: some easing of CFMs and increased openness to foreign portfolio and direct investment and external commercial borrowing, but some tariff increases on selected items. - Authorities’ response to episodes of capital outflows in 2018 combined exchange rate flexibility, intervention sales in spot and forward markets, and easing of CFMs; monetary policy tightening was driven by inflation pressures rather than capital outflows. - Structural reforms key to boosting inclusive and sustainable growth (labor and product market reforms) have progressed more slowly than advised, despite advances in transportation infrastructure, electrification, digitization, and ease of doing business. *Source: IMF staff (India country report material as provided).* ### Appendix VII. Recent and Planned IMF Capacity Development ### Appendix VII. Recent and Planned IMF Capacity Development ### Overview of IMF capacity development (CD) with India - The Fund’s capacity development (CD) activities with India have been scaled up in recent years. - IMF technical assistance (TA) and training have supported efforts to enhance the formulation and implementation of sound macroeconomic and financial policies and to build institutions and capacity, including at the sub-national level. - Examples of TA and training support include: - 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. - Strengthening of macroeconomic statistics. ### SARTTAC role and delivery - The South Asia Regional Training and Technical Assistance Center (SARTTAC) was inaugurated in February 2017 and became the focal point for delivery of IMF CD services to India and South Asian countries. - SARTTAC activities and highlights: - Provided extensive training and TA in core Fund areas such as national accounts, BOP/IIP statistics, and public financial management. - Delivered a course on supervision of market and operations risks at the RBI in January 2019. - Evolving a government finance statistics/public sector debt statistics program mainly at the subnational level in collaboration with the Office of the Comptroller and Auditor General. - A total of 678 Indian officials received training in FY2019 through SARTTAC, up from 377 in FY2018. ### Integration with surveillance and tailoring to country needs - Recent activities and collaboration improved targeting to country needs: - At the request of the 15th Finance Commission, APD and FAD delivered a pipeline of TA missions to assist on fiscal federalism issues, including constraints on state budgets, achieving vertical fiscal balance, and incentivizing greater fiscal discipline among states, including through market discipline. - An APD/SARTTAC monetary policy workshop was held in September 2018 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: - SARTTAC assisted the budget office in India’s Ministry of Finance in preparing a draft fiscal strategy statement to improve the policy orientation of budget documents. - SARTTAC’s sub-national work addresses sizeable capacity building needs among the states, which carry out more than half of total government spending and play an important role in efforts to enhance fiscal transparency and budget coverage. - Key vehicles include courses on macro-fiscal policy analysis tailored for the Indian states, delivered during November 2018, January 2019 and April 2019. - Considerable work has been done on training for state officials on fiscal reporting and on TADAT, a tax administration diagnostic tool. *Appendix VII. Recent and Planned IMF Capacity Development* ### Appendix IX. Key Policy Actions 2018–19 ### Appendix IX. Key Policy Actions 2018–19 ### Monetary Policy - Jun. 6, 2018: policy repo rate raised by 25 bps to 6.25 percent; maintained neutral policy stance. - Aug. 1, 2018: policy repo rate raised by 25 bps to 6.50 percent; maintained neutral policy stance. - Oct. 5, 2018: policy repo rate maintained at 6.50 percent; changed policy stance to calibrated tightening. - Feb. 7, 2019: policy repo rate cut by 25 bps to 6.25 percent; changed policy stance to neutral. - Apr. 4, 2019: policy repo rate cut by 25 bps to 6 percent; maintained neutral policy stance. - Jun. 6, 2019: policy repo rate cut by 25 bps to 5.75 percent; changed policy stance to accommodative. - Aug. 7, 2019: policy repo rate cut by 35 bps to 5.40 percent; maintained accommodative policy stance. - Oct. 4, 2019: policy repo rate cut by 25 bps to 5.10 percent; maintained accommodative policy stance. - Dec. 5, 2018 Statutory Liquidity Ratio (SLR): RBI announced reduction in banks’ SLR requirement by 25 basis points every calendar quarter from 19.5 percent of their Net Demand and Time Liabilities (NDTL) to 18 percent from April 1, 2020. - Mar. 13, 2019 RBI to inject Rupee liquidity through long-term USD/INR Buy/Sell Swap auction: introduced new window to inject Rupee liquidity for longer duration through long-term foreign exchange Buy/Sell swaps under extant Liquidity Management Framework. - April 4, 2019 Liquidity Coverage Ratio (LCR): RBI permitted banks to count an additional 2 percent of government securities held by them under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) within the mandatory SLR requirement as Level 1 HQLA for computing LCR, in a phased manner. - Aug. 26, 2019 Expert Committee recommendations on the RBI’s Economic Capital Framework: - RBI to maintain a Contingent Risk Buffer (CRB) within the range of 5.5-6.5 percent of its balance sheet, comprising 4.5-5.5 percent for monetary and financial stability risks and 1 percent for credit and operational risks over the five-year period of 2018/19-2022/23; - RBI accepted the recommendations and decided to maintain the CRB at 5.5 percent of the balance sheet (out of the available realized equity of 6.8 percent), resulting in an excess provision of INR 526 billion which would be transferred to the government; - Unrealized valuation gains will be used as risk buffer against market risks and will not be transferred; - RBI accounting year (currently July to June) to be brought in line with the fiscal year (April to March) from financial year 2020/21; and payment of any interim dividend to be restricted to exceptional circumstances; - The framework to be reviewed every five years, barring any changes in the RBI’s risks and operating environment that warrant an intermediate review. - Sept. 4, 2019 External benchmark-based lending: RBI directed banks to link all new floating rate personal and retail loans and loans to micro and small enterprises to one of four external benchmarks, effective October 1, 2019: (i) RBI policy repo rate; (ii) 3-months Treasury Bill yield published by Financial Benchmarks India Private Ltd (FBIL); (iii) 6-months Treasury Bill yield published by the FBIL; and (iv) any other benchmark market interest rate published by the FBIL. ### Financial Sector - April 5, 2018 Deferment of Indian Accounting Standards (Ind AS) implementation: RBI notified delay in implementation of Ind AS by one year; on March 22, 2019, RBI decided to defer implementation of Ind AS till further notice. - April 6, 2018 Prohibition on dealing with Virtual Currencies (VCs): RBI directed banks and other entities regulated by it to refrain from dealing with VCs or provide services facilitating dealing with or settling VCs. - April 27, 2018 ECB Policy Rationalization and Liberalization: uniform all-in-cost ceiling of 450 basis points over the benchmark rate for all ECBs (foreign currency and Rupee); permitted housing finance companies (HFCs) and Port Trusts to avail of ECBs under all tracks; permitted companies in maintenance, repair and overhaul and freight forwarding to raise ECBs in INR only. - April 27, 2018 Investment by Foreign Portfolio Investors (FPI) in Debt: cap on aggregate FPI investments in any central government security raised to 30 percent from 20 percent of the outstanding stock of that security; fresh concentration limits prescribed in each of G-secs, SDLs and corporate debt; single/group investor-wise limit in corporate bonds introduced/tightened. - May 1, 2018 FPIs permitted to invest in corporate bonds with residual maturity below one year, subject to it not exceeding 20 percent of the total investment of that FPI in corporate bonds; FPIs permitted to invest in treasury bills issued by the Central Government. - May 31, 2018 Withdrawal of Exemptions Granted to Government-Owned NBFCs: RBI withdrew special dispensations and specified roadmap up to 2021/22 for these lenders to meet norms on capital adequacy, provisioning and corporate governance (IFCI, Power Finance Corporation, India Infrastructure Finance Company, Indian Railway Finance Corporation, Indian Renewable Energy Development Agency, Housing & Urban Development Corporation affected). - June 6, 2018 RBI relaxes NPA classification norms for MSMEs: temporary relaxation to 180 days instead of 90 days for MSMEs whose aggregate exposure of banks and NBFCs does not exceed INR 250 million as on May 31, 2018. - June 14, 2018 Interest Rate Options: RBI permits Interest Rate Swaptions in Rupees. - Oct. 3, 2018 ECB: public oil companies allowed to raise ECB for working capital with minimum maturity of 3-5 years; manufacturing sector companies allowed to raise ECBs with minimum average maturity of 1 year. - Oct. 19, 2018 Banks’ exposure to NBFCs: RBI raised single borrower limit for banks’ lending to NBFCs (not financing infrastructure) from 10 percent to 15 percent of capital funds till December 31, 2018. - Nov. 6, 2018 ECB: minimum average maturity requirement for ECBs in infrastructure reduced from 5 to 3 years; average maturity requirement for exemption from mandatory hedging reduced from 10 to 5 years; mandatory hedging requirement reduced from 100 percent to 70 percent for ECBs under Track I with average maturity between 3 and 5 years. - Nov. 29, 2018 Basel III Framework: RBI notified Net Stable Funding Ratio (NSFR) guidelines issued on May 17, 2018 would come into effect from April 1, 2020. - Jan. 1, 2019 Restructuring of advances to MSMEs: RBI permitted one-time restructuring of existing loans to MSMEs classified as ‘standard’ without downgrade in asset classification. - Jan. 16, 2019 ECB: ECB framework rationalized and access widened. - Feb. 6, 2019 ECB: concentration limits for each FPI in corporate bonds were lifted. - March 1, 2019 Voluntary Retention Route (VRR) for FPIs: RBI introduced VRR for FPI investment in debt markets free of macro-prudential and other regulatory norms applicable to such investments. - March 27, 2019 Rupee interest rate derivatives markets: RBI permitted non-resident participation in rupee interest rate derivatives markets. - April 25, 2019 FPI investment in Municipality Bonds: RBI permitted FPIs to invest in municipal bonds within limits set for FPI investment in State Development Loans (SDLs). - June 7, 2019 Prudential Framework for Resolution of Stressed Assets: revised framework requires lenders to review borrower’s account within 30 days from default; during Review Period of 30 days, lenders should decide on resolution plan to be implemented within 180 days from the end of the Review Period. - June 20, 2019 Foreign Exchange Trading Platform for Retail Participants: RBI permitted electronic trading platform (FX-Retail) for retail customers; operationalized by Clearing Corporation of India Limited (CCIL). - June 26, 2019 Financial Benchmark Administrators Directions, 2019: introduced regulatory framework for benchmarks issued by Financial Benchmarks of India Ltd. (FBIL). - June 26, 2019 Rupee Interest Rate Derivatives Directions, 2019: merged facilities for residents and non-residents into single unified facility; allow hedging of valid underlying and anticipated exposures; simplify procedures for authorized dealers. - June 28, 2019 Leverage Ratio: RBI reduced minimum Leverage Ratio (LR) under Basel III to 4 percent for domestic systemically important banks (DSIBs) and 3.5 percent for other banks (from 4.5 percent earlier). - June 28, 2019 Asset Reconstruction Companies (ARCs): RBI permitted ARCs to acquire financial asset from other ARCs under new guidelines. - Aug. 2, 2019 Liquidity support to Housing Finance Companies (HFCs): National Housing Bank (NHB) extended liquidity infusion facility of INR 100 billion for HFCs to support individual housing loans under affordable housing scheme. - Aug. 10, 2019 Government to extend partial credit guarantee to banks: government approved one-time six months partial credit guarantee to PSBs for first loss up to 10 percent to enable purchase of pooled assets of financially-sound NBFCs amounting to INR 1 trillion. - Aug. 13, 2019 Priority Sector Lending: RBI permitted bank credit to NBFCs (other than MFIs) for on-lending to be classified as priority sector lending. - Aug. 30, 2019 Bank merger: government announced merger of ten public sector banks into four bigger banks. - Sept. 12, 2019 Banks’ exposure to NBFC: RBI raised banks’ exposure limit to a single NBFC to 20 percent of Tier-I capital from 15 percent earlier. - Sept. 12, 2019 Risk weight for consumer credit lowered: RBI reduced risk weight for consumer credit, including personal loans but excluding credit card receivables, to 100 percent from 125 percent earlier. - Sept. 20, 2019 Priority Sector Lending: RBI raised sanctioned limit for classification of export credit under Priority Sector Lending (PSL) from INR 250 million per borrower to INR 400 million per borrower. ### Fiscal Policy - April 1, 2018 e-Way Bill system for inter-State movement: nationwide e-Way Bill system for inter-state movement of goods rolled out. - April 15-May 24, 2018 e-Way Bill system for intra-State movement: GST Council notified rollout for intra-state movement for 18 states. - June 27, 2018 Capital infusion in Export Credit Guarantee Corporation: government approved capital infusion of INR 20 billion. - July 21, 2018 GST rate reduction: GST council announced reductions across categories including 13 categories from 28 percent to 18 percent, and multiple other category adjustments. - August 7, 2018 Four GST Amendment Bills passed by Parliament amending central and state GST laws. - December 22, 2018 GST rate reduction: GST council announced further rate reductions and rationalization across multiple categories. - January 10, 2019 Kerala to levy cess to generate funds for calamities: GST Council allowed Kerala to levy cess on intra-state supply at rate not exceeding 1 percent for up to two years. - January 23, 2019 Goods and Services Tax Appellate Tribunal (GSTAT): government approved creation of National Bench of GSTAT. - February 2, 2019 Interim Union Budget 2019-20: - PM-KISAN scheme: INR 6,000 per year directly transferred to farmers with cultivable land up to two hectares in three instalments of INR 2,000 each; INR 200 billion allocated in 2018/19 and INR 750 billion in 2019/20. - Pradhan Mantri Shram-Yogi Maan-dhan scheme: monthly pension of INR 3,000 from age 60 for workers in unorganised sector with monthly income up to INR 15,000; monthly contribution of worker matched by central government. - Major tax changes: standard tax deduction for salaried individuals increased from INR 40,000 to INR 50,000; individuals earning annual income up to INR 0.5 million will not have to pay any tax. - February 6, 2019 Agri-Market Infrastructure Fund: government approved creation of Fund of INR 20 billion for development/up-gradation of infrastructure in 10,000 gramin agricultural markets and 585 regulated wholesale markets. - February 19, 2019 KUSUM scheme: launch of Kisan Urja Suraksha evam Utthaan Mahabhiyan to add solar capacity of 25,750 MW by 2022; total central financial support under scheme INR 344 billion. - March 19, 2019 GST on Housing: GST levied at effective rate of 5 percent without ITC on residential properties outside affordable segment; effective GST of 1 percent without ITC on affordable housing properties. - May 31, 2019 PM-KISAN Scheme extension: extended to include all land holding farmers; expected to cover around 20 million more farmers, increasing coverage to 145 million beneficiaries, with central government spending of about INR 872 bn in FY2019/20. - May 31, 2019 PM Kisan Pension Yojana for small and marginal farmers: - voluntary contributory pension scheme for all Small and Marginal Farmers (SMF); - entry age 18 to 40 years with minimum fixed pension of INR 3,000 per month at age 60; - government contributes equal amount as the eligible farmer; - estimated 50 million small and marginal farmers to benefit in first three years; central government would spend INR 107.75 billion for a period of 3 years towards matching contribution. - May 31, 2019 Pension scheme for traders and shop keepers: - minimum assured pension INR 3,000 per month after age 60; - eligibility: shopkeepers, self-employed persons, retail traders with GST turnover less than INR 15 million, age 18-40; - government to make matching contribution. - July 5, 2019 Budget 2019/20: - Corporate tax rate reduced to 25 percent for companies with annual turnover up to INR 4 bn; - Surcharge increased on individuals having taxable income from INR 20 million to INR 50 million and INR 50 million and above; - Present policy of retaining 51 percent government stake to be modified to retaining 51 percent stake inclusive of stake of government-controlled institutions; - Government to consider going to an appropriate level below 51 percent in PSUs where government control is still to be retained, on a case by case basis; - Government to raise part of its gross borrowing in external markets in external currencies; - Credit Guarantee Enhancement Corporation to be set up in 2019/20. - July 27, 2019 GST rate on all electric vehicles reduced from 12 percent to 5 percent; GST rate on charger or charging stations for Electric vehicles reduced from 18 percent to 5 percent; hiring of electric buses by local authorities exempted from GST. - Aug. 23, 2019 Measures announced to boost the economy and growth: (i) withdrew enhanced surcharge on long- and short-term capital gains for FPIs and domestic portfolio investors; (ii) withdrew “angel tax” provisions for start-ups; (iii) upfront release of INR 700 bn capital infusion into public sector banks; (iv) additional liquidity support of INR 200 bn to HFCs by NHB; (v) GST refund due to MSMEs to be sped up; (vi) violation of corporate social responsibility (CSR) obligation to be treated as civil liability, not criminal offence. - Sept. 20, 2019 Corporate income tax (CIT) rate reduced: CIT on existing corporations reduced from 30 to 22 percent, starting FY2019/20, subject to foregoing exemptions/incentives; effective tax rate for these companies will be 25.17 percent inclusive of surcharge and cess. For new companies incorporated on or after 1st October 2019 and planning to commence production on or before 31st March 2023, tax rate will be 15 percent (effective tax rate: 17.01 percent inclusive of surcharge and cess) and such companies will not have to pay the minimum alternative tax (MAT). ### FDI Policy - Revised Guidelines for FDI in e-commerce: - A vendor or seller having equity participation by a marketplace model e-commerce platform or its group companies will not be permitted to sell its products on the concerned platform. - A marketplace model platform cannot mandate any vendor to sell a product exclusively on its platform. - A marketplace model platform cannot exercise ownership or control over the inventory of a vendor; inventory deemed controlled if more than 25 percent of the vendor’s sales accrue to that platform or its group companies. - Marketplace model platform must provide services (logistics, warehousing, payment collection, etc.) to different vendors in a non-discriminatory and fair manner; same applies to cashback benefits. - A marketplace model e-commerce platform is allowed to have a vendor or its group companies contributing to more than 25 percent of its sales. - Aug. 28, 2019: - Permit 100 percent FDI under automatic route for sale of coal and coal mining activities; - Allowed 100 percent FDI under automatic route in contract manufacturing; - Further flexibility on local sourcing conditions for FDI in Single Brand Retail Trading (SBRT). ### Trade Policy - April 9, 2018 Anti-dumping duty imposed on import of phosphorus pentoxide from China. - May 20, 2018 India notified WTO of proposed suspension of concessions and obligations in connection with additional customs duty of 25 percent on steel products and 10 percent on aluminum products by the United States. - May 23, 2018 Import Duty on Wheat: government raised import duty from 20 percent to 30 percent. - June 22, 2018 India imposed higher tariff rates on 29 US items effective August 4, 2018. - July 1, 2018 Import duty: 10 percent basic customs duty (BCD) imposed on cellular mobile phone, specified parts and certain electronic goods. - Dec. 6, 2018 New Agriculture Export Policy: aim to double agricultural exports to US$ 60 bn by 2022. - April 18, 2019 Suspension of trade with Pakistan along the Line of Control in Jammu and Kashmir. - May 14, 2019 Delay of imposition of tariffs on 29 US items: deadline extended till June 16, 2019. ### Structural Policy / Real Sector - June 6, 2018 Guidelines on time bound closure of sick or loss making Central Public Sector Enterprises: land from closures prioritized to provide affordable housing per Ministry of Housing and Urban Affairs guidelines. - July 23, 2018 Insolvency and Bankruptcy (Second Amendment) Bill, 2018 passed by Parliament: - Financial creditors: allottee under a real estate project to be considered a financial creditor; allottees to be represented on committee of creditors. - Applicability to MSMEs: ineligibility criteria for NPAs and guarantors not applicable to persons applying for resolution of MSMEs; central government may modify/remove other provisions while applying to MSMEs. - Voting threshold of committee of creditors: majority threshold lowered from 75 percent to 51 percent; for certain key decisions threshold reduced from 75 to 66 percent (appointment/replacement of resolution professional; approval of resolution plan). - August 1, 2018 LIC acquires IDBI bank: government approved acquisition of controlling stake by Life Insurance Corporation of India (LIC) as promoter in IDBI bank and relinquishment of management control by government. - Sep. 12, 2018 PM-AASHA scheme for procurement of crops from farmers: approval of Pradhan Mantri Annadata Aay Sanrakshan Abhiyan with three procurement mechanisms (PSS, PDPS, PPSS). - Nov. 8, 2018 Leasing out six airports through PPP: in-principle approval to lease Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangaluru airports. - Nov. 8, 2018 Strategic disinvestment: 100 percent divestment of equity in Dredging Corporation of India Ltd (DCIL) to consortium of four ports. - Jan. 2, 2019 Merger of Vijaya Bank and Dena Bank with Bank of Baroda effective April 1, 2019. - June 13, 2019 Government reduced rate of ESI contribution from 6.5 to 4 percent: employers’ contribution reduced from 4.75 to 3.25 percent and employees’ contribution reduced from 1.75 to 0.75 percent, effective July 1, 2019. - Aug. 2, 2019 The Code on Wages Bill, 2019 passed: statutory protection for minimum wages and timely payment for approximately 500 million workers. - Aug. 6, 2019 Insolvency and Bankruptcy Code (Amendment) Bill, 2019 gazetted August 6, 2019: extends resolution period from 270 to 330 days (including legal/extension time); if not completed within 330 days, resolution to be completed within additional 90 days from commencement of bill; liquidation test incorporated as safeguard in resolution plans. - Sept. 7, 2019 National Infrastructure Pipeline: task force constituted to draw up pipeline for FY2019/20 to FY2024/25 to spend about $1.4 trillion (INR 100 trillion) over these years. ### Others - May 23, 2019 Merger of CSO and NSSO: Ministry of Statistics and Programme Implementation approved merging Central Statistics Office (CSO) and National Sample Survey Office (NSSO) into National Statistical Office (NSO). *Appendix IX. Key Policy Actions 2018–19* ### Appendix X. External Sector Assessment ### Appendix X. External Sector Assessment ### Overall Assessment - The external sector position in 2018 was broadly in line with the level implied by fundamentals and desirable policies. - India’s low per capita income, favorable growth prospects, demographic trends, and development needs justify running CA deficits. - External vulnerabilities remain, highlighted by bouts of turbulence in 2018. - Economic risks stem from volatility in global financial conditions, an oil price surge, and a retreat from cross-border integration. - Progress has been made on FDI liberalization, whereas portfolio flows remain controlled. - India’s trade barriers remain significant. - Policy guidance: rein in fiscal deficits while enhancing credit provision through faster cleanup of bank and corporate balance sheets and strengthening governance of public banks; improve the business climate, ease domestic supply bottlenecks, and liberalize trade and investment to attract FDI, improve the 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 and limit intervention to address disorderly market conditions. ### Foreign Asset and Liability Position and Trajectory Background - As of end-2018, NIIP improved to –15.9 percent of GDP, from –17.3 percent of GDP at end-2017. - Gross foreign assets: 22.2 percent of GDP. - Gross foreign liabilities: 38.1 percent of GDP. - The bulk of assets are official reserves and FDI; liabilities include mostly other investments and FDI. - External debt: some 20 percent of GDP; about half denominated in US dollars and another 36 percent in Indian rupees. - Long-term external debt: about 80 percent of total external debt. - Short-term external debt on a residual maturity basis: 43 percent of total external debt and 55.8 percent of FX reserves. Assessment - With CA deficits projected to continue in the medium term, the NIIP-to-GDP ratio is expected to weaken marginally. - The moderate level of foreign liabilities reflects India’s gradual capital account liberalization focused mostly on attracting FDI. - External debt is moderate compared with other emerging market economies, but rollover risks remain elevated in the short term. Key 2018 figures (% GDP) - NIIP: –15.9 - Gross Assets: 22.2 - Res. Assets: 14.5 - Gross Liab.: 38.1 - Debt Liab.: 18.3 ### Current Account Background - CA deficit increased to 2.1 percent of GDP in fiscal year 2018/19 from 1.8 percent of GDP in the previous year, due to rising oil import bill. - CAD is expected to narrow marginally to 2 percent of GDP in fiscal year 2019/20, on weaker domestic demand. - Robust export growth continued, supported by partners’ strengthening demand and rupee depreciation. - Over the medium term, the CA deficit is expected to remain about 2½ percent of GDP. Assessment - The EBA cyclically adjusted CA deficit stood at 2.0 percent of GDP in fiscal year 2018/19. - The EBA CA regression estimates a norm of –3.4 percent of GDP for India in fiscal year 2018/19, with a standard error of 1.4 percent, implying an EBA gap of 1.4 percent. - In staff’s judgment, a CA deficit of about 2½ percent of GDP is financeable over time. - Based on India’s historical cash flow and capital inflow restrictions, global financial markets cannot be counted on to reliably finance a CA deficit above 3 percent of GDP. - FDI flows are not yet sufficient to cover protracted and large CA deficits; portfolio flows are volatile and susceptible to changes in global risk appetite, as demonstrated in the taper tantrum episode and again in fall 2018. - Based on the staff-assessed CA norm, the CA is in line with fundamentals and desired policies, with a CA gap range from –0.5 to 1.5 percent of GDP. - Positive policy contributions to the CA gap stem from a negative credit gap and a relatively closed capital account, partly offset by a larger-than-desirable domestic fiscal deficit and a large decline in FX reserves. - Preliminary estimates suggest the 2019 assessment is likely to remain broadly in line with fundamentals and desirable policies. Key 2018 (% GDP) - Actual CA: –2.1 - Cycl. Adj. CA: –2.0 - EBA CA Norm: –3.4 - EBA CA Gap: 1.4 - Staff Adj.: –0.9 - Staff CA Gap: 0.5 ### Real Exchange Rate Background - The average REER in 2018 depreciated by about 3.8 percent from its 2017 average. - As of May 2019, the rupee had appreciated by about 7.7 percent in real terms compared with the average REER in 2018. Assessment - The EBA REER Index and REER level models estimate a REER gap of 5.4 and 2.5 percent, respectively, for 2018. - The external stability approach estimates a REER gap of about –2.0 percent. - Based on the staff-assessed CA gap, the REER gap is assessed to be in the range of –8 to 3 percent for fiscal year 2018/19. - Note: The midpoint of the staff assessed REER gap is within the (± 5 percent) interval generally described as broadly in line with fundamentals. ### Capital and Financial Accounts: Flows and Policy Measures Background - The sum of FDI, portfolio, and financial derivative flows on a net basis is estimated at 0.8 percent of GDP in fiscal year 2018/19, down from 2 percent in fiscal year 2017/18. - Net FDI inflows remained unchanged at 1.3 percent of GDP in fiscal year 2018/19. - Bouts of both equity and debt outflows, especially in the spring and fall of 2018, brought net portfolio flows into negative territory (by 0.5 percent of GDP) in fiscal year 2018/19. Assessment - Yearly capital inflows are relatively small; given the modest scale of FDI, flows of portfolio and other investments are critical to finance the CA. - 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. ### FX Intervention and Reserves Level Background - Authorities responded to market pressure in fall 2018 with exchange rate flexibility and FX intervention. - Spot foreign exchange sales were US$26 billion (1 percent of GDP) in 2018. - Net forwards decreased by US$31.5 billion in 2018. - International reserves stood at $411.9 billion at end-March 2019, down by about $12.5 billion from March 2018. - Reserve coverage: about 15.2 percent of GDP and about 6.7 months of prospective imports of goods and services. Assessment - Reserve levels are adequate for precautionary purposes relative to various criteria. - International reserves represent about 155 percent of short-term debt and 149 percent of the IMF’s composite metric. ### Fund Relations (selected facts) - Membership Status: Joined December 27, 1945; Article VIII. - Quota: 13,114.40 SDR Million (100.00 percent of quota). - Fund Holdings of Currency (Holdings Rate): 10,472.61 SDR Million (79.86 percent). - Reserve Tranche Position: 2,643.21 SDR Million (20.16 percent). - SDR Department net cumulative allocation: 3,978.26 SDR Million (100.00 percent). - SDR Department holdings: 1,046.31 SDR Million (26.30 percent). - Outstanding Purchases and Loans: None. - Projected payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs): Charges/interest — 2019: 6.84; 2020: 27.05; 2021: 27.02; 2022: 27.04; 2023: 27.04. Principal — 2019–2023: 0.00 each year. - Exchange rate arrangement: classified as floating; RBI intervenes to modulate excessive volatility and maintain orderly conditions. - Article IV Consultation: previous discussions held in May 2018; Staff Report and Selected Issues discussed by the Executive Board on July 18, 2018. - FSAP: Concluding meetings for the latest FSAP Update held in July 2017; FSSA Update report published December 2017; Detailed Assessment of Observance of the Basel Core Principles issued January 2018. - Resident representative’s office opened November 1991; Mr. Luis Breuer Senior Resident Representative since July 2019. ### Statistical Issues (summary of key points) 1. General - Data provision broadly adequate for surveillance, but weaknesses in timeliness and coverage of certain series. - India subscribed to the SDDS on December 27, 1996 and started posting metadata on October 30, 1997; currently in observance of the SDDS, using flexibility options for timeliness of general government operations and labor market data. 2. National accounts and employment statistics - New national accounts series released January 2015 with base year 2011/12; revisions reflect review of source data, compilation methods, and implementation of the 2008 System of National Accounts. - Supply-side data deemed better quality than expenditure-side data. - Weaknesses: sales-tax-based extrapolation of trade turnover value; deflation method issues (use of WPI rather than PPI); large revisions to historical series; short time span of revised series; discrepancies between GDP by activity and GDP by expenditure. - Employment data cover only the formal sector and are available with substantial lag. 3. Price statistics - Revised all-India CPI released early 2011 with 2009/10 base; CPI weights updated using 2011/12 expenditure data and revised from January 2015. - Multiple CPI series exist; some indices based on weights over ten years old. - WPI rebased to 2011/12; PPI under development. - New RBI residential property price indexes available, though geographic coverage limited; commercial real estate price data not available. - RBI has started producing rural wage data; economy-wide wage data remain scant. 4. Government finance statistics - MoF compiles and disseminates GFS; data include state governments but exclude extra-budgetary funds, local governments, and social security funds. - Scope to improve presentation (e.g., developmental/non-developmental, plan/non-plan spending). - Authorities reviewing reporting of quarterly consolidated general government data by June 2021 under G-20 Data Gaps Initiative. 5. Monetary and financial statistics - RBI website and RBI Bulletin publish a wide array of monetary and financial statistics. - Since 2011, RBI publishes weighted-average lending interest rate and other lending rates at annual frequency. - Frequency and quality of data dissemination have improved. - RBI reports several Financial Access Survey indicators. 6. Reporting to STA and financial sector statistics - RBI reports monetary data to STA with substantial delays and in non-standard format; "test" data lack sufficient detail to construct a complete monetary and financial picture consistent with the Monetary and Financial Statistics Manual. - Reported data cover depository corporations only; other financial corporations (insurance corporations, pension funds, investment funds) not covered. - All 12 core and 11 encouraged FSIs for deposit takers and three FSIs for real estate markets are reported quarterly; FSIs for other financial corporations, nonfinancial corporations, and households are not reported. *Source: Appendix X. External Sector Assessment, India — Staff Report for the 2019 Article IV Consultation (informational annex).* ### 7. External sector statistics: The concepts and definitions used to compile balance of ### 1indea2019001 - 7. External sector statistics: The concepts and definitions used to compile balance of ### External sector statistics: concepts, coverage, and data issues - Concepts and definitions used to compile balance of payments statistics are broadly in line with the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). - Trade data shortcomings: - Imports of goods in the balance of payments are registered in c.i.f. prices while BPM6 requires f.o.b. pricing. - Trade in goods prices, volumes, and composition are not regularly available on a timely basis. - Valuation, timing, and coverage problems affect trade data. - External debt and maturity attribution: - External debt statistics are 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): - IIP statistics cover the sectors prescribed in BPM6. - Quarterly IIP data are disseminated within three months of the reference period. - The IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences. - Reserves and liquidity reporting: - India disseminates monthly the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS. - More up-to-date information on certain variables (total foreign reserve assets, foreign currency assets, gold, and SDRs) are available on a weekly basis and disseminated as part of a weekly statistical supplement on the RBI web site. - Coverage limitation: - Coverage of direct investment positions data is hampered by the absence of appropriate legal or institutional authority. ### Key data-frequency observations (selected indicators and latest observations as presented) - Exchange Rates: 10/02/19 (Date of latest observation), Date received 10/02/19, Frequency D - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 09/20/19 and 09/27/19, Frequency W - Reserve/base money: 09/20/19 and 09/27/19, Frequency W - Broad money: 09/13/19 and 09/27/19, Frequency BWBW? - Central bank balance sheet: 09/20/19 and 09/27/19, Frequency M - Consolidated balance sheet of the banking system: 09/13/19 and 09/27/19, Frequency BW - Interest rates: 10/02/19, Frequency D - Consumer price index: August 2019; 9/12/19; Frequency M - Revenue, expenditure, balance and composition of financing - General Government: 2018/19; 09/30/19; Frequency AA - Revenue, expenditure, balance and composition of financing - Central Government: August 2019; 10/01/19; Frequency M - Stocks of central government and central government-guaranteed debt: June 2019; 09/27/19; Frequency Q - External current account balance: Apr-Jun 2019; 09/30/19; Frequency Q - Exports and imports of goods and services: August 2019; 9/13/19; Frequency M - GDP/GNP: Apr-Jun 2019; 8/30/19; Frequency QQQ - Gross external debt: June 2019; 09/30/19; Frequency QQ - International Investment Position: June 2019; 09/30/19; Frequency QQQ (Note: frequency codes: Daily (D), Weekly (W), Biweekly (BW), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).) ### Statement by the IMF Staff Representative (November 25, 2019) — key findings and projections - Growth projections and risks: - Staff report projects growth at 6.1 percent in FY2019/20 (April 2019-March 2020). - Projection predicated on acceleration during second half of fiscal year (October-March) supported by lagged effects of monetary policy easing, reduction in corporate income tax rates, and government policies to support rural incomes and consumption. - Recent high-frequency data (industrial production, bank credit, imports and exports, sales and profits of listed companies) indicate growth remained weak during July-September 2019 quarter. - Early indicators for October-December 2019 quarter do not yet point to the onset of the envisaged cyclical recovery. - Selected recent high-frequency trade indicators: - U.S. dollar-value of non-oil merchandise exports expanded by 1.4 percent in October (y/y), following a 2.2 percent contraction during the July-September quarter (y/y). - U.S. dollar-value of non-oil imports declined by 9.2 percent in October (y/y) compared to an 11.3 percent decline during the July-September quarter (y/y). - Inflation and domestic demand: - Core inflation (CPI excluding food and beverages, and fuel and light) decelerated from 4.2 percent in September (y/y) to 3.3 percent in October (y/y). - Continued weakness of domestic demand. - External sector and reserves: - Relative stability of international oil prices and continued portfolio inflows have strengthened India’s balance of payments. - Since mid-October, the Indian rupee/U.S. dollar exchange rate moved within a narrow range. - Central bank gross reserves rose to a new record high of US$448 billion on November 8. ### Authorities’ (Statement by Surijit Bhalla et al., November 25, 2019) — views, assessments, and policy measures - Growth outlook and policy measures: - Authorities agree growth will be subdued in 2019-20 before recovering. - Both IMF and RBI projected India’s GDP to grow at 6.1 percent in 2019-20; WEO projected growth at 7.0 percent in 2020-21 and acceleration thereafter. - Policy measures taken: series of policy rate reductions, large cut in corporate income tax rates, continued resolution of impaired banking sector assets, bank recapitalization. - Expected effects: boost to investment and consumption; support from fiscal discipline, sound external position, liberalization of FDI inflows, emphasis on financial inclusion. - Inflation and monetary policy: - Headline consumer price inflation projected to remain within or possibly below RBI target of 4 per cent during 2019-20. - Past seven months (April-Oct) CPI inflation averaged 3.5 per cent. - Core CPI inflation declined from 5.8 per cent in 2018-19 to 4.2 per cent in April-Oct 2019. - Core WPI inflation (excluding food and fuels) declined from 4.8 per cent in 2018-19 to 0.4 per cent during April-Oct. 2019. - RBI cut policy rates starting February 2019. - Fiscal policy and tax reform: - Government reduced corporate tax rate from 30 per cent to 22 per cent for existing companies and from 25 per cent to 15 per cent for fresh investments by new companies — described as the largest tax cut in a single year by any country, ever. - Authorities emphasize medium-term fiscal consolidation per the Fiscal Responsibility and Budget Management (FRBM) Act. - Expected compensating measures: streamlining GST filing and refund, digitization to enhance compliance and collection; corporate tax cuts expected to spur activity and enhance compliance offsetting short-term revenue losses. - Personal income tax revenue buoyant: during 2014/15 to 2018/19 there was a 69 percent increase in number of personal income tax returns, a 46 percent increase in number of firms filing returns, direct tax to GDP ratio increased from 5.6 per cent to 6.0 per cent, overall tax to GDP ratio increased from 9.9 percent to 11.8 percent. - Targeting subsidies and DBT: - Authorities welcome targeting subsidy support via direct-benefit-transfer (DBT) beneficiaries, citing PM-KISAN support to small and marginal farmers (initiated December 2018; extended to all farmers). - Transfer of benefits increased from about USD 1.2 billion in 2014-15 to USD 38.4 billion in 2018-19, with an estimated gain of USD 20.2 billion due to rationalization and removal of duplicate/bogus beneficiaries. - Number of DBT beneficiaries expanded from 228 million to 1376 million during the same period. - Public sector enterprises and fiscal assessment: - Several profit-making public sector enterprises (PSEs) operate on commercial principles; borrowings by such enterprises do not crowd out private investment and contribute to capital formation. - Administered interest rates and monetary transmission: - Suggest reducing rigidity by aligning small-savings interest rates with market instruments to improve transmission and lower cost of capital. - Reference to High-Level Advisory Group (2019) recommending revisiting operation of small savings schemes. - Monetary transmission data: - Cumulative reduction of 135 bps in policy rate since February 2019; staff noted cumulative repo rate reduction of 110 bps during February-August 2019. - Weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by only 29 basis points during February-August 2019. - WALR on outstanding rupee loans increased by 7 basis points during the same period. - Policy steps: from 1st October 2019, banks required to link floating rate loans to external benchmarks; RBI planned reduction in Statutory Liquidity Ratio (SLR) to 18 per cent by April 2020. - Staff suggested there could be room for additional easing. - External sector: - Authorities broadly agree with staff assessment that external sector fundamentals remain robust. - Government eased capital flow management measures (raising limit on FPI investment in government securities, external commercial borrowings, and automatic route for more sectors). - Staff assessment: reserve cover adequate even in case of a sustained 30 per cent increase in oil prices. - India’s current account deficit remained well within sustainable level estimated at about (-) 2.5 percent of GDP. - Regarding recent use of longer-term foreign exchange swaps, authorities consider balance sheet risks limited given size of operations. - Financial sector reforms and insolvency: - Insolvency and Bankruptcy Code, 2016 (IBC) outcomes: recovery rate for financial creditors in 158 cases resolved through IBC by September 2019 is 42 per cent compared with average recovery rate of 26.5 per cent prior to IBC. - Recovered amount is around twice the liquidation value for these 158 cases. - Revised guidelines on resolution of stressed assets reduce reliance on court procedures and provide flexibility for banks. - Governance and ease of doing business: - Authorities contest staff emphasis on corruption perception; cite World Bank `Control of Corruption’ index improvement (percentile rank jumped to world median in 2018; improvement of 13 ranks since 2013). - Cite “The 2019 Edelman Trust Barometer” placing India among most trusted nations for government, business, NGOs and media. - As per World Bank data, India is top improver in `Ease of Doing Business’ for fourth consecutive year beginning 2016 among 43 countries with GDP of US$ 300 billion or more; rank improved from 142 in 2014 to 63 in 2019. - Government governance measures highlighted: Aadhar national identity, direct transfers of subsidies to beneficiaries’ bank accounts, linking MGNREGA to infrastructure development, digitization of land records, demonetization (Nov 8, 2016), amendment to Prevention of Corruption Act in 2018, Digital India Programme. - Employment and labor market: - Annual Survey of Industries (ASI) data: average annual increase of 2.7 % (from 13.4 to 15.6 m) between 2011/12 and 2017/18. - EPFO payroll data (September 2017 - August 2019): net addition of 12.4 million payroll subscribers; during 2018-19 net addition was 6.2 million. - Periodic Labour Force Survey (PLFS), principal status: increase of 8 million jobs between 2011/12 and 2017/18. - Shift from temporary to more durable employment; greater formalization. - Female labor force participation: for age-group 15 to 24, adjusted LFPR for women increases from 48 % in 2004-5 to near 60 % in 2017-18. - Rural economy and social programs: - Pradhan Mantri Fasal Bima Yojana (PMFBY) objectives: provide financial support for crop loss/damage; stabilize farmers’ incomes; encourage modern agricultural practices; support improved flow of credit. - Infrastructure investment plans: - Aim to become a 5 trillion dollar economy by 2024-25. - Government plans US$ 1.4 trillion investment in infrastructure in the next 5-year period to support national roads, highways, modernizing ports, and creating air connectivity for small towns. - Inclusive growth and social outcomes: - Welfare programs for toilets, clean cooking fuel, water, electricity, health, education, minimum income, and pension benefits to rural/vulnerable population. - Achievements claimed: - Near 100 per cent open-defecation free environment. - Near 100 percent rural electrification. - Clean cooking gas (LPG) provided to 70 million families. - Steps to provide piped water supply to all rural households by 2024. - 50 million small and marginal farmers to receive pension benefits in first three years of new pension scheme. - Health coverage to 107 million families belonging to vulnerable sections. - Financial inclusion: Pradhan Mantri Jan Dhan Yojana (PMJDY) launched August 2014; as of 3rd July 2019 there were 192 million bank accounts under the scheme. *Source: Excerpt from the IMF staff report materials and authorities’ statements included in the supplied content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1indea2019001.pdf_