## 1indea2021001 ## Source details **Canonical URL:** [1indea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1indea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1indea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1indea2021001.pdf.json) --- ### COVID-19 spread, containment, and vaccination - First wave: started in March 2020 and peaked in September 2020; second wave started in urban centers in March 2021 and spread to all states, including rural areas, temporarily overwhelming health facilities. - Pandemic uncertainties: possible third wave, risks from variants, and vaccination rate needs to increase to meet authorities’ target to vaccinate the adult population by end 2021. - Containment measures: - First wave: strict national lockdown started on March 25, 2020, extended several times, followed by gradual re-opening and restrictions in select containment zones. - Second wave: localized state-wide lockdowns in most states. - Vaccination and supply: - India is among the world’s largest vaccine producers. - Supply chain bottlenecks, including shortages of critical raw materials, initially constrained scaling up vaccine production. - COVAX relies on production from India; delays in vaccine production and exports have global implications. - After a slow start, vaccinations have picked up more recently; if the current pace can be sustained and gradually raised, India may be on track to fully vaccinate 40 percent of the population by end-2021. - Gender gap in vaccination: nearly 17 percent more men than women have received a vaccine dose (as of mid-July). ### Health and mobility indicators - India has the second highest number of confirmed cases in the world (figure caption). - Mobility is gradually recovering from the trough due to the second wave. - Second wave: peaked in early May (cases coming down from the early May peak). - Vaccination pace: slowed in May but picked up recently. - Case fatality rate: stabilized at around 1.3 percent, with a pickup in the recovery rate. ### Economic impact: aggregate and sectoral outcomes - Pre-pandemic growth: 4 percent in FY2019/20 (April to March). - GDP outcomes: - GDP contracted by 7.3 percent in FY2020/21. - GDP decline in 2020Q2: 24.4 percent. - Growth resumed: 2020Q4: 0.5 percent; 2021Q1: 1.6 percent. - Demand-side contractions (FY2020/21): - Private consumption: -9 percent. - Gross fixed capital formation: -10.8 percent. - Imports: -13.6 percent. - Sectoral effects: - Contact-intensive trade, hotels, transportation, and communication services: -18.2 percent. - Agriculture: grew by 3.6 percent. - Financial services: moderate contraction. - Investment and employment: fell sharply due to supply disruptions. - Labor market: urban unemployment rose and labor force participation declined during the first wave. - Second wave effects: - Another sharp, albeit smaller and shorter, fall in activity; mobility declined broadly. - Manufacturing and Services PMIs entered contractionary territory towards the end of 2021Q2. - High-frequency indicators (industrial production, mobility, electricity consumption) have witnessed a recovery more recently. ### Inflation and prices - Inflation dynamics: - Inflation peaked at 7.6 percent in October 2020. - Inflation eased to 5.6 percent in July (year not specified in excerpt). - Core inflation remained elevated at 5.8 percent. - Inflation risks: higher global commodity prices and rising input costs, evidenced by recent increase in wholesale price inflation. ### Financial sector and credit developments - Bank credit growth: 5.5 percent (year-on-year) in FY2020/21 (lowest in last four financial years); growth lower for public than private sector banks. - Credit composition and behavior: - Bank credit initially declined more for MSMEs. - Large corporates benefited from capital markets and RBI policies (e.g., TLTRO). - Banks retrenched to safer and more liquid assets; sovereign debt holdings increased by almost 19 percent in 2020. - Banks’ exposure to NBFCs continued to rise. - Asset quality and provisioning: - NPA ratios of banks and nonbanks improved between March 2020 and March 2021 due to borrower relief measures, restructuring classifications, and the Supreme Court’s temporary suspension of NPA recognition (lifted in March 2021). - Recently, share of loans overdue (but not yet classified as nonperforming) has increased across portfolio segments. - Banks increased provisioning ratios and raised capital via new equity issuance and PSB recapitalization. ### External sector developments - Current account: - Temporary current account surplus of 0.9 percent of GDP in FY2020/21 driven by initial domestic demand shock, lower oil prices, steady service exports, and resilient remittances. - Current account returned to a deficit in the second half of FY2020/21 reflecting recovery and higher oil prices. - Capital flows and reserves: - Net FDI inflows: estimated at 2 percent of GDP in 2020. - Portfolio outflows of 0.5 percent of GDP occurred in March 2020; portfolio inflows gained momentum in second half of FY2020/21. - Policy measures eased debt inflows (e.g., “fully accessible” bonds). - Portfolio flows later came under renewed pressure due to rise in U.S. yields, Fed policy expectations, and the second wave. - Foreign exchange reserves increased; foreign exchange reserves reached $599 billion by end-May 2021. - SDR allocation: $17.8 billion (0.6 percent of GDP). - External position assessment: - FY2020/21 external position broadly in line with level implied by medium-term fundamentals and desirable policies. - Staff-assessed current account gap: 1 percent of GDP (EBA model, accounting for transitory COVID-19 impacts). - Net international investment position: improved marginally. ### Global and regional implications - India’s GDP accounts for around 7 percent of the world and 80 percent of the South Asia total in PPP terms. - Decline in India’s growth has sizeable negative global spillovers via trade and supply chains. - Disruptions to air travel bubbles and border trade with neighbors (Bhutan, Bangladesh, Nepal, and Sri Lanka) could cause negative regional spillovers. - Re-orientation of vaccines to domestic use due to the second wave has implications for COVAX vaccine delivery. ### Policy implications and priorities (high-level) - Accelerate vaccinations to meet authorities’ target to vaccinate the adult population by end 2021. - Close the gender gap in vaccinations (nearly 17 percent more men than women received a vaccine dose as of mid-July). - Strengthen health care infrastructure and social spending. - Further strengthen the financial sector to address potential delayed impacts once borrower relief measures and regulatory forbearance are withdrawn. - Implement recently passed structural reforms to support medium-term growth. ### Near- and medium-term outlook (staff projections) - Growth (real GDP, fiscal years Apr–Mar): - 2020/21: -7.3 - 2021/22: 9.5 - 2022/23: 8.5 - 2023/24: 6.6 - 2024/25: 6.3 - 2025/26: 6.2 - 2026/27: 6.1 - Prices (CPI-Combined, percent): - 2020/21: 6.2 - 2021/22: 5.6 - 2022/23: 4.9 - 2023/24: 4.3 - 2024/25: 4.1 - 2025/26: 4.0 - 2026/27: 4.0 - Fiscal and credit: - Headline inflation projected at 5.6 percent in FY2021/22. - Domestic credit growth (including credit to the public sector) expected at 8 percent in FY2021/22. - Current account projected to return to a deficit of about 1 percent of GDP in FY2021/22. - Medium-term potential growth: expected at around 6 percent. - Staff baseline notes: statistical carryover effects for FY2021/22 (10.6 percent) and FY2022/23 (5.2 percent) are significant drivers. ### Fiscal developments, stance, and strategy - Fiscal shock and response: - Central government above-the-line measures: 4.1 percent of GDP. - Below-the-line measures: 6.2 percent of GDP. - Central government fiscal deficit estimated at 4.8 percent of GDP in FY2019/20 (above budget target of 3.3 percent). - FY2020/21 deficits: central government 8.6 percent of GDP; general government 12.8 percent of GDP. - Central government debt: close to 52 percent of GDP in FY2019/20, increased to 63 percent of GDP in FY2020/21. - State finances: - State deficit: broadly unchanged at 2.6 percent of GDP in FY2019/20; increased to 4.2 percent of GDP in FY2020/21. - States’ borrowing limits increased from 3 to 5 percent of GSDP. - FY2021/22 budget and metrics: - Authorities’ central government fiscal deficit (authorities’ definition): 6.7 percent of GDP. - IMF corresponding definition excluding divestment receipts: 7.4 percent of GDP. - Budget envisages large divestment receipts (about 0.8 percent of GDP). - Staff projects considerable increase in capital expenditure—by close to 50 percent relative to FY2019/20 (albeit lower than budget projection). - General government fiscal stance: change in cyclically adjusted primary balance projected broadly neutral in FY2021/22; expansionary relative to pre-COVID-19 period. - Medium-term staff baseline: - Projected deficit decline to about 4.9 percent of GDP by FY2026/27. - Public debt projected to decline to 85 percent of GDP by FY2026/27. - Staff recommends a medium-term consolidation more ambitious than baseline: target general government primary deficit of 1 percent by FY2026/27. - Fiscal space and near-term support: - Fiscal space reduced by higher deficits, debt, and risks. - Staff recommends about 1 percent of GDP additional near-term support relative to staff’s baseline (which already reflects announced additional support). - Additional support to be targeted on social protection, employment support and health spending. ### Revenue, expenditure, and fiscal reform measures - Tax gaps estimated around 5 percent of GDP. - Specific revenue measures (size estimates in percent of GDP): - GST: 1-2.5 - Corporate and personal income tax base broadening: 0.5 - Subsidy reform (replace subsidies by cash transfers): 0.5 - Staff welcomes measures: mandatory e-invoicing in GST (gradual phasing-in), reduced compliance burden, improved enforcement. - Maintain increase in fuel excise taxes last year as fiscal buffer. - Improve PFM and procurement transparency; recommended measures include more timely fiscal reporting, emergency procurement rules, publishing all contract award data and ex-post validation of delivery. ### Monetary policy, liquidity, and exit strategy - Monetary easing since pandemic: - Repo and reverse repo rates cut by 115 basis points to 4 and 3.35 percent, respectively, building on pre-pandemic easing of 135 bps. - Cash reserve requirement reduced by 100 bps. - Liquidity injections: - Cumulative liquidity injection of over 6 percent of GDP during February 2020 – 2021. - G-sec yields reached a 17-year low amid elevated inflation and large public borrowing. - Appropriate stance and normalization: - Accommodative stance and adequate systemic liquidity remain appropriate given the second wave. - Well-communicated plan for gradual reduction in exceptional monetary policy support warranted; start with withdrawal of broad-based liquidity support and adjust forward guidance. - RBI actions: use of term reverse repos and phased restoration of CRR to 4 percent welcomed. - Monetary transmission: - Room for further measures to improve transmission via bank lending channel. - Durable improvement requires more competitive, efficient, and well-capitalized banking system and continued implementation of PSB governance, NPL resolution, and capitalization reforms. ### Financial stability, stress tests, and restructuring - Impact on corporates and MSMEs: - Transport, services, and MSMEs hit hard due to higher pre-pandemic interest burdens, lower profitability, and limited credit access. - Policy support: monetary easing, borrower relief measures (six-month moratorium), credit guarantee schemes (ECLGS). - MSME credit guarantee scheme expanded during the second wave; loan restructuring reintroduced. - Asset quality and stress tests: - RBI stress tests (July 2021) show system-wide bank NPAs increase from 7.5 in March 2021 to 9.8 in March 2022 under a “baseline scenario”; public sector banks NPAs rise to over 12.5 percent. - Credit quality indicators expected to worsen as policy support measures expire. - NBFCs could face pronounced delinquencies; rising bank exposure to NBFCs increases spillover risks. - Policy recommendations: - Continue targeted support to viable corporates (subsidies on interest costs, guarantees on principal). - Facilitate exit of non-viable firms: hybrid restructuring, simpler out-of-court MSME restructuring, reforms to individual insolvency. - Ensure loans under restructuring are closely monitored and properly provisioned to avoid loan evergreening. - Ensure adequate bank capitalization; recent PSB recapitalization welcomed. - NARCL (proposed “bad bank”) announced February 2021: design should follow best international practice (governance, operational independence, asset valuation). ### Structural reforms and medium-/long-term priorities - Financial sector reforms: - Plans to privatize two PSBs and a state-owned insurance company are welcome. - NBFC regulatory reform planned to tighten capital, provisioning, and large exposure requirements for systemic nonbank institutions. - Enhance domestic corporate debt markets and resolution/crisis management framework (Financial Resolution and Deposit Insurance Bill recommended by 2017 FSAP). - Strategic disinvestment of IDBI bank to provide lessons for next privatization round (expected to commence in 2022). - Broader reform priorities: - Infrastructure investments, land reforms, labor reforms (including increasing female labor force participation), access to finance, reforms to reduce informality, governance and rule of law improvements. - Education outcomes: COVID-19 school closures likely led to substantial learning losses; more widespread, tailored, and sustained support needed. - Trade and FDI: - Further trade and investment liberalization and lowering tariffs on intermediate goods recommended to deepen global value chain integration. - Recent liberalization steps in FDI policies noted; further liberalization important to attract FDI. ### Downside scenario (Box 1) - Scenario drivers: COVID-19 uncertainties, tightening financial conditions, adverse longer-term implications. - Quantitative impacts (relative to baseline): - GDP growth about 2 percentage points lower in FY2021/22; a further 0.5 to 1 percentage point lower in the subsequent two years. - Monetary policy response limited: additional cut in policy rates by 50 basis points. - Fiscal deficit increase: about 0.6 percent of GDP. - Public debt increase: close to 3.6 percentage of GDP compared to baseline. - Corporate interest rates could rise by up to 250 basis points compared with the baseline. - Output level roughly 3½ percent below baseline by end of FY2023/24. - Policy recommendations under downside: - Additional fiscal support of about 2 percent of GDP, focused on vulnerable households and firms. - Fully deploy below-the-line measures announced at pandemic onset; target affected and viable firms; facilitate exit of non-viable firms. - Additional fiscal support likely needed to recapitalize PSBs. - Limited space for monetary easing implies targeted liquidity support to viable firms. - Credible announcement and implementation of structural reforms to support medium-term potential growth. ### Risk Assessment Matrix (selected external risks and implications) - Global resurgence of the COVID-19 pandemic - Likelihood: M; Horizon: ST, M. - Policy implications: Increase public expenditure in health, education, social safety nets; maintain exchange rate flexibility. - De-anchoring of inflation expectations in the U.S. - Likelihood: M; Horizon: ST, M. - Policy implications: Enhance environment for attracting stable non-debt capital (FDI); maintain exchange rate flexibility. - Rising commodity prices amid volatility - Likelihood: M; Horizon: ST, MT. - Policy implications: Improve targeting of transfers; accelerate fuel subsidy reform; intervene to prevent disorderly currency movements. - Intensified geopolitical tensions - Likelihood: H; Horizon: ST, MT. - Policy implications: Continue exchange rate flexibility; with adequate reserves, provide FX liquidity to prevent disorderly movements. ### Debt Sustainability and public debt dynamics (Appendix III & DSA highlights) - Baseline public debt path: - Public debt-to-GDP increase to about 89 percent in FY2020/21; decline to about 85 percent by FY2026/27. - Nominal and real projections and parameters: - Nominal GDP growth projected to increase to about 13.7 percent in FY2021/22; remain around 11 percent over medium term. - Effective interest rates projected around 7-7.5 percent. - Inflation forecast stable at around 4 percent in medium term. - Debt stabilizing primary deficit: 2.9 percent of GDP. - Gross financing needs: - Projected to remain around 15-16 percent of GDP in the medium term. - Stress tests (selected outcomes): - Growth shock (output growth 3.4 percentage points lower in FY2022/23 and FY2023/24): debt-to-GDP peaks at about 97 percent; gross financing needs peak ~17.5 percent of GDP. - Combined macro-fiscal shock (growth shock + primary balance shock cumulative impact ~3.6 percent of GDP + interest rate shock 270 basis points): debt increases to 100 percent of GDP in medium term. - Contingent liability shock (~5.5 percent of GDP in FY2022/23): debt peaks above 100 percent of GDP. - Vulnerability assessment: vulnerabilities high given high baseline debt-to-GDP and breach of debt and gross financing risk thresholds in 2020. ### Key quantitative indicators (selected exact figures) - Real GDP growth: - 2017/18: 6.8; 2018/19: 6.5; 2019/20: 4.0; 2020/21: -7.3; 2021/22: 9.5; 2022/23: 8.5. - CPI-Combined inflation: - 2017/18: 3.6; 2018/19: 3.4; 2019/20: 4.8; 2020/21: 6.2; 2021/22: 5.6. - General government finances (percent of GDP): - Revenue: 2020/21: 18.3; 2021/22: 19.2. - Expenditure: 2020/21: 31.1; 2021/22: 30.4. - Fiscal balance: 2020/21: -12.8; 2021/22: -11.3. - Public debt: 2020/21: 89.6; 2021/22: 90.7. - Balance of payments: - Current account (% of GDP): 2020/21: 0.9; 2021/22: -1.0. - FDI, Net Inflow (% of GDP): 2020/21: 1.7; 2021/22: 1.6. - Reserves (months of imports): 2020/21: 10.6; 2021/22: 11.0. - External debt (% of GDP): 2020/21: 21.4; 2021/22: 21.8. - Selected Table 2 balance of payments lines (billions of U.S. dollars, 2020/21): - Current account balance: 24.0 / 0.9 percent of GDP. - Merchandise exports: 296.3. - Merchandise imports: 398.5. - Direct investment, net: -44.0 (["-" signifies inflow]). - Portfolio investment, net: -36.1 (["-" = inflow]). - Reserve Assets, net: 59.5. - Key fiscal and financial metrics (selected): - Nominal GDP (2018/19): 2,701 (billions of U.S. dollars). - GDP per capita (IMF staff est.): 1,997 (U.S. dollars). - Population total (2018/19): 1.35 (billions). - Scheduled commercial banks: Risk-weighted CAR (2020/21): 16.0. - Gross nonperforming assets (2020/21): 7.5 (percent of outstanding advances). - NBFCs: Gross nonperforming assets (2020/21 as of Sep-2020): 6.4 (percent). ### Policy actions and measures (selected timelines and measures) - Monetary policy and liquidity (selected actions and dates): - Mar 27, 2020: repo rate reduction by 75 bps to 4.40%, reverse repo reduced by 90 bps to 4%; CRR reduced by 100 bps to 3% for one-year period; TLTRO of ₹1 trillion announced. - May 22, 2020: policy repo rate reduced 40 bps to 4.0% and reverse repo to 3.35%. - Oct 09, 2020: on tap TLTRO of ₹1 trillion; HTM up to 22% of NDTL extended. - Feb 5, 2021: restoration of CRR in two phases: 3.5% effective March 27, 2021 and 4.0% effective May 22, 2021. - Apr 7, 2021: G-SAP 1.0: secondary market G-sec acquisition program of ₹1 trillion. - June 4, 2021: G-SAP 2.0: upfront purchases of government securities of ₹1.2 trillion. - Aug 6, 2021: on tap TLTRO extended until December 31, 2021; VRRR auctions to raise fortnightly VRRR auctions by additional ₹2.0 trillion to a total of ₹4.0 trillion by September 24, 2021. - Financial sector measures (selected): - Mar 4, 2020: Government approved merger of 10 PSBs into four bigger banks effective April 1, 2020. - Mar 27, 2020: moratorium on term loans (3 months) permitted; asset classification standstill for moratorium accounts. - May 23, 2020: ECLGS 1.0: 100% guarantee to additional working capital/term loans up to 20% of outstanding loans as on February 29, 2020. - Mar 31, 2021: ECLGS 3.0 extended to Hospitality, Travel & Tourism, Leisure & Sporting sectors; ECLGS schemes extended up to June 30, 2021 (or till guarantees of ₹3 trillion issued). - Aug 3, 2021: Pre-Packaged Insolvency Resolution Process (PIRP) introduced for MSMEs. - Aug 9, 2021: DICGC Act amended to allow depositors to claim insurance up to Rs. 0.5 million within 90 days of liquidation or moratorium. - Fiscal policy measures (selected): - Mar 26, 2020: PM Garib Kalyan measures (food, cash transfers, increased MNREGA wage to ₹202 a day, other support). - May 13, 2020: Employees provident fund contribution reduced to 10% for three months. - May 14, 2020: One Nation one Ration Card; free food grains to migrants for 2 months; Rs 50 billion credit facility for street vendors. - May 17, 2020: Center allows states to borrow up to 5% of GSDP for 2020–21 linked to reforms. - Feb 1, 2021 (Budget FY22): proposed recapitalization of PSBs by ₹200 billion in FY22; Development Finance Institution with capital of ₹200 billion; FDI limit on Insurance company raised to 745 from 49% (as presented in source text). - Apr 23, 2021 & June 8, 2021: PM-GKAY free food program extended and then extended until November 2021. ### Capacity development, data, and statistical issues - Data and statistical findings: - Data provision broadly adequate for surveillance but weaknesses in timeliness and coverage remain. - National accounts revised to 2011/12 base (January 2015); concerns on extrapolation, deflation methods, and discrepancies between GDP by activity and expenditure. - CPI base year 2012; multiple CPI series remain with old weights in some cases. - External sector statistics broadly BPM6 consistent; trade data valuation/timing/coverage issues noted. - India disseminates monthly Data Template on International Reserves and Foreign Currency Liquidity as per SDDS; weekly updates on RBI website available for some variables. - SARTTAC and CD: - SARTTAC inaugurated February 2017; 496 Indian officials received training in FY2020 through SARTTAC. - Fund CD engagement deepened and recalibrated for online delivery during the pandemic. ### Authorities’ views (Statement highlights) - Vaccination: - India’s population: 1.3 billion. - Authorities cited current pace more than 10 million a day and target to fully vaccinate at least 60 percent of population by end-December 2021 is on track. - Latest (September 10th) figures indicate 40 percent of the population has at least one dose. - Growth and inflation: - Both IMF and RBI projected growth at 9.5 percent in 2021-22. - Authorities cited fiscal deficit target: central government budgeted at 6.8 percent of GDP in current year; committed to reduce to 4.5 percent by FY2025/26. - Headline consumer price inflation projected at 5.6 percent during 2021-22; currently at 5.3 percent yoy in August 2021. - Financial sector and reforms: - Authorities concur on need for adequate capitalization of intermediaries and streamlining insolvency. - Proposed ARC-AMC model for NPA resolution without government equity contribution described. - Authorities dispute staff conclusion that financial weaknesses reduce potential growth from 7.3 percent to 6 percent—characterized as analytically inappropriate. - Poverty and support: - Share of GDP allocated to direct income support for the poor increased from 2.1 percent to 2.7 percent. - Authorities highlighted expanded income support and food subsidies. *Source: IMF staff summary of the chapter content unit 1indea2021001 (India staff report).* ### 1. COVID-19 Developments______________________________________________________________________________ 6 ### 1. COVID-19 Developments ### COVID-19 pandemic: spread, containment, and vaccination - The first wave started in March 2020 and peaked in September 2020; the second wave started in urban centers in March 2021 and spread to all states, including rural areas with relatively weak health care infrastructure, temporarily overwhelming health facilities. - Pandemic-related uncertainties include a possible third wave, risks from variants, and a vaccination rate that needs to increase to meet the authorities’ target to vaccinate the adult population by end 2021. - Authorities' containment measures: - First wave: a strict national lockdown started on March 25, 2020, extended several times, followed by gradual re-opening and restrictions in select containment zones. - Second wave: localized state-wide lockdowns in most states. - State-level analysis suggests social distancing and containment measures effectively reduced case numbers but imposed economic costs; state characteristics such as health care infrastructure and the share of services in the economy influenced outcomes. - India is among the world’s largest vaccine producers, but: - Supply chain bottlenecks, including shortages of critical raw materials, initially constrained scaling up vaccine production. - COVAX relies on production from India; delays in vaccine production and exports have global implications. - After a slow start, vaccinations have picked up more recently; if the current pace can be sustained and gradually raised, India may be on track to fully vaccinate 40 percent of the population by end-2021. - Gender gap in vaccination: nearly 17 percent more men than women have received a vaccine dose (as of mid-July). ### COVID-19 indicators and mobility (as reported) - India has the second highest number of confirmed cases in the world (figure caption). - Mobility is gradually recovering from the trough due to the second wave. - The second wave peaked with case numbers coming down from the early May peak. - The pace of vaccinations slowed in May but picked up recently. - Case fatality rate stabilized at around 1.3 percent, with a pickup in the recovery rate. ### Deep economic and social impact - Pre-pandemic growth: 4 percent in fiscal year (FY) FY2019/20 (April to March), reflecting a decline in private domestic demand. - Authorities' policy responses included fiscal support, monetary easing, liquidity and regulatory measures for the financial sector, credit and debt relief programs for borrowers, and advancement of structural reforms despite the pandemic. - GDP outcomes: - Following the first wave and the strict national lockdown, GDP contracted by an unprecedented 7.3 percent in FY2020/21. - GDP decline in 2020Q2 was 24.4 percent. - Growth resumed in 2020Q4 (0.5 percent) and 2021Q1 (1.6 percent), accompanied by a recovery in mobility. - Sectoral impacts: - Contact-intensive trade, hotels, transportation, and communication services contracted the most (-18.2 percent). - Financial services experienced a moderate contraction. - Agriculture grew by 3.6 percent. - Investment and employment fell sharply due to supply disruptions. - Demand-side contractions: - Private consumption: -9 percent. - Gross fixed capital formation: -10.8 percent. - Imports: -13.6 percent. - Labor market: urban unemployment rose and labor force participation declined during the first wave. - Second wave impacts: - Resulted in another sharp, albeit smaller and shorter, fall in activity. - Mobility declined broadly; traffic congestion in major cities fell. - Manufacturing and Services PMIs entered contractionary territory towards the end of 2021Q2. - More recently, high frequency indicators such as industrial production, mobility, and electricity consumption have witnessed a recovery. - Inflation: - Inflation peaked at 7.6 percent in October 2020. - Inflation eased to 5.6 percent in July (year not specified in excerpt), driven by softer food prices and base effects. - Core inflation remained elevated at 5.8 percent. - Inflation risks stem from higher global commodity prices and rising input costs, as evidenced by recent increase in wholesale price inflation. ### Social and human development effects - The pandemic is likely to have disrupted progress in human development, associated with an increase in poverty and declines in earnings for workers. - Government relief measures helped mitigate impacts, especially in rural areas through the existing rural employment program. - Social protection coverage is less complete for the informal sector and urban poor; migrant workers have been adversely impacted. - Educational impacts: - According to UNICEF, schools have been closed for more than half of instruction days, likely affecting those with less access to online learning—poor, rural households, and girls. ### Financial sector and credit developments - Bank credit growth was 5.5 percent (year-on-year) in FY2020/21, the lowest rate in the last four financial years; growth remained much lower for public than for private sector banks. - Bank credit initially declined more for micro, small and medium size enterprises (MSMEs). - Large corporates benefited from easy conditions in capital markets and Reserve Bank of India (RBI) policies such as the Targeted Long-Term Repo Operation (TLTRO). - Despite adequate system-wide liquidity, banks retrenched to safer and more liquid assets; sovereign debt holdings increased by almost 19 percent in 2020. - Banks’ exposure to nonbank financial companies (NBFCs) continued to rise, supported by emergency credit line guarantee schemes. - Nonperforming asset (NPA) ratios of banks and nonbanks improved between March 2020 and March 2021 due to borrower relief measures, classification of loans under restructuring schemes as standard, and the Supreme Court’s (temporary) suspension of recognition of pandemic-affected loans as nonperforming (lifted in March 2021). - Recently, the share of loans overdue (but not yet classified as nonperforming) has increased across portfolio segments. - Banks increased provisioning ratios and raised capital via new equity issuance and public sector bank (PSB) recapitalization in anticipation of potential surge in impaired assets. ### External sector developments during the pandemic - Initial COVID-19 shock and lower oil prices reduced imports, contributing to a temporary current account surplus of 0.9 percent of GDP in FY2020/21. - Drivers of current account improvement: initial domestic demand shock, lower oil prices, steady service exports, and resilient remittance inflows. - The current account returned to a deficit in the second half of FY2020/21 reflecting recovery in activity and higher oil prices. - Capital flows and reserves: - Net FDI inflows recovered and are estimated at 2 percent of GDP in 2020. - Portfolio outflows of 0.5 percent of GDP occurred in March 2020, but portfolio inflows gained momentum in the second half of FY2020/21. - Policy measures eased debt inflows, including extension of the list of “fully accessible” bonds with no investment limits for foreign investors and easing limits for foreign investment in corporate bonds. - Portfolio flows came under renewed pressure due to rise in U.S. yields and market expectations of U.S. Federal Reserve policy tightening, and later due to the second wave and concerns about a third wave. - Current account surplus and strong net capital inflows supported an increase in foreign exchange reserves. - External position: - In FY2020/21, the external position was broadly in line with the level implied by medium-term fundamentals and desirable policies (Appendix I: External Sector Assessment). - Based on the EBA model and accounting for transitory COVID-19 impacts, the staff-assessed current account gap was 1 percent of GDP, with positive policy contributions mostly from the increase in foreign exchange reserves and the credit gap. - Net international investment position improved marginally. ### Global and regional implications - India’s GDP accounts for around 7 percent of the world and 80 percent of the South Asia total in purchasing-power parity (PPP) terms. - A decline in India’s growth has sizeable negative global spillovers, primarily through trade linkages and global supply chains. - Disruptions to air travel bubbles and border trade with neighbors (Bhutan, Bangladesh, Nepal, and Sri Lanka) could result in negative regional spillovers. - Supply chain disruptions and re-orientation of vaccines to domestic use due to the second wave have implications for COVAX vaccine delivery. ### Policy implications and priorities (as identified in text) - Accelerate vaccinations to meet authorities’ target to vaccinate the adult population by end 2021 and to reduce pandemic-related uncertainties. - Close the gender gap in vaccinations (nearly 17 percent more men than women received a vaccine dose as of mid-July). - Strengthen health care infrastructure and social spending to better contain health crises and mitigate economic costs. - Further strengthen the financial sector to address potential delayed financial sector impacts once borrower relief measures and regulatory forbearance are withdrawn. - Implement recently passed structural reforms to support medium-term growth. ### Gradual economic recovery and medium-term outlook - Baseline growth projections: - Growth is expected at 9.5 percent in FY2021/22 and 8.5 percent in FY2022/23. - Projected growth reflects high statistical carryover effects for both FY2021/22 (10.6 percent) and FY2022/23 (5.2 percent). - Inflation and credit: - Headline inflation is projected at 5.6 percent in FY2021/22 amid elevated price pressures. - Domestic credit growth (including credit to the public sector) is expected to remain broadly unchanged at 8 percent in FY2021/22. - Current account: - Projected to return to a deficit of about 1 percent of GDP in FY2021/22 due to gradual recovery in domestic demand and higher oil prices. - Medium-term growth: - Potential growth is expected at around 6 percent over the medium term, reflecting a more persistent impact from the pandemic and the need to further strengthen the financial sector. - Investment fell sharply and the lagged impact of the pandemic on corporate and financial sectors will likely contribute to lower investment and capital accumulation, including in MSMEs. - Reduced access to education and training due to the pandemic could weigh on human capital improvements and adversely impact labor markets. - Implementation of recently passed structural reforms will be critical for supporting medium-term growth. *Source: IMF staff summary of "1. COVID-19 Developments" chapter (India country report).* ### 14. Uncertainty about the economic outlook is elevated, driven by multiple risk factors ### 14. Uncertainty about the economic outlook is elevated, driven by multiple risk factors ### Elevated risks and channels - COVID-19 and vaccinations - Main domestic risks: continued spread of the virus, emergence of new variants, potential future waves, difficulties in ramping up vaccinations. - Further outbreaks could prompt additional lockdowns, dampen consumer and investor confidence, delay the economic recovery and undermine medium-term growth. - A longer lasting pandemic could increase poverty and inequality further and result in social discontent. - Corporate and financial sector risks - A protracted slowdown could adversely impact corporate and financial sectors, with implications for the economic outlook and fiscal sustainability. - Fiscal risks - In the absence of a credible medium-term plan, a weaker fiscal position could increase risks stemming from higher financing costs and the realization of contingent liabilities, with broader implications for financial conditions and the financial system. - External uncertainties - A reassessment of global market fundamentals could trigger a widespread global risk-off event and capital outflows from emerging markets, adversely affecting corporate, household, and financial institutions’ balance sheets. - Bouts of volatility in oil prices could affect India’s current account, exchange rates, and inflation. - External uncertainties could impact the economic recovery and pose financial stability risks. ### Text Table 1: Medium Term Outlook (selected series, fiscal years 2017/18–2026/27) - Fiscal year definition: "Fiscal Year is April to March (e.g. 2020/21 = Apr-2020 - Mar-2021)." - Output: Real GDP growth (%) - 2017/18: 6.8 - 2018/19: 6.5 - 2019/20: 4.0 - 2020/21: -7.3 - 2021/22: 9.5 - 2022/23: 8.5 - 2023/24: 6.6 - 2024/25: 6.3 - 2025/26: 6.2 - 2026/27: 6.1 - Prices: Inflation, CPI-Combined (%) - 2017/18: 3.6 - 2018/19: 3.4 - 2019/20: 4.8 - 2020/21: 6.2 - 2021/22: 5.6 - 2022/23: 4.9 - 2023/24: 4.3 - 2024/25: 4.1 - 2025/26: 4.0 - 2026/27: 4.0 - General government finances (% of GDP) - Revenue: 2017/18: 20.0; 2018/19: 20.0; 2019/20: 19.7; 2020/21: 18.3; 2021/22: 19.2; 2022/23: 19.5; 2023/24: 19.6; 2024/25: 19.8; 2025/26: 20.0; 2026/27: 20.1 - Expenditure: 2017/18: 26.2; 2018/19: 26.3; 2019/20: 27.1; 2020/21: 31.1; 2021/22: 30.4; 2022/23: 29.2; 2023/24: 28.4; 2024/25: 28.2; 2025/26: 28.1; 2026/27: 27.9 - Fiscal balance: 2017/18: -6.2; 2018/19: -6.4; 2019/20: -7.4; 2020/21: -12.8; 2021/22: -11.3; 2022/23: -9.7; 2023/24: -8.8; 2024/25: -8.3; 2025/26: -8.1; 2026/27: -7.8 - Public debt: 2017/18: 69.7; 2018/19: 70.4; 2019/20: 74.1; 2020/21: 89.6; 2021/22: 90.7; 2022/23: 88.9; 2023/24: 88.2; 2024/25: 87.3; 2025/26: 86.4; 2026/27: 85.2 - Money and credit - Broad money (% change): 2017/18: 9.2; 2018/19: 10.5; 2019/20: 8.9; 2020/21: 11.7; 2021/22: 6.9; 2022/23: 8.7; 2023/24: 8.9; 2024/25: 9.0; 2025/26: 8.7; 2026/27: 8.7 - Domestic credit (% change y/y): 2017/18: 7.7; 2018/19: 11.8; 2019/20: 8.3; 2020/21: 8.1; 2021/22: 8.2; 2022/23: 9.1; 2023/24: 9.4; 2024/25: 10.0; 2025/26: 10.1; 2026/27: 10.4 - Balance of payments - Current account (% of GDP): 2017/18: -1.8; 2018/19: -2.1; 2019/20: -0.9; 2020/21: 0.9; 2021/22: -1.0; 2022/23: -1.4; 2023/24: -1.5; 2024/25: -1.8; 2025/26: -2.3; 2026/27: -2.5 - FDI, Net Inflow (% of GDP): 2017/18: 1.1; 2018/19: 1.1; 2019/20: 1.5; 2020/21: 1.7; 2021/22: 1.6; 2022/23: 1.6; 2023/24: 1.6; 2024/25: 1.6; 2025/26: 1.6; 2026/27: 1.6 - Reserves (months of imports): 2017/18: 7.9; 2018/19: 8.2; 2019/20: 11.1; 2020/21: 10.6; 2021/22: 11.0; 2022/23: 11.0; 2023/24: 10.9; 2024/25: 10.6; 2025/26: 10.1; 2026/27: 9.5 - External debt (% of GDP): 2017/18: 20.0; 2018/19: 20.0; 2019/20: 19.5; 2020/21: 21.4; 2021/22: 21.8; 2022/23: 21.7; 2023/24: 22.0; 2024/25: 22.3; 2025/26: 22.5; 2026/27: 22.8 - Exchange rate: REER (% change) - 2017/18: 3.5; 2018/19: -5.0; 2019/20: 3.3; 2020/21: 1.1 ### Near-term outlook, upside risks, and authorities' view - Upside risks - Faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic. - A faster near-term rebound in demand could improve the medium-term outlook. - Successful implementation of announced wide-ranging structural reforms could increase India’s growth potential. - Authorities' assessment - RBI projected growth at 9.5 percent in FY2021/22, the same as the July WEO forecast. - Authorities agreed with staff assessment of near-term growth but were optimistic about medium-term growth, citing structural reforms, government capital spending, privatization and asset monetization, and growth-friendly sectoral strategies. - Authorities highlighted MSMEs and contact-intensive services were hit hard but noted recovery under way, formal sector coping better with the second wave, and expected mitigation of third-wave risks by vaccination and higher seroprevalence. ### Fiscal policy response and developments - Fiscal support packages (central government) - Above-the-line measures: 4.1 percent of GDP. - Below-the-line measures: 6.2 percent of GDP. - State governments also introduced support packages. - Early-stage above-the-line focus - Social protection, employment support, health care. - Scaled up social protection in March 2020 to provide food, cooking gas, and cash assistance initially for three months; food assistance extended an additional five months and reintroduced to cover May-November 2021. - Expanded rural employment program, contributions to social insurance funds for low-wage workers, emergency in-kind and cash support to migrants through a subnational disaster fund. - Direct Benefit Transfer system aided effective delivery, but limited coverage and initial lack of portability constrained support to migrants, informal workers, and the urban poor. - Below-the-line measures - Loan-guarantee programs for businesses, NBFCs, distressed electricity distribution companies, and farmers. - Expedited payment of existing benefits and tax refunds, intra-year tax deferrals, eased tax compliance. - Subsequent measures shifted toward demand support via additional public investment, production incentive schemes and other sectoral support. - Fiscal deterioration - Central government fiscal deficit estimated to have increased to 4.8 percent of GDP in FY2019/20 (above budget target of 3.3 percent). - Contraction in activity, lower revenue, and pandemic support measures estimated to have widened the fiscal deficit to 8.6 percent of GDP for the central government and 12.8 percent of GDP for the general government in FY2020/21. - Central government debt estimated to have increased from close to 52 percent of GDP in FY2019/20 to 63 percent of GDP in FY2020/21. - State finances - State deficit estimated to have remained broadly unchanged at 2.6 percent of GDP in FY2019/20 and increased to 4.2 percent of GDP in FY2020/21. - Central government expedited and increased transfers to states, increased states’ borrowing limits from 3 to 5 percent of GSDP, and provided additional transfers as part of a GST shortfall compensation scheme. RBI increased flexibility allowing states to access temporary financing. ### FY2021/22 budget and fiscal stance - FY2021/22 central government fiscal deficit - Authorities’ definition: 6.7 percent of GDP. - Corresponding IMF definition excluding divestment receipts: 7.4 percent of GDP. - Budget priorities and assumptions - Emphasizes expenditure on health and infrastructure and improved transparency. - Budget envisages large divestment receipts (about 0.8 percent of GDP). - Staff projections incorporate a considerable increase in capital expenditure—by close to 50 percent relative to FY2019/20—albeit lower than the budget projection, and higher current expenditure reflecting announced post-budget support measures. - State government deficit ceilings temporarily increased (up to 4 percent of GSDP, with a portion earmarked for capital expenditure). - General government fiscal stance - Change in cyclically adjusted primary balance as percent of potential GDP projected to be broadly neutral in FY2021/22, maintaining expansionary stance relative to pre-COVID-19 period. - Fiscal policy projected to contribute modestly to growth reflecting compositional shift toward capital expenditure. ### Medium-term fiscal projections and risks - Staff baseline projections - Projected decline in the deficit to about 4.9 percent of GDP by FY2026/27. - Implies fiscal consolidation of about 2 percent of potential GDP in the medium-term in terms of the cyclically-adjusted primary deficit. - Public debt projected to decline to 85 percent of GDP by FY2026/27. - Risks and uncertainties - Debt will remain significantly higher than pre-pandemic levels and gross financing needs are projected to remain elevated. - Important risks include higher contingent liabilities due to weaker corporate and financial sector balance sheets and a slower than projected pace of fiscal consolidation. - Significant uncertainty exists around potential growth and interest rates. - Staff Debt Sustainability Assessment - Suggests public debt remains broadly stable or declining under most scenarios and stochastic simulations over the medium term, but with material risks. ### Fiscal space, near-term support, and prioritization - Fiscal space assessment - Fiscal space has been reduced by increased public deficit and debt and higher fiscal risks. - Sizable economic slack, higher fiscal multipliers, potential adverse medium-term output impacts, and favorable debt dynamics suggest appropriateness of additional near-term fiscal support. - Recommended near-term additional support - About 1 percent of GDP relative to staff’s baseline projections (which already reflect additional support announced since the budget). - Additional support could be underpinned by targeted spending on social protection, employment support and health spending. - Emphasis on expenditure prioritization to protect priority spending areas and maximize growth multipliers. ### Medium-term consolidation strategy and composition (policy recommendations) - Anchoring target - Medium-term consolidation should be more ambitious than staff baseline, targeting a reduction of the general government primary deficit to 1 percent by FY2026/27 to ensure a meaningful reduction in debt. - Composition: revenue mobilization and expenditure efficiency - Tax gaps estimated to be around 5 percent of GDP; reductions could come from base expansion, higher rates, and improved revenue collection, mainly under GST and direct taxes. - Specific measures (size estimates): - GST: Measures to improve revenue efficiency through improved compliance, rate rationalization and rationalization of non-food exemptions — 1-2.5 (percent of GDP) - Corporate and personal income tax: Eliminating loop-holes and broadening the tax base — 0.5 (percent of GDP) - Subsidy reform: Reducing subsidies and replacing them by cash transfers — 0.5 (percent of GDP) - Staff welcomes initiatives: mandatory e-invoicing in GST (gradual phasing-in), measures to reduce compliance burden, and improving enforcement. - Increase in fuel excise taxes last year provided an important fiscal buffer and should be maintained. - Subsidy reform can generate important savings while ensuring affected beneficiaries are compensated during transition. - Ongoing efforts to improve expenditure efficiency (rationalization of centrally sponsored schemes, universal application of Treasury Single Account) are welcomed. - Communication and credibility - Authorities should clearly communicate a medium-term fiscal strategy with credible macroeconomic and fiscal assumptions, alternative scenarios, and a set of concrete state-dependent measures to anchor the path for fiscal deficits and instill confidence. ### Public financial management and fiscal institutions - Need for improved PFM and fiscal institutions to enhance credibility of fiscal anchor, commitment to sustainability and spending transparency. - Reforms to strengthen enforcement at central and state government levels are essential. - Public procurement and transparency measures - Mandated e-procurement use facilitated by government’s electronic marketplace helped speed procurement and enhance transparency during the pandemic; entire procurement data provided in the public domain. - Further improvements recommended: more timely and comprehensive fiscal reporting, emergency procurement rules, publishing all contract award data including beneficial ownership information, and ex-post validation of delivery. - Improved PFM and public procurement can improve quality of public expenditure, strengthen fiscal discipline and accountability, address governance, corruption and AML/CFT vulnerabilities, and help reduce the build-up of fiscal risks. *Source: IMF staff summary of "14. Uncertainty about the economic outlook is elevated, driven by multiple risk factors" (PDF chapter).* ### 25. Fiscal policy can and should play a key role in facilitating a strong, inclusive, and green ### 1indea2021001 - 25. Fiscal policy can and should play a key role in facilitating a strong, inclusive, and green ### Fiscal policy priorities and public expenditure - Fiscal policy should facilitate a strong, inclusive, and green economic recovery by increasing public expenditure in infrastructure, education, health, and social safety nets. - Large expenditure needs in these priority areas highlight the importance of revenue mobilization and the authorities’ privatization agenda; staff analysis suggests the authorities’ privatization program, if implemented, can mobilize the public sector balance sheet for high-return investments in infrastructure and human capital. ### Social protection, health, and education (human capital) - Social protection - Improve delivery of portable benefits, enhance coverage for migrants, the urban poor, and other vulnerable groups, and move to a more integrated system of social safety nets. - Staff welcomes steps such as the One Nation, One Ration Card scheme and creating the National Database of Unorganized Workers. - Health - Public spending on health is relatively low, at about 1.5 percent of GDP. - High out-of-pocket health expenditure for catastrophic health events risks pushing many into poverty. - Enhancing the size and scope of the health insurance scheme (PMJAY) and higher spending on health care and infrastructure are important priorities. - Education - The pandemic has had considerable impact on education, particularly for children from lower-income, rural households and girls. - Resources should be efficiently allocated to ensure students make up for lost school days and mitigate negative effects on human capital and inequality. ### Infrastructure investment and green transition - Infrastructure investment - Higher infrastructure spending is projected to support economic activity and, if maintained in the medium term, help close infrastructure gaps and boost growth potential. - The authorities’ National Infrastructure Pipeline is ambitious; implementation will be critical. - Authorities can prioritize environmentally sustainable public investment to facilitate a job-rich and green recovery. - Transition to a greener economy - India is supporting adoption of renewables (especially solar panels and rechargeable batteries), electric vehicles, and energy efficient and biofuels through policy mandates, government schemes and climate financing. - A greener transition can be achieved by adoption and transfer of technology, subsidies to lower the cost of renewables, and by increasing the cost of thermal production. - Such steps can also help reduce the large health burden of local pollution. ### Fiscal federalism, digitalization, and service delivery - Improving fiscal federalism, coordination across different levels of government, and expanding use of digital technologies can improve service delivery. - Enhancing the role of local governments and strengthening fiscal federalism will be critical for efficiency and effectiveness of public services. - India’s relatively advanced use of digital technologies for service and benefit delivery provides important opportunities. ### Authorities’ fiscal stance and medium-term strategy - Near-term stance - Authorities expect to achieve their central government deficit target of 6.8 percent of GDP this fiscal year (authorities’ definition) and do not see the need for additional fiscal support in the near-term. - Authorities highlighted improvements in GST and income tax buoyancy and potential for finding savings in the budget, while protecting capital spending. - Authorities expect to fully implement the capital budget and reach their target for disinvestment receipts this fiscal year. - In case the economic outlook deteriorates, authorities would be prepared to increase spending. - Medium-term priorities and consolidation - Authorities reaffirm commitment to fiscal discipline and see their deficit target of 4.5 percent of GDP by FY2025/26 as appropriate. - Next year’s budget will include medium-term macroeconomic projections and a revision of the Fiscal Responsibility and Budget Management Act (FRBM). - Revenue mobilization is an important component of medium-term fiscal strategy: - There is scope to raise about 2 percent of GDP in additional GST revenue in the medium term through universal use of the e-invoice system, reactivating GST audits, implementing closer scrutiny of returns, and rate rationalization. - Earlier corporate income tax cuts are expected to deliver benefits on compliance and investment and lead to greater tax buoyancy. - Expenditure-side improvements under way include adoption of the Treasury Single Account and rationalization of centrally sponsored schemes. - Authorities highlighted transparency of COVID-19-related spending and ongoing PFM reforms. ### Accommodative monetary policy and liquidity support - Monetary easing and communication - The RBI provided significant, broad-based monetary easing through interest rate cuts and accommodative forward guidance. - Since the pandemic, repo and reverse repo rates were cut by 115 and 155 basis points (bps) to 4 and 3.35 percent, respectively, building on the pre-pandemic easing of 135 bps. - The cash reserve requirement was reduced by 100 bps. - Time- and state-contingent forward guidance and guidance on asset purchases helped anchor market expectations. - Monetary policy communication has impacted both short- and long-term rates and corporate yields. - Liquidity measures and market outcomes - Additional liquidity measures, including long-term repo operations, operation twists, and asset purchases, supported financial markets. - Various liquidity measures resulted in a cumulative injection of over 6 percent of GDP during February 2020 – 2021 and helped avoid a broad-based liquidity crunch. - Targeted liquidity measures were aimed at MSMEs and, more recently, companies in health care infrastructure and service sectors. - Government securities’ yields reached a 17-year low amid elevated inflation, a large public borrowing program, and volatile global risk-free yields. - Formalization and market guidance on asset purchases helped anchor market expectations; announcement impact on longer-term yields has been in line with other emerging markets. - Appropriate stance and normalization - An accommodative monetary stance coupled with adequate systemic liquidity remains appropriate given the second wave’s negative impact. - A well-communicated plan for gradual reduction in exceptional monetary policy support is warranted as recovery strengthens, starting with withdrawal of broad-based liquidity support and adjusting forward-looking communication. - RBI’s usage of term reverse repos and phased restoration of the cash reserve ratio to 4 percent are welcome steps. - Continued transparent and forward-looking communication can guide normalization in policy interest rates and support recalibration of RBI’s balance sheet over the medium term. - Monetary transmission - Room exists for further measures to improve monetary policy transmission, particularly through the bank lending channel. - Durable improvement requires a more competitive, efficient, and well-capitalized banking system and continued implementation of PSB governance, NPL resolution, and adequate capitalization reforms. - Continued communication improvements about the policy reaction function could further increase predictability and effectiveness. ### External sector, exchange rate policy, and reserves - Exchange rate flexibility - Exchange rate flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions. - Reserves and interventions - Foreign exchange reserves reached $599 billion by end-May 2021 and are adequate for precautionary purposes. - The Special Drawing Rights (SDR) allocation ($17.8 billion, 0.6 percent of GDP) will support foreign exchange reserves further. - Despite frequent interventions, the RBI purchased foreign exchange on net in 11 months of FY2020/21, with total purchases reaching 5.5 percent of GDP. - Precautionary accumulation of reserves has mitigated risks due to external vulnerabilities; further accumulation is less warranted and interventions should be limited to disorderly market conditions. - Authorities’ view - Authorities reiterated commitment to exchange rate flexibility and noted interventions are intended to smooth excessive volatility. - They emphasized the need for strong external buffers against risks from potential sudden capital outflows with policy normalization by advanced economies. ### Policies to support growth and maintain financial stability - Impact on corporates and MSMEs - The pandemic hit transport, services, and MSMEs particularly hard due to higher pre-pandemic interest rate burden, lower profitability, and limited access to credit. - Monetary easing and borrower relief measures (six-month moratorium on loan repayments, credit guarantee schemes for MSME loans and bonds issued by NBFCs) softened the impact. - In response to the second wave, the MSME credit guarantee scheme was expanded, loan restructuring for COVID-19-affected borrowers was reintroduced, and banks were allowed to readjust conditions of loans restructured under a similar scheme last year. - Reintroduction of restructuring schemes is likely to delay provisioning and recognition of problem assets. - Asset quality and stress tests - Credit quality indicators are expected to worsen as policy support measures expire; stress tests suggest potential increases in NPAs on bank and nonbank balance sheets. - PSBs likely to be hit harder due to larger exposures to affected borrowers and lower capital adequacy. - NBFCs, being less diversified and more exposed to corporates and MSMEs, could face more pronounced delinquencies; growing bank exposure to NBFCs increases spillover risks. - RBI stress tests from July 2021 show an increase in system-wide bank NPAs from 7.5 in March 2021 to 9.8 in March 2022 under a “baseline scenario”. The public sector banks would see the largest increase in NPAs, to over 12.5 percent. - Support and exit of non-viable firms - Targeted support to viable corporates should continue, including possible subsidies to help cover interest costs and government guarantees on principal payments. - Policies facilitating the exit of non-viable firms are warranted: introduce hybrid restructuring schemes, simpler out-of-court restructuring process for MSMEs, and reforms in treatment of insolvency of individuals. - Recent lifting of suspension of the corporate insolvency and bankruptcy process and simplification of insolvency for MSMEs (“pre-pack” reform) are welcome. - Supervisors should apply enhanced monitoring, collect more granular data, analyze broader corporate performance indicators, and continuously communicate with supervised institutions. - Authorities should proactively develop contingency plans to address potential increases in insolvencies. - Banking sector capitalization and recognition of problem loans - To avoid loan evergreening, regulators should ensure loans benefiting from COVID-19-related restructuring schemes are closely monitored and properly provisioned. - The RBI should continuously monitor bank and NBFC health, restructuring practices, treatment of accrued interest, and take prompt action where institutions struggle to meet minimum capital requirements. - Ensuring adequate capitalization is critical; recent recapitalization of PSBs is welcome and further strengthening of common equity ratios is desirable. - The authorities announced setup of the National Asset Reconstruction Company Ltd (NARCL) in February 2021 to deal with distressed PSB assets; its design should follow best international practice in governance, operational independence, and asset valuation to ensure effective loan loss recoveries and limit costs to taxpayers. - Once recovery is underway, policies should encourage lenders to assess post-pandemic viability of borrowers in lending decisions and ensure post-restructuring asset classification and provisioning are risk-based and reflected in regulatory capital calculations. - Raising capital and avoiding lender risk aversion are important to achieve healthy credit growth supporting the recovery. *International Monetary Fund staff summary from the provided chapter content.* ### 40. Structural reforms in the financial sector are important to support a speedy post- ### 1indea2021001 - 40. Structural reforms in the financial sector are important to support a speedy post- ### Financial sector reforms and governance - Recently announced plans to privatize two PSBs and a state-owned insurance company are welcome and should pave the way for more substantial reduction in the government’s presence in the sector. - Implementation of governance and risk management reforms in PSBs remains a challenge and a priority. - Planned reform of the NBFC sector regulations should help reduce systemic vulnerabilities through tighter capital, provisioning, and large exposure requirements for the systemic nonbank institutions. - Efforts to support further development of domestic corporate debt markets should continue. - It remains critical to continue enhancing the resolution and crisis management framework through introduction of the Financial Resolution and Deposit Insurance Bill, as recommended by the 2017 FSAP. - The NARCL (proposed “bad bank”) is intended to free banks from hard-to-resolve problem assets and should further enhance banks’ lending capabilities. - Authorities expressed commitment to reducing the state’s presence in the banking sector; the strategic disinvestment of the IDBI bank will provide important lessons for the next privatization round, expected to commence in 2022. - Ongoing NBFC regulatory reforms are expected to enhance resilience and limit regulatory arbitrage. ### Credit risks, bank capitalization, and insolvency - Authorities acknowledged credit risks from the pandemic and agreed on the importance of ensuring adequate capitalization. - Actions taken to streamline the insolvency process for MSMEs; further reforms to reduce delays in IBC proceedings and to enhance the personal bankruptcy process are under consideration. - Authorities cited improving bank capital adequacy, recovering credit growth to MSMEs, and lower-than-expected increase in NPA ratios as evidence of effective policy interventions and a smaller-than-expected impact of the pandemic on the financial sector. - RBI’s stress tests show that banks remain well capitalized and able to sustain a severe stress scenario. - The government is ready to provide additional capital to PSBs as and when needed. - Authorities view risks from increased interconnectedness to remain contained as bank exposures are largely limited to the larger and well-rated NBFCs. ### Structural reforms for inclusive and medium-/long-term growth - Advancing structural reforms has been an important component of the authorities’ policy response; labor market reforms are highlighted as easing administrative bottlenecks, improving labor market functioning, supporting formalization, and expanding social security benefits for workers. - Implementation and sequencing of structural reforms should be accompanied by strengthening of social safety nets to minimize adverse transition impacts. - Reform priorities emphasized: - Infrastructure investments - Land reforms - Labor reforms (including increasing female labor force participation) - Access to finance to create more and better jobs - Reforms to reduce informality (also to increase the tax base) - Reforms to strengthen governance, the regulatory framework, and the rule of law to reduce corruption, foster transparency, and safeguard public accountability - Education outcomes: COVID-19-related school closures likely led to substantial losses in learning and exacerbated inequalities; more widespread, tailored, and sustained support for students will be needed. ### Trade, FDI, and global value chain integration - Further trade and investment liberalization, aided by structural reforms, could deepen integration in global value chains and support post-pandemic recovery. - Recommendations and observations: - Work actively with other major nations to conclude new WTO-based agreements and strengthen WTO rules. - Lowering tariffs (customs duties) on intermediate goods would strengthen backward linkages and lift competitiveness of exports such as autos, chemicals, electronics, and industrial machinery. - Recent liberalization steps in FDI policies (e.g., in agriculture, defense, telecommunications services, and the insurance sector) are important; further liberalization will be important to attract FDI flows and improve the current account financing mix. - Structural reforms, production-linked incentive schemes, and privatization of enterprises in non-strategic sectors may support greater FDI. ### Data, capacity development, and technical collaboration - Timely availability of quarterly general government fiscal data and expansion of its coverage, labor market data, and updated CPI weights would foster transparency and help policy formulation. - IMF stands ready to intensify support for improving statistical systems through capacity development, including via the South Asia Technical Assistance and Training Center (SARTTAC), also at the state level and with cohorts of civil servants. - Authorities reiterated interest in technical and analytical collaboration and highlighted themes of interest including fintech, digital currency, climate change, and monetary policy design. ### Staff appraisal: macro outlook and policy recommendations - COVID-19 impact and recovery: - Two COVID-19 waves resulted in a deep and broad-based economic downturn with potential for an adverse longer-term impact. - Growth projections: growth is expected to rebound to 9.5 percent this year and 8.5 percent in FY2022/23. - Recovery in consumption and investment expected to be gradual given the second wave, concerns about a third wave, and the need to further strengthen the financial sector, partly offset by the lower base and stronger global growth. - Uncertainty about the economic outlook remains elevated, with pandemic-related uncertainties contributing to both downside and upside risks. - Near-term policy priorities: - Addressing the health crisis, including accelerating vaccinations. - Further fiscal support warranted until the recovery is fully entrenched; additional fiscal support in the near term—by about 1 percent of GDP relative to staff’s baseline projections—could be underpinned by targeted spending on social protection, employment support and health spending. - Monetary policy should remain accommodative, ensure adequate systemic liquidity, and targeted support to viable corporates and borrower relief measures should continue. - Fiscal strategy and public investment: - Public debt is projected to decline gradually to 85 percent over the medium-term, reflecting lower deficits and a favorable interest rate-growth differential. - Policy space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy that outlines a gradual removal of exceptional policy support and revenue enhancing measures. - Increasing public expenditure in infrastructure, education, health, and social safety nets are long-standing priorities to achieve the Sustainable Development Goals and boost potential growth; the large expenditure needs highlight the importance of revenue mobilization and the authorities’ privatization agenda. - Improving fiscal federalism, coordination across levels of government, and expanding use of digital technologies can improve service delivery. - Monetary exit and liquidity: - While closely monitoring elevated inflation pressures, maintaining accommodative monetary policy remains appropriate until growth begins to firmly recover. - A well-communicated plan for a gradual reduction in exceptional monetary policy support as the recovery strengthens—starting with withdrawal of broad-based liquidity support and adjusting forward-looking communication—would foster orderly market transitions. - External sector: - The external position in FY2020/21 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - With the current account surplus, renewed FDI and portfolio flows, valuation effects, and foreign exchange interventions, foreign exchange reserves are adequate for precautionary purposes. - Exchange rate flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions. - Financial sector policy stance: - Policies should support the recovery while allowing the exit of non-viable firms and encouraging banks to continue building capital buffers and recognize problem loans. - Targeted support to viable corporates should continue, but policies facilitating the exit of non-viable firms are also warranted. - Credit quality indicators are expected to worsen as policy support measures expire, calling for continued close monitoring. - Ensuring adequate capitalization is critical to deal with the potential increase in corporate insolvencies and to create conditions for the financial system to better support the recovery, including through credit growth, and maximize long-term growth. - The design of the newly established NARCL should follow best international practice to ensure effective loan loss recoveries and limit costs to taxpayers. - Concluding emphasis: steadfast implementation of announced structural reforms as well as further efforts to broaden them are needed to maximize India’s growth potential. *Source: INDIA — IMF staff report content unit 1indea2021001 - 40.* ### 56. It is recommended that the next Article IV consultation take place on the standard 12- ### 1indea2021001 - 56. It is recommended that the next Article IV consultation take place on the standard 12- ### Recent Macroeconomic Developments - The pandemic led to a broad-based contraction in economic activity in 2020, with a gradual recovery in the first few months of 2021 prior to the second wave. - Real GDP growth: - Contracted sharply in 2020Q2, followed by a gradual recovery. - Demand components (FY2020/21): - Private consumption, investment and exports contracted sharply in FY2020/21. - 2020/21 data are provisional estimates. - Industrial activity and sentiment: - Industrial production, manufacturing and services PMIs all declined sharply in 2020Q2 before recovering gradually. - Consumption indicators: - Motor vehicle sales recovered from the trough last year, but consumer credit remains subdued. - Investment: - Real Gross Fixed Capital Formation: notable sharp contraction during the first wave then a strong rebound. - Trade: - Goods exports and imports saw a strong rebound from the trough last year. - Selected historical year-on-year growth axis shown from Mar-10 to Mar-21 for GDP and GVA (Basic Prices) with tickmarks at -26, -21, -16, -11, -6, -1, 4, 9, 14 (chart axes preserved). ### External Sector Developments - Current account and reserves: - Temporary current account surplus and renewed net capital inflows supported an increase in foreign exchange reserves. - Current account balance improved significantly in FY2020/21, mainly due to temporary contraction in imports and lower oil prices. - Capital flows: - After initial COVID-19 shocks, both FDI and portfolio flows rebounded. - Debt flows remained under pressure during the fiscal year. - External debt and reserves: - Lower level of external debt compared to peer economies, and adequate foreign exchange reserves support mitigating external vulnerabilities. - Reserve adequacy metric presented as "Official Reserves as a percent of IMF-specific metric" with suggested adequacy range (data as of March 2021). - Financial account and items: - Financial Account components include Bank capital (including NRI loans), FII, FDI (charted in percent of GDP). - Composition of imports (3mma, in millions of U.S. dollars): Coal, Oil, Gold (time series Jun-14 to Jun-21). ### Financial Market Developments - Exchange rate and portfolio flows: - Indian rupee: under downward pressure in March 2020 but recovered afterwards amid heightened volatility and rebound of total portfolio flows. - Foreign Portfolio Investment Flows (Net): charted (USD Billion, cumulative starting Jan-27, 2020) for Equity, Debt, Total. - Equity markets and yields: - Stock market gained strong momentum in the second half of 2020. - Both short and long-term yields eased aided by monetary policy easing. - Government bond yields charted: 3 Month, 1 year, 10 year (In percent) with sample values across dates (e.g., 10-year yields around 6.x percent in parts of 2020-2021). - International comparisons: - BRICS: 10-year Government Bond Yields compared for India, China, Brazil, Russia, South Africa, Indonesia. - Effective exchange rates: - REER in FY2020/21 appreciated by about 0.5 percent from its 2015-2019 average. - Nominal and Real Effective Exchange Rates indexed to 2010=100 (NEER, REER) and US$/INR bilateral rate included. ### Monetary Sector Developments - Inflation dynamics: - Inflation has remained above or near the RBI’s upper band, with sticky core. - CPI (Combined) and CPI-Core/Core-Core series charted (In percent, Year-on-Year). - REER and inflation comparisons show inflation in India and its G20 peers; peer group median includes Brazil, Russia, China, South Africa, Indonesia, and Turkey. - Inflation expectations: - Household and Consensus Expectations for 1-Year Ahead inflation remain elevated. - Policy response and liquidity: - Significant policy rate easing and liquidity measures led to sizeable liquidity injections by the RBI, resulting in easing of monetary conditions soon after the COVID-19 shock. - Policy rates: Repo Rate and Reverse Repo Rate plotted; RBI Net Liquidity Injection/Absorption reported in INR Trillion. - Food inflation contribution: - CPI Food Inflation Contributions chart shows Cereals, Milk, Vegetables, Pulses, Others (Jul-17 to Jul-21). - Monetary Conditions Index: - MCI = RIR + REER charted (Real Interest Rate, REER, MCI). ### Fiscal Sector Developments - Fiscal impact of COVID-19: - The COVID-19 shock led to a considerable increase in the fiscal deficit at both the central and state government levels. - Government balance (central and state) series shown from 2000/01 to 2020/21*. - Expenditure and composition: - Government Expenditure rose sharply in 2019/20 and 2020/21* (central, state, general government shares shown). - Increased expenditure mostly reflects higher current spending while capital spending was held back, including by constraints at the state level. - General Government Non-interest Current Spending shown relative to historical averages (Avg 2003/04 to 2007/08 and Avg 2008/09 to 2012/13). - Revenue and subsidies: - Tax revenues relative to GDP declined in FY2019/20 reflecting the corporate tax rate cut and remained flat in FY2020/21. - Central Government Revenue composition: Direct and Indirect; Central Government Subsidies increased considerably in FY2020/21 reflecting additional food subsidies to vulnerable households. - Government Subsidies (percent of GDP): Food, Fertilizer, Petroleum, Total (time series through 2020/21*). ### Corporate and Banking Sectors - Corporate sector: - The COVID-19 shock halted ongoing progress in repair of corporate and financial balance sheets. - Corporate profitability was slowly recovering pre-pandemic; deleveraging was progressing, particularly at larger firms. - Interest Coverage Ratio (EBIT to Interest Expenses, median) and Return on Assets (median) series by firm size (Large, Medium, Small, Micro) shown for fiscal years. - Credit growth and composition: - Bank credit growth remains subdued; growth in credit to MSMEs only recently recovering from negative territory. - Credit growth by borrower type (YoY growth percent): Wholesale corporate, MSME, Housing credit, Overall non-food credit (Dec-19 to Mar-21 datapoints indicated). - Bank Credit Growth by sector (change in percent from a year ago) series by Industry, Housing, Personal Loans (excl. housing), Agriculture, Services (share weights provided). - Asset quality and capital: - Bank and NBFC NPA ratios declined since March 2020 but are expected to increase going forward. - Non-Performing Assets of Financial Institutions charted (percent of total assets) for Public sector banks, Private sector banks, All commercial sector banks, NBFCs (Mar-16 to Mar-21). - Capital Adequacy Ratio of Financial Institutions improved (Percent of Risk-Weighted Assets) for Public sector banks, Private sector banks, All commercial sector banks, NBFCs (Mar-16 to Mar-21). ### Key Quantitative Indicators (selected exact figures from tables) - GDP and social: - Nominal GDP (2018/19): 2,701 (billions of U.S. dollars). - GDP per capita (U.S. dollars) (IMF staff est.): 1,997. - Population total (in billions) (2018/19): 1.35. - Urban population (percent of total): 34.0. - Life expectancy at birth (years, 2015/16): 68.3. - Poverty and nutrition: - Headcount ratio at $1.90 a day (2011): 21.2 (percent of population). - Undernourished (2015): 15.3 (percent). - Macroeconomic projections (Table 6 highlights): - Real GDP growth (2020/21): -7.3 (percent change). - Real GDP growth (2021/22): 9.5 (percent change). - Consumer prices (2021/22): 5.6 (percent change, period average). - Central government balance (2021/22): -6.2 (percent of GDP). - General government balance (2021/22): -9.7 (percent of GDP). - General government debt (2021/22): 90.7 (percent of GDP). - Gross reserves (end-period, 2021/22 projection): 694.0 (billions of U.S. dollars). - Balance of payments (Table 2 selected lines): - Current account balance (2020/21): 24.0 (billions of U.S. dollars) / as percent of GDP 0.9. - Merchandise exports (2020/21): 296.3 (billions of U.S. dollars). - Merchandise imports (2020/21): 398.5 (billions of U.S. dollars). - Direct investment, net (2020/21): -44.0 (billions of U.S. dollars) ["-" signifies inflow]. - Portfolio investment, net (2020/21): -36.1 (billions of U.S. dollars) ["-" = inflow]. - Reserve Assets, net (2020/21): 59.5 (billions of U.S. dollars). - Fiscal (Central Government operations, Table 4, percent of GDP): - Revenue (2019/20): 8.5. - Taxes (2019/20): 6.7. - Expenditure (2019/20): 13.2. - Net lending / borrowing (overall balance) (2019/20): -4.8. - Central government debt (2019/20): 51.7 (percent of GDP). - Financial soundness (Table 8, selected): - Scheduled commercial banks: Risk-weighted CAR (2020/21): 16.0. - Gross nonperforming assets (2020/21): 7.5 (percent of outstanding advances). - NBFCs: Gross nonperforming assets (2020/21 as of Sep-2020): 6.4 (percent of outstanding advances). - High frequency indicators (Table 9 selected 2021 datapoints): - Domestic passenger vehicle sales: Jan 2021 = 15.2 (percent year-on-year growth). - CPI (combined): May 2021 = 4.2 (percent, monthly series shows multiple months). - Industrial production: May 2021 = 24.1 (percent y-o-y). - Change in FX reserves (USDbn): Jan 2021 = 10.4 (monthly change series across 2020-2021 available). *Sources: Figures, tables, and charts as presented in the supplied IMF content unit.* ### Box 1. Downside Scenario ### Box 1. Downside Scenario ### Scenario description - A possible downside scenario combines: COVID-19 related uncertainties, tightening financial conditions, and adverse longer-term implications. - Uncertainties about the path of the pandemic and the speed of vaccinations could reduce current and expected income of firms and households, further damaging confidence and delaying recovery in investment and demand for contact-intensive sectors. - A slower recovery could increase risk aversion, leading to tighter financial conditions for vulnerable businesses; increasing corporate stress could trigger an adverse macro-financial feedback loop, weakening bank and NBFC balance sheets and reducing lending to the real sector. - The recovery would be more prolonged, leading to lower growth for several years after the initial pandemic shock. ### Quantitative impacts (relative to the baseline) - GDP growth would be about 2 percentage points lower than the baseline in FY2021/22, and a further 0.5 to 1 percentage point lower in the subsequent two years. - Monetary policy response limited to an additional cut in policy rates by 50 basis points. - Fiscal deficit would increase by about 0.6 percent of GDP. - Public debt would increase by close to 3.6 percentage of GDP compared to the baseline. - Corporate interest rates could rise by up to 250 basis points compared with the baseline. - The slower recovery and tighter financial conditions result in an output level roughly 3½ percent below baseline by the end of FY2023/24. ### Policy recommendations - Additional fiscal support of about 2 percent of GDP, focused on vulnerable households and firms, should play a key role in the policy response. - Authorities should fully deploy below-the-line measures announced at the onset of the pandemic, targeting affected and viable firms, while facilitating the exit of non-viable firms. - Additional fiscal support is likely needed to further recapitalize PSBs. - Given limited space for additional monetary policy support, downside risks would call for additional easing through targeted liquidity support to viable firms in vulnerable sectors. - Announcement of credible structural reforms and subsequent strong implementation would support medium-term potential growth. ### Modeling note - The downside scenario is estimated using the Flexible System of Global Models, which considers a combination of domestic COVID-related real shocks, corporate and financial sector stress, and adverse longer-term implications from the pandemic. *Source: Box 1. Downside Scenario.* ### Appendix II ### Appendix II ### Risk Assessment Matrix — Key risks and policy implications - Overview: - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. Relative likelihoods: "L" = probability below 10 percent, "M" = probability between 10 percent and 30 percent, "H" = probability of 30 percent or more. - The RAM reflects staff views on sources of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. - External risks listed (source, likelihood, time horizon, and implications): - Global resurgence of the COVID-10 pandemic - Source: External - Likelihood: M - Horizon: ST, M - Description: Local outbreaks lead to a global resurgence of the pandemic (possibly due to vaccine-resistant variants), requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. - Policy implications: - Increase public expenditure in health infrastructure, education, and social safety nets to mitigate the immediate impact of the pandemic and boost potential growth. - Maintain exchange rate flexibility to absorb external shocks. - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia - Source: External - Likelihood: M - Horizon: ST, M - Description: A fast recovery in demand combined with Covid-19-related supply constraints leads to sustained above-target inflation readings and a de-anchoring of expectations. The Fed reacts by signaling a need to tighten earlier than expected, leading to a front-loaded tightening of financial conditions and higher risk premia. - Policy implications: - Enhance the environment for attracting stable non-debt creating capital flows, particularly FDI. - Maintain exchange rate flexibility to absorb external shocks. - Rising commodity prices amid bouts of volatility - Source: External - Likelihood: M - Horizon: ST, MT - Description: Commodity prices increase by more than expected against a weaker U.S. dollar, post-pandemic pent-up demand and supply disruptions, and for some materials, accelerated plans for renewable energy adoption. Volatility in oil prices could affect India’s current account, exchange rates and inflation. - Policy implications: - Improve targeting of transfers to shelter the most vulnerable. - Accelerate reform of remaining fuel subsidies. - Intervene to prevent disorderly currency movements. - Intensified geopolitical tensions and security risks - Source: External - Likelihood: H - Horizon: ST, MT - Description: A rise in cross-border tensions could cause economic/political disruption, disorderly migration, higher volatility in commodity prices (if supply is disrupted), and lower confidence. It could also trigger financial market pressure, reduce capital inflows, and cause general tightening of financial conditions. - Policy implications: - Continue exchange rate flexibility as the main shock absorber. - With adequate reserves, provide FX liquidity to prevent disorderly currency movements. ### Appendix III — Debt Sustainability Analysis (Key findings) - Summary statement: - India’s debt and gross financing needs are high and are projected to remain elevated over the medium term. Under the baseline, the public debt-to-GDP ratio would decline from about 89 percent in FY2020/21 to about 85 percent of GDP by FY2026/27, while gross financing needs would remain elevated at around 15-16 percent of GDP in the medium term. Medium-term debt dynamics are uncertain and fiscal risks have increased. - Mitigating factors: public debt is denominated in domestic currency and predominantly held by residents; the statutory liquidity requirement creates a captive domestic market for debt. - Key baseline projections and parameters: - Public debt-to-GDP: - Increase to about 89 percent of GDP in FY2020/21. - Decline to about 85 percent of GDP by FY2026/27. - Nominal GDP growth: - Projected to increase to about 13.7 percent in FY2021/22. - Remain at around 11 percent over the medium term. - Effective interest rates: - Projected to remain at around 7-7.5 percent. - Inflation: - Forecast to be stable at around 4 percent in the medium term. - Debt stabilizing primary deficit: - Calculated at 2.9 percent of GDP. - Macroeconomic and fiscal assumptions used in the public DSA: - Growth assumptions: - Growth is projected to be 9.5 percent in FY2021/22 and decline to about 6 percent by FY2026/27. - Staff’s projection of India’s potential growth in the medium- to long-term has been revised down from 7.3 percent to 6 percent. - Fiscal assumptions: - General government fiscal deficit projected to decline modestly to about 11.3 percent of GDP in FY2021/22 and to about 7.8 percent of GDP in the medium term. - Revenues projected to increase by about 12 percent in the medium term. - Expenditure growth projected to be about 10 percent. - Primary deficit projected to decline to about 2 percent of GDP by FY2026/27. - Composition and financing risks: - Gross financing needs: - Equivalent to about 15-16 percent of GDP in the medium term. - Foreign-currency-denominated debt: - Negligible. - Non-resident holdings of government debt: - About 2 percent of total market borrowing. - Average maturity of central government debt securities (as of December 2020): - About 11 years. - Share of market debt with outstanding maturity less than one year: - About 3.6 percent. - Financing composition: - Bulk of financing needs met by issuance of medium and long-term debt denominated in domestic currency and held by residents. - Factors keeping interest costs low: - Statutory liquidity requirement, low policy rates, and expanded central bank purchases of government debt. - Uncertainty and stress test results: - Realism of baseline assumptions: - 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 have a percentile rank around 50 percent. - Primary risk to debt sustainability: - Low growth. - Growth shock stress test: - Output growth is 3.4 percentage points lower in FY2022/23 and FY2023/24. - Result: debt-to-GDP peaks at about 97 percent of GDP and gross financing needs reach a peak of about 17.5 percent of GDP. - Combined macro-fiscal shock: - Incorporates: a similar growth shock; a primary balance shock in which none of the planned adjustment is implemented in FY2021/22 and the medium-term fiscal adjustment is delayed (cumulative impact on the primary deficit of about 3.6 percent of GDP relative to baseline); and an interest rate shock leading to a 270 basis points increase in interest rate relative to baseline through the medium-term. - Result: debt increases to 100 percent of GDP in the medium term. - Contingent liability shock: - Shock size: about 5.5 percent of GDP in FY2022/23. - Result: debt would peak at above 100 percent of GDP and would decline very gradually in the medium term. - Vulnerability assessment: - Heat map conclusion: Vulnerabilities are high, reflecting the high baseline debt-to-GDP ratio. - Under all shocks, debt sustainability metrics signal high risks, reflecting the breach of the debt and gross financing risk thresholds in 2020 and a significant increase in risks relative to the previous assessment. - Risks from market perception (measured by bond spreads), external financing requirements (current account balance and amortization of short-term external debt), and change in the share of short-term debt are within the low and the high-risk thresholds and signal a medium level of vulnerabilities. *Source: Appendix II and Appendix III of the IMF staff report (India).* ### 6. A gradual fiscal consolidation starting in ### 6. A gradual fiscal consolidation starting in ### Fiscal consolidation and debt dynamics - A gradual fiscal consolidation starting in the medium term and structural reforms to boost potential growth are critical to achieving a meaningful reduction in public debt. - Under a constant primary deficit of -2 percent of GDP (its projected level at the end of staff’s medium-term horizon) and the assumption of an interest-rate-growth differential of about -3.5 percent (similar to its historical average level), debt would decline to 70 percent of GDP (its average level before the pandemic) in about 20 years. - A primary balance of about -0.5 percent of GDP would bring the debt-to-GDP ratio to 70 percent in about 6 years under the same interest rate-growth differential. - Long-term debt dynamics depend critically on the economy’s growth potential. The interest rate-growth differential will likely be higher in the medium- to long-term, relative to its historical average, and is subject to considerable uncertainty. - If the interest rate-growth differential is higher by 1 percentage point relative to the pre-pandemic average, bringing debt down to 70 percent in 6 years would require a considerably larger fiscal consolidation (a primary balance of about 0.2 percent of GDP). - Conclusion: further fiscal consolidation and fiscal discipline in the medium term are important to achieve a meaningful reduction in public debt. ### DSA baseline projections and key macro-fiscal indicators (as presented) - Nominal gross public debt: 68.2 73.9 89.4 89.8 88.1 87.5 86.7 85.8 84.7 - EMBIG (bp) 3/498 - Public gross financing needs: 11.9 11.6 17.2 16.5 15.2 14.4 15.0 14.8 15.8 5Y CDS (bp)80 - Real GDP growth (in percent): 7.3 4.0 -7.3 9.5 8.5 6.6 6.3 6.2 6.1 - Inflation (GDP deflator, in percent): 5.5 3.6 4.6 3.9 5.3 4.7 4.3 4.2 4.2 - Nominal GDP growth (in percent): 12.7 7.8 -3.0 13.7 14.2 11.6 11.2 11.1 11.1 - Effective interest rate (in percent) 4/: 7.7 7.2 7.2 7.2 7.1 7.1 7.2 7.3 7.4 - Ratings (Foreign/Local): Moody's Baa3/Baa3; S&Ps BBB-/BBB-; Fitch BBB-/BBB- - cumulative Change in gross public sector debt: -0.1 3.7 15.5 0.4 -1.7 -0.6 -0.8 -0.9 -1.1 -4.7 - Identified debt-creating flows: -0.2 2.8 14.9 0.2 -1.8 -0.6 -0.6 -0.6 -0.7 -4.1 - Primary deficit: 2.8 2.7 7.4 5.7 4.2 3.2 2.8 2.4 2.2 20.5 - Primary (noninterest) revenue and grants: 19.5 19.6 18.2 19.1 19.4 19.6 19.8 19.9 20.1 117.9 - Primary (noninterest) expenditure: 22.2 22.3 25.6 24.8 23.6 22.8 22.5 22.4 22.2 138.4 - Automatic debt dynamics 5/: -2.8 -0.2 7.7 -5.2 -5.6 -3.5 -3.0 -2.7 -2.5 -22.5 - Interest rate/growth differential 6/: -3.0 -0.3 7.7 -5.2 -5.6 -3.5 -3.0 -2.7 -2.5 -22.5 - Of which: real interest rate: 1.4 2.3 2.2 2.2 1.0 1.7 2.0 2.2 2.3 11.4 - Of which: real GDP growth: -4.4 -2.6 5.5 -7.5 -6.7 -5.2 -5.0 -4.8 -4.7 -33.9 - Exchange rate depreciation 7/: 0.1 0.2 -0.1 - Other identified debt-creating flows: -0.2 0.3 -0.2 -0.2 -0.4 -0.4 -0.4 -0.4 -0.4 -2.1 - Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Residual liabilities to NSSF: 0.3 0.5 0.0 0.2 0.1 0.1 0.1 0.1 0.1 0.7 - Residual, including asset changes 8/: 0.1 0.8 0.6 0.2 0.1 0.0 -0.3 -0.3 -0.4 -0.7 - Note on assumptions 9/: Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. ### Alternative scenarios and stress tests (high-level) - Baseline, Historical, and Constant Primary Balance scenarios are presented with underlying assumptions (example highlights): - Baseline Real GDP growth: 9.5 8.5 6.6 6.3 6.2 6.1 - Baseline Inflation: 3.9 5.3 4.7 4.3 4.2 4.2 - Baseline Primary Balance: -5.7 -4.2 -3.2 -2.8 -2.4 -2.2 - Constant Primary Balance scenario keeps Primary Balance at -5.7 across projection years. - Macro-fiscal stress tests include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Contingent Liability Shock with alternative projected paths for Real GDP growth, Inflation, Primary balance, and Effective interest rate under each shock. ### Risk assessment and indicators - Heat-map and risk-assessment framework applied: benchmarks include 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for public debt held by non-residents; and 20 and 60 percent for share of foreign-currency denominated debt. - Selected metrics cited: Bond spread 470 bp; External Financing Requirement 12 (percent of GDP? as presented); Public Debt Held by Non-Residents 8 percent. ### Policy recommendations and financial sector priorities (selected) - Improve the governance and financial operations of public sector banks (PSBs) and develop a strategic plan for their consolidation, divestment, and privatization. - Authority: Ministry of Finance (MoF) - Time frame: S (short/ongoing) - Status/In process highlights: - 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 created at PSBs by separately appointing non-Executive Chairpersons alongside the post of CEO/Managing Director. - Banks Board Bureau responsibilities expanded for advising government on Board of Directors selection and related matters. - Plans announced in August 2019 to enhance PSBs’ management accountability to the Board; PSBs can now recruit Chief Risk Officers from the market. - The number of PSBs as of March 2021 stands at 12, reduced via consolidation within PSBs space. - A majority stake in a PSB was sold to the state-owned Life Insurance Corporation of India and the bank has been classified as private sector bank since January 21, 2019, for regulatory purpose. - Recent budget speech announced that in addition to IDBI Bank, two Public Sector Banks will be privatized. Government of India and RBI are discussing the modalities. - Conduct granular assessments of banks’ capital needs and require additional provisions and swift recapitalization and restructuring. - Authority: Reserve Bank of India (RBI), MoF - Time frame: S - Status/In process highlights: - A recapitalization plan announced in October 2017 to clean up legacy NPAs and support credit growth. - INR 881 billion was infused in FY2017/18 (excluding INR 19 billion injected during the year before the announcement of the Plan). - The capital injection in FY2018/19 was raised from INR 650 billion to INR 1.06 trillion. - An additional INR 700 billion in FY2019/20 and INR 200 billion in FY2020/21 has been infused. For the FY2021/22, INR 200 billion has been budgeted. - Since the third quarter of 2018, the Banks Board Bureau conducts quarterly assessments of PSB capital requirements reported to the government and the RBI. - Redesign the corporate debt restructuring mechanisms to make them more flexible. - Authority: RBI - Time frame: S - Status/In process highlights: - Prudential Framework for Resolution of Stressed Assets issued on Jun 7, 2019 replaces previous guidelines and lays out principles for early recognition, lender discretion in designing resolution plans (RPs), and disincentives for delays. - The framework eliminated mandatory referral to the Insolvency and Bankruptcy Code (IBC) and allows tailored RPs subject to boundary conditions and prudential requirements. - The framework demonstrated in COVID-19: RBI opened a window for resolution under the framework with only a few tweaks for pandemic-related stress. ### Financial sector oversight and supervision (selected) - System-wide oversight and macroprudential policies: - Retain regulators’ role in collecting firm-level data. - Authority: MoF; Time frame: M; Status: Implemented — the draft Financial Data Management Centre (FDMC) Bill dropped direct collection from regulated entities and retained regulators’ role; FDMC may collect directly only when regulators are not able to provide data. - Banking supervision: - Review loan classification and provisioning rules in the context of IFRS and with respect to special loan categories. - Amend the legal framework to provide the RBI with full supervisory powers over PSBs and clarify its legal independence. - Authority: RBI / Government; Status: In process. - Indian Accounting Standards (Ind AS) planned implementation note: Ind AS was planned to be implemented by Scheduled Commercial Banks (SCBs), excluding regional rural banks from April 1, 2018, vide RBI Circular dated February 11. *Source: IMF staff (as of August 20, 2021).* ### 2016. However, the implementation was deferred for the second time in March 2019, until further ### 1indea2021001 ### Loan classification and Ind-AS implementation - Implementation of loan classification and provisioning under Ind-AS norms was deferred for the second time in March 2019, until further notice, pending necessary legislative amendments. - 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. - Responsible authority: IRDAI. - Status: In process. - Key developments: - 10-member steering committee formed in September 2017 to implement risk-based capital regime. - Consultancy Evaluation Committee formed and in process of finalizing request for proposal document to be issued to the consultants shortlisted. - Project committee submitted a report in November 2017. - Implementation Committee formed January 2018; interim report submitted June 2018. - IRDAI circulated intention of moving towards RBS Framework to insurance companies in October 2018. - Central Points of Contact designated for 5 insurance companies on a pilot basis in November 2018. - Expression of interest released in March 2019 for consultancy services for development and implementation of RBS Framework. ### Securities regulation - Recommendations: - Transfer legal authority over public-listed company reporting to the Securities and Exchange Board of India (SEBI) and introduce a risk-based review of company disclosures. - Adopt a strategy to unify regulation of commodities trading markets. - Responsible authorities: Government, SEBI. - Status: Medium term / In process. - Key points: - Companies Act 2013 (CA-13) provides minimum requirements for preparation, circulation, filing and review of disclosures; provides for a National Financial Reporting Authority for audit. - Information sharing arrangements between the Ministry of Corporate Affairs and SEBI exist; timely disclosure on exchange platforms required. - SEBI has specified additional sectoral requirements and issued a circular in May 2018 to streamline procedures related to non-compliance with Listing Obligations and Disclosure Requirements (LODR); a dedicated division monitors compliance. - SEBI developing a smart aggregator of financial and other publicly available information filed by listed companies. - Under consideration: Expert Committee set up June 13, 2017 to integrate spot and derivatives markets for commodities trading; report submitted February 12, 2018 with recommendations, many implemented by RBI/SEBI. ### Financial market infrastructure oversight (CCIL) - Recommendation: Improve stress testing scenarios and methodologies. - Responsible authority: Clearing Corporation of India (CCIL). - Status: Implemented; ongoing reviews. - Implementations and methodological changes (preserve exact timing and measures): - CCIL revised its credit stress test model in July 2017 to include hypothetical scenarios along with historical scenarios. - Revised reverse stress test model since December 2018 to incorporate more realistic scenarios. - Stress testing scenarios and methodologies are reviewed by CCIL on an ongoing basis; comprehensive review annually by external experts. - Revisions since July 2018: - Stress losses assessed more conservatively by assuming members will default in incremental MTM margin and Volatility margin requirements. - Since Feb 2019: - Any downward revision in Default Fund at month-end evaluation is subject to a floor of 85% of the prevailing default fund. - Since Sep 2019: - In Forex Forwards and Rupee Derivatives segments, CCIL maintains Default Funds as per the Cover 2 criterion (sum of highest stress loss on account of a member and its affiliates and the second highest stress loss on account of a member and its affiliates in the past six months, plus stress losses on account of five weak entities). - CCIL's contribution towards the default waterfall, linked to member contributed default fund, increased significantly. - A 25% weightage is given to the highest stress loss of a member while determining the member's default fund requirement; existing parameters gross position and initial margin carry weightages of 50% and 25% respectively. - Stress testing methodology modified to incorporate clearing member structure in Securities, Forex Forwards and Rupee derivatives segments (client level losses aggregated with respective clearing member's gains or losses). - Since Oct 2020: - Threshold for intra-month revision in default fund is lowered and made equal to the prevailing level of default fund (previously set equal to 95% of total prefunded resources). - Since Feb 2021: - With implementation of auction-based default handling in derivatives segments, Stress Period of Risk (SPOR) increased from two days to five days in Forex Forwards segment and from three days to five days in Rupee Derivatives segment for trades linked to MIBOR benchmark. - Ongoing: Stress testing scenarios and methodologies reviewed on an ongoing basis; comprehensive annual external expert review. ### Crisis management framework - Recommendations: - Resolution legislation should preserve RBI’s full supervisory authority over going concern banks, and promote equal treatment of domestic and foreign creditors. - Improve frameworks for emergency liquidity assistance, deposit insurance, and crisis preparedness. - Responsible authorities: RBI, Government. - Status: Medium term / In process. - Key developments: - The Financial Resolution and Deposit Insurance (FRDI) Bill introduced in Lok Sabha in August 2017; referred to Joint Committee of Parliament; withdrawn from Parliament in August 2018; under examination and reconsideration. - Reconsideration expected to address duplication of supervisory authority in pre-resolution phase, strengthen resolution tools and safeguards, recovery and resolution plans, treatment of domestic and foreign liability holders, and crisis preparedness, in consultation with RBI. - Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021 passed by Parliament on August 9, 2021; Act to come into force on such date as Central Government may appoint by notification. - DICGC performance: - Average period for settlement of main claims by DICGC after receipt from liquidators reduced to 3 days during 2019-20 from 11 days during 2018-19 and has remained within 2 months (period stipulated in DICGC Act, 1961). - Insurance cover for depositors raised from Rs. 1 lakh to Rs. 5 lakh per depositor with effect from February 4, 2020 (with Government approval). - Increase in premium rate to 12 paise per Rs.100 of deposits effected from April 1, 2020 (previous level 10 paise per Rs.100). - Crisis preparedness: - Under Financial Stability and Development Council framework, ‘Early Warning Group’ meetings frequency increased from once in three months to at least every two months. - Implemented: RBI has a board-approved lender of last resort policy incorporating constructive ambiguity and flexibility to limit moral hazard. ### Market integrity - Recommendations: - Subject domestic politically-exposed persons to adequate due diligence. - Qualify domestic tax evasion as predicate offense to money laundering. - Responsible authority: MoF. - Status: Short term / Not implemented. - Current situation: - Definition of politically-exposed persons remains limited to those 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). - Domestic tax evasion qualifies as a tax crime in the Indian context but has not yet been made a predicate offence to money laundering. ### Market development - Recommendations: - Progressively reduce the SLR to deepen markets and encourage lending. - 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. - Responsible authorities: RBI, MoF. - Status and implementations: - SLR: Implemented. - The SLR has been reduced from 22.5 percent in June 2014 to 18 percent as of April 2021. - RBI intends to continue reduction in a calibrated manner to align the SLR with the Liquidity Coverage Ratio. - PSL (Priority Sector Lending): Implemented. - Review carried out; revised guidelines issued to banks on September 4, 2020. - Significant changes: financing of start-ups; increased limits for renewable energy, including solar power and compressed bio gas plants; higher limits for health infrastructure; increasing targets for lending to ‘Small and Marginal Farmers’ and ‘Weaker Sections’ in a phased manner. - Incentive framework introduced to address regional disparities: higher weights for incremental priority sector credit in identified low-credit districts and lower weights in higher-credit districts. - Revised guidelines aim to encourage environment friendly lending policies to help achieve Sustainable Development Goals (SDGs). ### Appendix V — Recent and Planned Capacity Development - Fund CD engagement with India deepened; recalibrated toward online delivery since the pandemic for central and state levels and recovery-support areas (e.g., loan moratorium and resolution framework). - Examples of online delivery and engagement: - PFM Seminar for Indian State Finance Secretaries; virtual seminars on insolvency issues by LEG; customized training in macroeconomic issues for experienced civil servants. - Engagement with 15th Finance Commission and Insolvency and Bankruptcy Board of India. - SARTTAC: - Inaugurated February 2017; focal point for CD delivery in the region. - Played important role during the pandemic; FY2020 Annual Report highlights extensive training and TA in core IMF areas. - Total of 496 Indian officials received training in FY2020 through SARTTAC. - Ongoing workplans: asset and liability management at state level (including cash flow forecasting), fiscal reporting, budget execution and control, compilation and dissemination of macroeconomic and financial data at state level. - CD strategy and integration with surveillance: - Recent activities customized for country needs; online delivery facilitated wider and higher-level participation. - APD and FAD worked with the 15th Finance Commission on fiscal federalism approaches. - CD integrated with surveillance and IMF policy advice; APD and functional departments (e.g., MCM) worked with authorities on specific queries during pandemic uncertainties. - Ongoing SARTTAC work at sub-national level emphasizes capacity building for states using courses on macro-fiscal policy analysis, TADAT and GFS, and ICD training for Indian Economic Service and Indian Administrative Service officers. ### Appendix VI — Uptake of Previous IMF Advice - Overall: Policies broadly consistent with previous IMF advice; COVID-19 presented new challenges and implementation bottlenecks. - Monetary policy: - Significant easing: 115 basis points of repo rates since March 2020. - Liquidity support measures helped avoid liquidity crunch and supported the economy. - Accommodative stance with forward guidance and asset purchases supported financial markets. - Introduction of forward guidance in 2019 and review/reaffirmation of RBI inflation target in 2021 consistent with staff advice. - Fiscal policy: - Pandemic delayed fiscal consolidation targets; fiscal policy appropriately focused on supporting vulnerable groups and the economy. - Accommodative fiscal stance emphasized health and infrastructure and increased transparency. - Regulatory forbearance and borrower relief: - Eased immediate macro-financial risks but likely increased pre-existing vulnerabilities and medium-term financial sector risks. - Staff advice on financial sector reforms, including on PSBs, increasingly urgent. - Trade and investment liberalization: - Progress on liberalization mixed: steps taken on foreign portfolio and direct investment inflows; uncertainties persist from frequent changes to tariff rates and trade policies. - External sector response: - Authorities’ response during the pandemic broadly in line with past Fund advice — a mix of exchange rate flexibility and FX market intervention. - Structural reforms: - Significant reform efforts announced in multiple areas (labor market, agriculture, FDI regulations) aligned with staff advice but face implementation challenges. - Labor bills are a step toward formalization; proposed agricultural reforms aim to improve productivity. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Appendix VI. Key Policy Actions ### Appendix VI. Key Policy Actions ### Monetary Policy - Mar 27, 2020 - Policy rate: Reduction in the repo rate by 75 bps to 4.40%, reverse repo rate by 90 bps to 4% and continued with an accommodative stance. - Marginal standing facility: Banks permitted to borrow under the facility up to 3% of Statutory Liquidity Ratio (SLR) from 2% earlier until June 30, 2020. - Cash reserve ratio (CRR): Reduced CRR by 100 bps to 3% for one-year period and daily minimum CRR balance reduced from 90% to 80% up to June 26, 2020. - Targeted Long-Term Repos Operations: RBI to auction ₹1 trillion long-term repo operations up to three years tenor to be tied to deployment in investment grade corporate bonds, commercial paper, and non-convertible debentures. - April 1, 2020 - Limits for ways and means advances (WMA) of states/union territories increased by 30% for all states/union territories. - April 7, 2020 - RBI relaxed norms for overdraft facilities for states/union territories: Increase the number of days for which states can be in overdraft continuously to 21 working days from 14 working days (for states, in any quarter, from 36 to 50 working days). - Apr 17, 2020 - Reverse repo rate reduced by 25 bps to 3.75%. - Targeted long-term repo operations (TLTRO 2.0) of ₹500 billion to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50% going to small and mid-sized NBFCs and microfinance institutions. - Special refinance facilities of ₹500 billion to NABARD, SIDBI and NHB to meet sectoral credit needs of regional rural banks, cooperative banks, MFIs and housing finance companies (HFCs). - Apr 17, 2020 (State Finance) - The WMA limit of states increased by 60% over and above the level as on March 31, 2020. - Apr 20, 2020 (Central Finance) - The limit for WMA for the central government raised by ₹800 billion to ₹2,000 billion. - Special liquidity facility for mutual funds (SLF-MF): RBI opened a special liquidity facility for mutual funds of ₹500 billion. - May 22, 2020 - Policy repo rate reduced 40 bps to 4.0% and the reverse repo rate to 3.35% from 3.75%. - Aug 31, 2020 - Special open market operation: RBI to conduct additional OMO of ₹200 billion. - Term repo operations: RBI to conduct term repo operation of ₹1 trillion. - Held to maturity (HTM) limits: Banks allowed HTM up to a limit of 22% of NDTL up to March 31, 2021. - Oct 09, 2020 - On tap TLTRO: RBI to conduct on tap TLTRO for ₹1 trillion. The funds were initially available for five sectors: agriculture, infrastructure, secured retail, MSMEs, and drugs, pharmaceuticals and healthcare until March 31, 2021. - SLR holdings in HTM category: RBI extended the enhanced HTM limits of 22% up to March 31, 2022. - Open market operations (OMOs) in State Developments Loans (SDLs) introduced to improve liquidity and facilitate efficient pricing. - Dec 4, 2020 - On tap TLTRO: RBI added 26 more stressed sectors under on tap TLTRO. - Feb 5, 2021 - On tap TLTRO for NBFCs introduced. - Restoration of CRR in two phases: 3.5% of NDTL effective March 27, 2021 and 4.0% effective May 22, 2021. - HTM: The higher limits at 22% extended until March 31, 2023. - April 7, 2021 - On tap TLTRO: Extended until September 30, 2021. - G-SAP 1.0: A secondary market G-sec acquisition program of ₹1 trillion. - WMA limit for States/UTs: RBI enhanced the aggregate WMA limit of states and UTs to ₹470 billion, an increase of about 46% from the current limit of ₹322 billion. - May 5, 2021 - On-tap liquidity support to COVID related health care infrastructure and services: An on-tap liquidity window of ₹500 billion to increase capacity and improve healthcare infrastructure for the pandemic. - Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs) of ₹100 billion at repo rate for the SFBs, to be deployed for fresh lending of up to ₹1 million per borrower. - June 4, 2021 - On tap TLTRO for contact-intensive sectors of ₹150 billion for contact-intensive sectors. - Special refinance facilities of an additional ₹500 billion refinances to NABARD, SIDBI and NHB to meet sectoral credit needs of regional rural banks, cooperative banks, MFIs and HFCs. - G-SAP 2.0: RBI committed upfront purchases of government securities of ₹1.2 trillion. - July 8, 2021 - Roadmap for LIBOR Transition by December 31, 2021. - Aug 6, 2021 - On tap TLTRO: Extended until December 31, 2021. - Marginal Standing Facility (MSF): Relaxation extended until December 31, 2021. - Variable rate reverse repo (VRRR) auctions: RBI to raise fortnightly VRRR auctions by additional ₹2.0 trillion to a total of ₹4.0 trillion by September 24, 2021. ### Financial Sector - Mar 4, 2020 - Public sector bank consolidation: Government approved merger of 10 PSBs into four bigger banks, effective April 1, 2020. - Mar 13, 2020 - Yes Bank: Government notified a new reconstruction plan for Yes Bank. - Mar 27, 2020 - Moratorium on Term Loans: All banks permitted to allow 3-months moratorium on instalments of all term loans outstanding as on March 1, 2020. - Deferment of interest on working capital loan: 3-month deferment of interest on working capital loan. - Asset classification: The above moratorium, deferment and relaxations would not result in asset classification downgrade. - Net stable funding ratio (NSFR): The implementation of NSFR deferred by six months to October 1, 2020. - Capital conservation buffer (CCB): RBI deferred the implementation of the last tranche of 0.625% of the CCB from March 31 to September 30, 2020. - April 1, 2020 - Countercyclical capital buffer activation delayed by one year. - Apr 20, 2020 - RBI eases regulatory measures: Moratorium or deferment to all loans and an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. - Resolution plan period extended by 90 days. Banks required to hold an additional provision of 20% if a resolution plan for a defaulting account has not been implemented within 210 days. - Liquidity Coverage Ratio: Requirement for banks brought down to 80% from 100%. - May 13, 2020 - Government to provide ₹3 trillion emergency working capital facility for businesses, including MSMEs. - May 22, 2020 - Moratorium on term loan extended till August 31, 2020. - Deferment of Interest on working capital facilities till August 31, 2020. - Payment of interest on deferred working capital loan: Lending institutions permitted to convert the accumulated interest on working capital into a funded interest term loan, repayable by March 31, 2021. - Asset classification standstill during moratorium. - Easing of working capital financing: Lending institutions permitted to reassess the working capital cycle of a borrowing entity up to an extended period till March 31, 2021, and standstill in asset classification. - Extension of resolution timeline: Lending institutions permitted to exclude the entire moratorium/deferment period from March 1, 2020 to August 31, 2020 from the calculation of 30-day review period or 180-day resolution period, if the Review/Resolution Period had not expired as on March 1, 2020. - Limit on group exposures under the large exposure framework: increased from 25% to 30% of the eligible capital base of the bank (applicable up to June 30, 2021). - Refinancing facility for SIDBI to roll over its special refinance facility extended to borrowers by another 90 days. - Export credit: RBI raised the maximum permissible period of pre-shipment and post-shipment export credit from the existing one year to 15 months, for disbursements made up to July 31, 2020. - May 23, 2020 - Emergency Credit Line Guarantee Scheme (ECLGS 1.0): 100% guarantee to additional working capital/term loans by MSMEs/individuals from banks and NBFCs up to 20% of their outstanding loans as on February 29, 2020. - Jun 21, 2020 - Risk weight: Banks to assign zero percent risk weight under ECLGS. - July 1, 2020 - Special liquidity scheme for NBFCs/HFCs to purchase short-term papers from eligible NBFCs/HFCs. - Aug 6, 2020 - Additional standing liquidity facility (ASLF) of ₹50 billion to NHB for HFCs and ₹50 billion to NABARD. - Restructuring MSME debts permitted under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. - Loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes raised from 75% to 90%. - Sept 29, 2020 - Capital Conservation Buffer (CCB) implementation of last tranche of 0.625% deferred till April 1, 2021. - NSFR implementation by another six months. - Nov 25, 2020 - The Lakshmi Vilas Bank (LVB)’s amalgamation with DBS Bank India Limited (DBIL) effective November 27, 2020. - Nov 26, 2020 - Emergency Credit Line Guarantee Scheme (ECLGS 2.0) extended to loans to 26 sectors. - Dec 22, 2020 - Suspension of IBC till March 31, 2021. - Feb 5, 2021 - NSFR: Deferred implementation of NSFR to October 1, 2021. - Mar 31, 2021 - Emergency Credit Line Guarantee Scheme (ECLGS 3.0) extended to loans to the Hospitality, Travel & Tourism, Leisure & Sporting sectors (tenor of 6 years, including moratorium for 2 years). - ECLGS 1.0, ECLGS 2.0 & ECLGS 3.0 extended up to June 30, 2021 or till guarantees for an amount of Rs. 3 trillion are issued. Last date of disbursement extended to September 30, 2021. - May 5, 2021 - Lending by Small Finance Banks (SFBs) to MFIs for on-lending to be classified as priority sector lending (available till March 31, 2022). - Resolution Framework 2.0 for COVID related stressed assets of individuals, small businesses and MSMEs. - Relaxation under Resolution Framework 1.0: The moratorium period and/or the residual tenor extended up to a total of 2 years for loans restructured under Framework 1.0 for of individual borrowers and small businesses. - Utilization of Floating Provisions and Countercyclical Provisioning Buffer: 100% of floating provisions/countercyclical provisioning buffer held by banks as on December 31, 2020 for making specific provisions for nonperforming assets with prior approval of their Boards. - Relaxation in Overdraft (OD) facility for states governments: The maximum number of days of OD in a quarter for states is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days till September 30, 2021. - May 30, 2021 - Emergency Credit Line Guarantee Scheme (ECLGS 4.0) of loans up to ₹20 million to hospitals/nursing homes/clinics/medical colleges for setting up on-site oxygen generation plants. The validity extended until September 30, 2021 or till guarantees of ₹3 trillion are issued. Disbursement till December 31, 2021. - Aug 3, 2021 - Pre-Packaged Insolvency Resolution Process (PIRP) introduced an alternate insolvency resolution process (PIRP) for micro, small, and medium enterprises (MSMEs). - Aug 9, 2021 - Deposit Insurance and Credit Guarantee Corporation (DICGC) Act amended to allow depositors to claim insurance up to Rs. 0.5 million within 90 days of liquidation or imposition of moratorium by the RBI. ### Fiscal Policy - Mar 26, 2020 - Insurance scheme for health workers: ₹0.5 million per health worker fighting COVID-19. - PM Garib Kalyan Ann Yojana: Provide 5 kg wheat or rice and 1 kg of pulses for free for three months 800 million poor people. - To give ₹500 per month for three months to 204 million women Jan Dhan account holders. - MNREGA wages: Increase MNREGA wage to ₹202 a day. - Ex-grata payment: to pay ex-gratia of ₹1,000 to 30 million poor senior citizens, widows and disabled. - PM Garib Kalyan Yojana: Free gas cylinders to 80 million poor families for three months. - Low wage earners in organized sectors: 24% of the monthly wages into PF accounts of workers earning below ₹15,000 per month (in businesses having less than 100 workers) for three months. - Self-Help groups: Limit of collateral free lending to be increased from ₹1 million to ₹2 million for 6.3 million women Self Help Groups (SHGs). - Employees’ Provident Fund Regulations amended regulation to allow workers to withdraw 75% provident fund. - Building and Other Construction Workers Welfare Fund: State governments directed to utilize the fund to provide assistance and support to workers. - District Mineral Fund to supplement and augment facilities of medical testing, screening and as well as treat COVID-19 patients. - May 13, 2020 - Relief measure: Employees provident fund support for business and organized workers extended by another 3 months. - Employee provident fund contribution to be reduced for 3 months to 10% from 12% for all establishments covered by EPFO. - May 14, 2020 - One Nation one Ration Card: Technology-enabled system to access ration public distribution system from any fair price shops in India by March 2021. - Free food grains supply to migrants for 2 months. - Scheme for affordable rental housing complexes for migrant workers and urban Poor to be launched. - Rs 50 billion credit facility for street vendors. - ₹700 billion boost to housing sector and middle income group through extension of credit linked subsidy scheme under PMAY(Urban). - ₹60 billion for creating employment using Compensatory Afforestation Fund Management and Planning Authority funds. - ₹300 billion additional emergency working capital for farmers through NABARD. - ₹2 trillion credit boost to 25 million farmers under Kisan Credit Card Scheme. - May 17, 2020 - MNREGA of an additional ₹400 billion. - Center allows states to borrow up to 5% of gross state domestic product for 2020–21, linked to specific reforms (including recommendations of Finance Commission). - Jun 20, 2020 - Garib Kalyan Rojgar Abhiyaan: This ₹500 billion program to run for 125 days, to generate employment in 116 districts. - Jun 24, 2020 - Distressed Assets Fund–Sub-ordinate Debt for MSMEs to extend guarantee cover worth Rs. 200 billion to the promoters for further investing in their stressed MSMEs as equity. - Jun 30, 2020 - Pradhan Mantri Garib Kalyan Anna Yojana of ₹900 billion to extend the scheme to provide free 5 kg wheat or rice along with 1 kg pulses to more than 800 million people until November 2020. - Sept 08, 2020 - Asset monetization of subsidiaries of Power Grid Corporation of India (₹70 billion assets, transmission lines and substations). - Oct 04, 2020 - Government decides to waive interest on loans up to ₹20 million by MSME and personal loans up for six-months. - Oct 16, 2020 - GST compensation shortfall: The Centre announced to borrow up to ₹1.1 trillion, the estimated revenue shortfall, and lend the same amount to states. - Feb 1, 2021 (Budget FY22) - Increased fiscal transparency in off-budget expenditure: Loans to Food Corporation of India (FCI) for food subsidy and provision are reflected on budget. - Fiscal consolidation path revised for center and states to reach fiscal deficit level below 4.5% of GDP by FY26. - Asset Reconstruction Company proposed for the banking system. - Privatization of two public sector banks and one general insurance company. - Recapitalization public sector banks by ₹200 billion in FY22. - FDI limit on Insurance company raised to 745 from 49%. - Development Finance Institution with a capital of ₹200 billion with a target of lending portfolio of ₹5 trillion in 3 years. - A revamped reforms-based result-linked power distribution sector scheme to be launched with an outlay of ₹3.1 trillion over 5 years to aid DISCOMS. - A “National Monetization Pipeline” of potential brownfield infrastructure assets to be launched. Monetization of non-core assets like land through a Special Purpose Vehicle (SPV). - Mega Investment Textiles Parks (MITRA) to be launched in addition to the PLI scheme. Seven textile parks to be established over 3 years. - Apr 23, 2021 - Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY): Government to give 5 kg free (rice or wheat) to 800 million people for two months (May and June 2021). - June 8, 2021 - Pradhan Mantri Garib Kalyan Anna Yojana extended: The government extended its free food program (PM-GKAY) until November 2021. - Aug 5, 2021 - Retroactive tax to be removed (introduced since May 28, 2012). ### Structural Reforms - Mar 21, 2020 - Production linked incentive (PLI) scheme for medical devices. - Apr 1, 2020 - PLI scheme for large scale electronics manufacturing (an incentive of 4% to 6% on incremental sales of goods manufactured in India for a period of five years). - May 16, 2020 - Private participation in coal sector: Govt to introduce competition, transparency and private sector participation in coal sector through a revenue sharing mechanism. - Mining & mineral sector reforms: 500 mining blocks to be offered to private sector through an open and transparent auction process. - Electricity tariff policy reform: Progressive reduction in cross subsidies and time-bound grant of open access; introduction DBT for subsidy payment; and privatization of power distribution in UTs. - 'Make in India' for defense production: FDI limit in defense manufacturing under automatic route raised to 74% and corporatization of Ordnance Factory Board. - Airport privatization: Six more airports to be auctioned under a PPE model and another six airports to be put out for the third round of bidding. - May 17, 2020 - Privatization PSEs. All PSEs in non-strategic sector to be privatized. - Ease of doing business for MSMEs: Minimum threshold to initiate insolvency proceedings raised to ₹10 million from 0.1 million for MSMEs and a special insolvency resolution framework for MSMEs; Suspension of fresh initiation of insolvency proceedings up to one year; Empowering central government to exclude COVID-19-related debt from the definition of “default”. - Decriminalization of Companies Act defaults involving minor technical and procedural defaults (shortcomings in CSR reporting, inadequacies in board report, filing defaults, delay in holding AGM). - Ease of Doing Business for Corporates, including direct listing of securities by Indian public companies in permissible foreign jurisdictions. - Health Reforms & Initiatives: Infectious Diseases Hospital Blocks to be set up in all districts and lab network and surveillance to be strengthened. - National Digital Health Mission: Implementation of National Digital Health Blueprint. - June 26, 2020 - Definition of micro, small and medium enterprises (MSMEs) revised by significantly raising the limits in investment in plant and machinery or equipment and turnover for each category, effective July 1, 2020. - Sept 17, 2020 - The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 to increases choices for farmers and traders. - The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020 to provide a national framework on farming agreements. - Sept 22, 2020 - Essential Commodities (Amendment) Act, 2020 to remove commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities and allow their free movement across states. - Labor code: Government passed three labor codes (i) Industrial Relations Code, 2020 (ii) Occupational Safety, Health & Working Conditions Code, 2020 and (iii) Social Security Code, 2020. - Nov 11, 2020 - Production-Linked Incentive (PLI) Scheme: The government extended PLI scheme in 10 key sectors. *Source: Appendix VI. Key Policy Actions (from the provided document).* ### Appendix V of the staff report. ### Appendix V — Staff Report (Resident Representative; Information on Other IFIs; Statistical Issues; Table of Common Indicators; Authorities' Statement) ### Resident Representative and Other IFIs - Resident representative’s office opened in November 1991. - Mr. Luis Breuer has been the Senior Resident Representative since July 2 019. - Information on activities of other IFIs in India: - World Bank: http://www.worldbank.org/en/country/india/overview - Asian Development Bank: https://www.adb.org/sites/default/files/publication/27768/ind-2018.pdf ### Statistical Issues — Key Findings (numbered as in source) - 1. General - Data provision is broadly adequate for surveillance, but weaknesses remain in timeliness and coverage of certain statistical series. - India subscribed to the Special Data Dissemination Standards (SDDS) on December 27, 1996 and started posting metadata on the Dissemination Standards Bulletin Board on October 30, 1997. - Flexibility options used for timeliness of general government operations and for labor market data. - Data module of the ROSC (IMF Country Report No. 04/96) published in April 2004; assesses six datasets based on the Data Quality Assessment Framework (DQAF). - 2. National accounts and employment statistics - New series of national accounts with base year 2011/12 released in January 2015; revisions reflect review of source data, compilation methods, and implementation of the 2008 System of National Accounts. - Current price coverage adequate; methodology broadly consistent with international standards. - Concerns: - Sales-tax-based extrapolation of trade turnover from base year may not accurately gauge economy-wide value added growth from trade. - Supply-side data superior to expenditure-side data. - Weaknesses in deflation methods; use of Wholesale Price Index (WPI) as deflator deviates from conceptual requirements; Producer Price Index (PPI) is under development. - Large revisions to historical series, short span of revised series, and major discrepancies between GDP by activity and GDP by expenditure. - Employment data deficiencies: cover only formal sector and are available with substantial lag. - 3. Price statistics - All-India Consumer Price Index (CPI) base year 2012 published; separate urban and rural CPI series published; CPI published with about one month lag. - CPI weights updated using 2011/12 expenditure data; CPI series revised from January 2015. - Since January 2006, Labour Bureau publishes CPI for industrial workers with 2001 base year. - Four CPIs remain (industrial workers, urban and non-manual employees, agricultural laborers, rural laborers); except industrial workers’ CPI, others use weights over ten years old. - WPI rebased to 2011/12; PPI under development to replace WPI. - New RBI residential property price indexes improve surveillance but geographic coverage limited; commercial real estate price data not available. - RBI started producing rural wage series; economy-wide wage data remain scant. - 4. Government finance statistics - Ministry of Finance (MoF) compiles and disseminates Government Financial Statistics (GFS). - General government operations data cover only budgetary operations of central and state governments. - Scope to improve analytical usefulness of fiscal accounts presentation (e.g., classification between developmental/non-developmental and plan/non-plan spending). - Authorities reviewing how to meet G-20 Data Gaps Initiative commitment on reporting quarterly consolidated general government data later in 2021. - 5. Monetary and financial statistics - RBI website and RBI Bulletin publish wide array of statistics: reserve money and components, RBI survey, monetary survey, liquidity aggregates, interest rates, exchange rates, foreign reserves, government securities auction results. - In 2011, RBI started publishing weighted-average lending interest rate and other lending rates at annual frequency. - Frequency and quality of dissemination have improved substantially in recent years. - RBI reports several Financial Access Survey (FAS) series including two UN-adopted indicators for SDG Target 8.10 (commercial bank branches per 100,000 adults and ATMs per 100,000 adults). - 6. Reporting to IMF STA - RBI reports monetary data to STA in non-standard format and provides "test" data using standardized reporting forms. - Test data lack sufficient details (instrument, currency, and counterparty sector breakdowns) to construct a complete analytically useful picture consistent with Monetary and Financial Statistics Manual guidelines. - Data reported cover depository corporations only; other financial corporations (insurance corporations, pension funds, investment funds) are not covered. - 7. Financial sector statistics - 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. - 8. External sector statistics - Concepts and definitions broadly in line with BPM6. - Trade data have valuation, timing, and coverage problems: imports in BOP registered in c.i.f. prices while BPM6 requires f.o.b. pricing. - Trade in goods prices, volumes, and composition not regularly available in a timely basis. - External debt statistics available quarterly with one quarter lag; estimates of short-term external debt presented on original maturity basis. - Short-term maturity attribution on residual maturity basis available annually and excludes residual maturity of medium- and long-term nonresident Indian accounts. - IIP statistics cover BPM6 sectors and are disseminated within three months of the reference period for quarterly data; coverage of direct investment positions hampered by absence of appropriate legal or institutional authority. - India disseminates monthly the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under SDDS; more up-to-date information on some variables available weekly on RBI website. - Note: IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences. ### India: Table of Common Indicators Required for Surveillance (As of August 10, 2021) — Selected entries - Exchange rates: Date of latest observation 10-Aug-21; Date received 10-Aug-21; Frequency DDD - International reserve assets and reserve liabilities of the monetary authorities 2/: Date of latest observation 31-Jul-21; Date received 6-Aug-21; Frequency WWW - Reserve/Base money: Date of latest observation 31-Jul-21; Date received 6-Aug-21; Frequency WWW - Broad money: Date of latest observation 16-Jul-21; Date received 6-Aug-21; Frequency BWBWBW - Central bank balance sheet: Date of latest observation 31-Jul-21; Date received 6-Aug-21; Frequency WWW - Consumer price index: Date of latest observation Jun-21; Date received Jul-21; Frequency MMM - Revenue, expenditure, balance, and composition of financing - General government 4/ 5/ 6/: Date of latest observation 2019/20; Date received Oct-20; Frequency AAA - Revenue, expenditure, balance, and composition of financing - Central government 4/ 5/: Date of latest observation Jun-21; Date received Jul-21; Frequency MMM - External current account balance: Date of latest observation Jan-Mar 2021; Date received Jun-21; Frequency QQQ - GDP/GNP: Date of latest observation Jan-Mar 2021; Date received May-21; Frequency QQQ - Gross external debt: Date of latest observation Jan-Mar 2021; Date received Jun-21; Frequency QQQ - International investment position: Date of latest observation Jan-Mar 2021; Date received Jun-21; Frequency QQQ ### Statement by Mr. Bhalla and Mr. Goyal on India (September 17, 2021) — Key points and positions (paragraph numbering preserved) - 1. Authorities thank staff for candid and constructive discussions and value continued engagement; some divergences on a few issues highlighted in this BUFF statement. - 2. Pandemic impact: - First wave in 2020: sharp contraction due to strict containment measures; turnaround two quarters later in January-March 2021 following swift measures. - Recovery moderated with the second wave during April-June 2021. - Economy adapted with enhanced digitalization. - 3. Structural reforms continued during pandemic: - Reforms include agriculture and labor reforms, privatization program; expected to contribute to structural acceleration. - 4. Vaccination drive: - India’s population 1.3 billion. - Supply constraints earlier; current pace more than 10 million a day. - Target to fully vaccinate at least 60 percent of population by end-December 2021 is on track. - Latest (September 10th) figures indicate 40 % of the population has at least one dose of the vaccine, close to the world average of 41 %. - 5. Growth projections and indicators: - Both IMF and the RBI projected India’s GDP to grow at 9.5 percent in 2021-22 (April 2021-March 2022). - IMF expects GDP to grow at 8.5 percent in the next fiscal year. - Early indications (direct and indirect tax collections, export growth, industrial production growth, PMI indices) suggest Budget 2021/22 economic targets will be achieved. - July 2021 IIP data is now above the pre-pandemic level. - Structural reforms suggest better-than-expected performance beyond 2021/22. - 6. Inflation - Headline consumer price inflation projected at 5.6 percent during 2021-22 and to soften to 5.1 percent by the first quarter of 2022-23. - Currently at 5.3 % yoy in August 2021. - Inflation expected to remain within the upper bound of the Reserve Bank's target of 4 (+/- 2) percent. - Monetary authorities to continue accommodative stance as long as necessary to sustain durable output growth. - Structural Reforms (paragraph 7) - Staff supported Government’s reforms: production-linked incentive schemes, privatization in non-strategic sectors, agriculture and labor reforms. - Expected outcomes: improved labor market functioning, formalization, expanded social security, reduced market distortions in agriculture, increased efficiency and productivity growth. - Fiscal Issues (paragraph 8) - Authorities agree with maintaining accommodative fiscal policy in near term until recovery is firm, and to have credible medium-term fiscal consolidation to maintain market confidence and fiscal space. - Central government fiscal deficit budgeted at 6.8 percent of GDP in the current year; committed to reduce it to 4.5 percent of GDP by 2025-26. - Next year’s budget will include medium-term macroeconomic projections and revision of the Fiscal Responsibility and Budget Management Act (FRBM) for clarity and transparency. - Revenue mobilization central to medium-term fiscal strategy: streamlining GST with e-invoice system, GST audits, closer scrutiny of returns, rate rationalization. - Rationalized corporate income tax rates expected to encourage compliance and tax buoyancy. - Disinvestment (privatization and monetization of sovereign assets) to support consolidation. - Continued thrust on expanded public expenditures (education, skill development, health, infrastructure) expected to enhance productivity and potential growth and crowd in private investment. - Monetary Policy (paragraph 9) - Staff supported RBI's accommodating stance: cumulative reduction of 115 bps in the repo rate (current rate 4 %), in addition to pre-pandemic easing of 135 bps in the repo and 100 bps reduction in the cash reserve ratio. - Staff commended liquidity measures including TLTRO, operation twist, and asset purchases. - RBI requires TLTRO funds to be invested in corporate bonds, commercial paper and non-convertible debentures issued by entities in agriculture, retail, MSME and drugs sectors. - RBI indicated post-pandemic exit policies guided by expiration of time-bound monetary and liquidity measures. - Financial Sector (paragraphs 10–11) - Authorities concur with staff on importance of adequate capitalization of financial intermediaries. - To contain expected increase in NPAs, authorities working to streamline insolvency process and reduce IBC delays. - Proposed new NPA resolution structure: ARC-AMC model where ARC aggregates stressed assets and transfers them to a professionally managed AMC; set up jointly by public and private sector banks with no government equity contribution. - RBI stress tests (Financial Stability Report, July 2021) revealed that “banks remain well-capitalized and able to sustain a severe stress scenario. (page 40, Financial Stability Report, RBI, July 2021)”. - Government ready to provide additional capital to public sector banks (PSBs) as needed. - Authorities dispute staff conclusion that “sustained financial sector weaknesses” would lower India’s potential growth from earlier assumed 7.3 % to the Report’s forecast of 6 %—characterizing that conclusion as analytically inappropriate. - Pandemic and Poverty Alleviation (paragraphs 12–15) - Pandemic caused decline in economic activity, affected inequality, and hurt the poor the most. - Authorities expanded income support for the bottom of the income pyramid; food subsidies more than doubled in FY 2020-21 (April-March) from the pre-pandemic 2019-20 level. - Share of GDP allocated to direct income support for the poor increased from 2.1% to 2.7%. - One nation-one-card policy changed rules of allocation of food subsidies allowing the bottom two-thirds of population eligible for food subsidy to access it from anywhere in India, benefiting migrant and poor workers. - Authorities contend the Article IV report did not fully appreciate the significant government support to mitigate COVID impacts on poverty. - Call for deeper and more rigorous analysis by staff on socio-economic effects of the pandemic and effectiveness of government policy responses. *Source: Appendix V of the staff report (1indea2021001 - Appendix V of the staff report).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1indea2021001.pdf_