## 1indea2022001

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### Broad-based economic recovery
- Real GDP grew by 8.7 percent in fiscal year (FY) 2021/22, bringing total output above pre-pandemic levels.
- By end-FY2021/22 all sectors recovered to pre-pandemic levels except contact-intensive services, which remained 11 percent below FY2019/20 levels.
- Growth was 13.5 percent year-on-year in the first quarter of FY2022/23; high-frequency indicators (PMIs and mobility) suggest continued growth in Q2 FY2022/23.
- Estimated output gap remains negative.
- As of end-September, new COVID cases have fallen to low levels and about 70 percent of the population was fully vaccinated.
- Employment recovery is broad-based across gender and age groups but uneven across sectors; vulnerable groups (females, youth, less-skilled, daily wage and migrant workers) were hardest hit and real earnings recovery remains sluggish.

### Inflation, external sector, and near-term outlook
- Headline consumer price inflation rose to 7.4 percent in September; food inflation picked up to 8.4 percent; core inflation (excluding food and fuel) remained high at 6 percent.
- Inflation has been at or above the RBI’s tolerance band of 4±2 percent since January 2022.
- Real GDP growth projections:
  - FY2022/23: 6.8 percent
  - FY2023/24: 6.1 percent
- Inflation projection:
  - FY2022/2023: 6.9 percent
  - Inflation expected to moderate only gradually over the next year.
- Current account deficit projected to increase to 3.5 percent of GDP in FY2022/23 due to higher commodity prices and strengthening import demand.
- Balance of payments (select items, 2018/19–2023/24 projections):
  - Current account balance (in billions of U.S. dollars): -57.2, -24.5, 24.0, -38.7, -118.3, -109.7
  - Current account balance (percent of GDP): -2.1, -0.9, 0.9, -1.2, -3.5, -2.9
  - Gross reserves (in billions of U.S. dollars, end-period): 412.9, 477.8, 577.0, 607.3, 540.5, 558.3
  - Gross reserves (months of next year's imports): 8.2, 11.1, 9.0, 7.9, 6.7, 6.5
  - Exchange rate (rupee/U.S. dollar, end-period): 69.2, 75.4, 73.5, 75.8, ..., ...

### Credit growth and financial sector developments
- Non-food bank credit growth rose to 15.1 percent in July, up from 6.2 percent a year ago, driven by stronger credit growth by private banks.
- Sector and firm-size breakdown (July):
  - Credit to Micro Small and Medium-Sized Enterprises (MSMEs) in the industry sector led the pick-up.
  - Credit growth to medium-sized enterprises: 37 percent.
  - Credit growth to micro and small enterprises: 28.3 percent.
  - Credit to large enterprises: 5.2 percent (up from -3.8 percent a year ago).
- Sectoral and household credit:
  - Credit to the services sector grew 16.5 percent in July.
  - Personal loans rose by 18.8 percent.
- The credit-to-GDP gap remains negative.
- Banks’ selected indicators (2021/22):
  - Risk-weighted CAR: 16.3
  - Net nonperforming assets (percent of outstanding net advances): 1.7
  - Gross nonperforming assets (percent of outstanding advances): 5.8
  - Return on assets: 0.9

### External position, reserves, and capital flows
- FY2021/22 external position: broadly in line with medium-term fundamentals and desirable policies.
- Current account developments:
  - FY2021/22: current account returned to a deficit of about 1.2 percent of GDP.
  - Staff assessed the current account gap at 1 percent of GDP (based on the EBA model, after accounting for transitory COVID-19 impacts).
- Reserves and coverage:
  - FX reserves decreased (reflecting valuation losses and RBI intervention) but remain at a relatively comfortable level, covering about 7 months of prospective imports and more than 150 percent of the IMF reserve adequacy metric.
- Recent external pressures:
  - Widening current account deficit and portfolio investment outflows put pressure on the exchange rate and contributed to FX reserves losses.
  - External shocks noted: global financial tightening and the war in Ukraine.
- Authorities restricted exports of wheat, sugar, and rice in response to rising food prices and food security concerns.
- Policy measures to ease external financing pressures: RBI relaxed capital flow management measures (temporary, effective until end-2022) and widened scope for foreign investment in government and corporate bonds; expanded FDI in oil, gas, and life insurance sectors.

### Outlook, projections, and risks
- Growth projections (staff baseline):
  - Real GDP growth: 6.8 percent in FY2022/23 and 6.1 percent in FY2023/24.
  - Potential growth: expected at 6 percent over the medium term under the baseline.
- Current account projection:
  - Expected to increase to 3.5 percent of GDP in FY2022/23, then decline to around 2.5 percent over the medium term.
- Credit and inflation:
  - Credit growth is expected to strengthen, but further financial deepening would be needed to support medium-term economic growth.
  - Inflation projection: 6.9 percent in FY2022/23; expected to gradually return to within the tolerance band next year.
- Uncertainty about the economic outlook is high and risks are tilted to the downside.
- External risks include: sharp global growth slowdown; intensified spillovers from the war in Ukraine; supply and demand shocks causing disruptions in global food and energy markets; risk of persistently higher inflation and de-anchoring of inflation expectations; medium-term risk of deglobalization.
- Domestic risks include: rising inflation impacts on vulnerable groups; new COVID-19 variants; tightening financial conditions causing asset quality deterioration and financial sector stress; weakening fiscal position increasing financing costs; climate change-driven disasters.
- Downside scenario: joint realization of major external and domestic downside risks would significantly lower growth in FY2022/23 and FY2023/24 and markedly increase inflation, particularly in FY2022/23. Both exports and imports would decline, especially in FY2022/23.

### Fiscal stance, sustainability, and policy recommendations
- Fiscal balances (percent of GDP, 2018/19–2023/24):
  - Central government overall balance: -3.9, -4.8, -8.6, -6.7, -6.5, -6.2
  - General government overall balance: -6.4, -7.5, -12.8, -10.0, -9.9, -9.0
  - General government debt: 70.4, 75.1, 89.2, 84.2, 83.5, 83.9
- FY2021/22 fiscal developments:
  - Central government deficit declined to 6.7 percent (due to higher revenues and lower spending).
  - State governments’ deficit estimated to have declined close to the medium-term target of 3 percent, with variation across states; some states face debt burdens over 40 percent of state-level GDP.
- FY2022/23 budget stance:
  - Budget and additional support measures suggest a slightly contractionary fiscal stance, projected to tighten further in FY2023/24.
  - Measures to mitigate higher commodity prices (free food rations; reduction in fuel taxes; higher fertilizer subsidies; and a fuel subsidy for low-income households) are being offset by buoyant GST and income tax revenues.
- Medium-term fiscal outlook and risks:
  - Public debt: 84 percent of GDP in FY2021/22.
  - Gross financing needs: 15 percent of GDP.
  - Risks increased by monetary policy tightening but mitigated by the bulk of public debt being fixed-rate, domestic-currency, and predominantly held by residents.
- Fiscal consolidation guidance and numeric proposals:
  - Authorities reaffirmed commitment to a central government deficit target of 4.5 percent of GDP by FY2025/26, implying a general government deficit of 7.5 percent of GDP (down from 9.9 percent in FY2022/23).
  - Staff suggestion: fiscal consolidation should be more ambitious than the baseline, feasibly targeting an additional general government primary consolidation of around 1 percent of GDP by FY2027/28, bringing debt down to 80 percent of GDP.
  - Revenue measures proposed: reversing fuel excise tax cuts; further broadening corporate and personal income tax bases; simplifying the GST rate structure; rationalizing items subject to preferential GST treatment; continued improvements in tax administration.
  - Other recommendations: maintain momentum in asset monetization and privatization; better target subsidies using Direct Benefit Transfer to reduce leakages; rationalize central schemes; reform electricity tariffs and improve financial viability of electricity distribution companies.
  - India’s estimated tax gap: around 5 percent of GDP.
- Protect high-quality spending:
  - Protect infrastructure, education, and health spending to support green and inclusive growth during consolidation.
- Public financial management and transparency:
  - Continue improving PFM, fiscal institutions, and transparency.
  - Digital solutions (e.g., e-procurement, faceless income tax assessments, e-bills) have improved transparency.
  - Recommendation: develop an integrated Government Financial Management System and a dedicated platform for central, state, and local governments to share fiscal information.

### Monetary policy stance and recommendations
- Monetary policy accommodation has been gradually withdrawn; the main policy rate has been increased by 190 basis points so far in 2022 (RBI increased the policy rate three times since May 2022, by a cumulative 190 basis points).
- Liquidity operations: absorbed liquidity using variable rate reverse repo auctions; raised the cash reserve ratio by 50 bps in May 2022; discontinued government securities purchase program in October 2021.
- Surplus liquidity moderated due to capital outflows; overnight call money rate has risen, approaching the policy rate.
- Long-term inflation expectations remain relatively well anchored at around 5 percent.
- Policy recommendations:
  - Additional monetary policy tightening should be carefully calibrated and clearly communicated to balance inflation objectives and impact on economic activity.
  - Frontloading policy actions can anchor inflation expectations and reduce the need for more aggressive future increases.
  - Magnitude of additional tightening should be data-dependent and well-timed to avoid significant economic costs of over-tightening.
  - Exchange rate should continue to act as a shock absorber with foreign exchange intervention limited to addressing disorderly market conditions.
  - Improved monetary policy communication can enhance policy transmission and reinforce market confidence.

### Exchange rate flexibility, FX intervention, and CBDC
- Flexible exchange rate should continue to act as the first line of defense in absorbing external shocks, with interventions limited to preventing disorderly market fluctuations.
- RBI used previously accumulated foreign exchange reserves to smooth excessive market volatility, resulting in more limited rupee depreciation vis-à-vis the U.S. Dollar in 2022 compared to many other emerging market currencies.
- Assessment: India’s external position remains sufficiently strong to withstand external shocks in the near term.
- Central Bank Digital Currency (CBDC):
  - Authorities intend to begin phased implementation of both retail and wholesale CBDC within the current fiscal year to complement the domestic payment system and facilitate cross-border transactions.
  - An intermediated model is mostly being explored (central bank issues digital money; distribution and client service delegated to private sector).
  - About 80 percent of retail transactions now take place via the UPI platform.
  - Estimated operating costs associated with physical cash amount to about $3.4 bn (about 0.1 percent of GDP).
  - Recommendation: adopt a prudent and gradual implementation approach; prioritize CBDC features that facilitate cross-border payments; enhance capacity for analysis and testing; ensure clear communication.

### Financial sector resilience, vulnerabilities, and policy priorities
- Corporate and financial sector balance sheets have improved, but risks from tightening financial conditions remain.
- Improvements:
  - Banks’ NPA ratio decreased and capital ratios increased over the last fiscal year; NBFC balance sheets have also improved.
  - Declining leverage of listed firms and falling delinquency rates across sectors and borrower types confirm corporate sector recovery.
- Remaining vulnerabilities and stress-test findings:
  - RBI stress tests suggest resilience under an adverse scenario, but some banks and NBFCs may be vulnerable to liquidity shocks due to duration mismatches.
  - Banks, especially public ones, have substantial unrealized bond portfolio losses at the beginning of a monetary policy tightening cycle.
  - Credit risk: about 48 percent of bank loans are based on variable interest rates.
  - Interest-rate risk: large holdings of government bonds (about 22 percent of bank assets) strengthen sovereign-bank interconnections.
  - Liquidity risk: some banks and NBFCs vulnerable to liquidity shocks while facing higher funding costs.
  - Interconnectedness: NBFCs account for about 8.5 percent of bank lending.
- Prudential and supervisory recommendations:
  - Strengthen capital buffers.
  - Promote prudent underwriting standards given sharp increases in unsecured retail credit.
  - Consider calibrating loan-to-value ratios or introducing debt-service-to-income limits to taper issuance of new variable-rate loans.
  - Improve NBFC resilience through strengthened supervision and regulation of liquidity-risk exposures beyond 30-day maturity horizon.
  - Consider tightening limits on bank exposure to NBFCs.
- Structural priorities:
  - Facilitate exit of non-viable firms and encourage early recognition of problem loans.
  - Advance insolvency reforms; accelerate implementation of “pre-pack” processes for MSMEs.
  - National Asset Reconstruction Company Limited (NARCL):
    - Expected to purchase Rs. 2 trillion (about 28 percent of total bank gross NPAs) of distressed assets, but no purchases had occurred as of mid-September.
    - Initial purchases will cover fully provisioned NPA; NARCL purchases structure: 15 percent paid in cash and 85 percent in tradable securities; government will guarantee Rs 306 billion against these securities, valid for 5 years.
  - Incentivize banks to reduce exposure to the public sector over time to weaken sovereign-bank linkages.

### Structural reforms for green, inclusive, and productivity-enhancing growth
- India has increased renewables and improved energy efficiency; further efforts, financing and technology transfer are needed to meet net zero objectives.
- Digital public infrastructure enabled rapid pandemic support deployment, efficient payments, and increased financial inclusion; narrowing the digital divide via access and literacy would further support productivity gains.
- Structural reform priorities:
  - Increase female labor force participation, reduce youth unemployment, and reduce informality.
  - Strengthen governance and regulatory frameworks to foster transparency and public accountability.
  - Further trade liberalization and tariff reductions to deepen integration in global value chains.
  - Strengthen health, education and social spending to recover human capital losses from the pandemic.
- Box 1 — Unleashing India’s Growth Potential:
  - Baseline medium-term potential growth estimated at about 6 percent (2027); counterfactual without the pandemic about 6.5 percent.
  - Upside scenario with broad reforms could raise medium-term potential growth to about 7 percent.
  - Key reform channels: improve financial intermediation; trade and product market reforms; increase female labor force participation; reduce youth unemployment; strengthen vocational training and education; advance digitalization.

### Governance, regulatory framework, and rule of law
- Authorities enhanced transparency of COVID-19 related spending, including on procurement.
- Suggested further improvements:
  - Publication of beneficial ownership information for awarded entities.
  - Publication of audits of emergency spending.
  - Continued digitalization of government service delivery (tax payments, contract enforcement, trading across borders).
  - Use of single-window clearance to start a business and to pay taxes.
- Regulatory and judicial reforms needed to reduce compliance costs and shorten approval timelines.
- Trade policy observations:
  - External tariff and non-tariff barriers remain elevated and above those in regional peers.
  - Recommendations: reduce tariffs and non-tariff barriers (including for intermediate goods); phase out food export restrictions; liberalize rules for FDI and portfolio investments as conditions allow.

### Inequality, poverty, and policy response
- Nominal GDP (2021/22, in billions of U.S. dollars): 3,176.
- GDP per capita (U.S. dollars) (IMF staff est.): 2,302.
- Population total (in billions, 2020/21): 1.38.
- Headcount ratio at $1.90 a day (2011): 22.5.
- Undernourished (2019): 15.3.
- World Bank estimates suggest poverty declined from 40 percent in 2004 to 22.5 percent in 2011; official measures suggest poverty was around 12.2 percent in 2011-12.
- Government expanded social assistance during the pandemic (additional food subsidies, cash transfers, and rural employment guarantee).
- Simulation evidence: food subsidies significantly lowered the increase in poverty during the pandemic, by about 30-40 percent based on the 1.9 $PPP threshold (preliminary).

### Risk assessment (Appendix II highlights)
- External risks (likelihood / policy response):
  - Intensifying spillovers from Russia’s war in Ukraine — Risk likelihood: High — Diversify imports; secure market access; accelerate renewables.
  - Commodity price shocks — Risk likelihood: High — Improve targeting of transfers; maintain exchange rate flexibility.
  - De-anchoring of inflation expectations and stagflation — Risk likelihood: Medium — Tighten fiscal and monetary policies; increase transfers to the poor as needed.
  - Abrupt global slowdown — Risk likelihood: Medium — Rebuild fiscal buffers; enhance FDI attractiveness.
  - Deepening geo-economic fragmentation — Risk likelihood: High — Build capacity for rupee use in international trade; promote regional cooperation.
  - Cyberthreats — Risk likelihood: Medium — Improve protection of digital assets; maintain backups.
- Domestic risks (likelihood / policy response):
  - Large scale social discontent — Risk likelihood: Medium — Increase social protection; communicate reforms; offset price hikes with transfers.
  - Local COVID-19 outbreaks — Risk likelihood: Medium — Increase public health, education, and social safety nets spending.
  - Financial sector vulnerabilities — Risk likelihood: Medium — Encourage capital buffers; targeted prudential policies; governance reforms in PSBs.
  - Weakening fiscal position — Risk likelihood: Medium — Credible medium-term fiscal consolidation; reduce sovereign-bank interconnectedness.
  - Natural disasters related to climate change — Risk likelihood: Medium — Increase resilient infrastructure; accelerate green transition; strengthen safety nets.

### Debt sustainability (Appendix III highlights)
- Overall assessment:
  - Debt sustainability risks have increased due to high debt levels and elevated gross financing needs amidst monetary policy tightening.
  - Public debt to GDP ratio peaked at 89 percent in FY2020/21 and was 83.4 percent at end-FY2021/22; expected to remain elevated before gradually declining from FY2025/26.
  - Gross financing needs remain high at around 15–16 percent of GDP over the next five years.
  - Effective interest rate around 7.6 percent; debt-stabilizing primary deficit estimated at 2.3 percent of GDP.
- Stress test results (selected):
  - Growth shock: output growth 3.4 percentage points lower than baseline in FY2023/24 and FY2024/25; debt-to-GDP peaking at about 93 percent; gross financing needs peaking at about 18 percent of GDP.
  - Combined macro-fiscal shock: debt increases to 95 percent of GDP in the medium term.
  - Contingent liability shock: debt would peak just below 100 percent of GDP.
- Policy implications:
  - Credible medium-term fiscal consolidation is critical to reduce public debt and regain fiscal space.
  - Debt dynamics sensitive to primary balance trajectory and interest-rate minus growth differential.

### Capacity development and IMF engagement
- SARTTAC since February 2017:
  - Delivered training to more than 6,000 officials (excluding webinars) at some 250 events.
  - Conducted approximately 350 technical assistance missions.
- In FY2021, SARTTAC provided training and TA in macro-fiscal forecasting, financial programming, national accounts, government finance statistics, revenue administration, PFM, monetary operations, and financial sector supervision.
- Ongoing/planned TA at subnational level includes PFM, compilation/dissemination of government finance statistics, and a subnational PIMA planned for Tamil Nadu.

*Source: IMF staff report for the 2022 Article IV Consultation on India (content unit: 1indea2022001).*

### 8.7 percent in FY2021/22, bringing total output above pre-pandemic levels. Growth has

### INDIA: STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION

### Broad-based economic recovery
- Real GDP grew by 8.7 percent in fiscal year (FY) 2021/22, bringing total output above pre-pandemic levels.
- By end-FY2021/22 all sectors recovered to pre-pandemic levels except contact-intensive services, which remained 11 percent below FY2019/20 levels.
- Growth was 13.5 percent year-on-year in the first quarter of FY2022/23; high-frequency indicators (PMIs and mobility) suggest continued growth in Q2 FY2022/23.
- Estimated output gap remains negative.
- As of end-September, new COVID cases have fallen to low levels and about 70 percent of the population was fully vaccinated; free administration of booster shots and broader booster eligibility criteria should help further improve vaccine coverage.
- Employment recovery is broad-based across gender and age groups but uneven across sectors; vulnerable groups (females, youth, less-skilled, daily wage and migrant workers) were hardest hit and real earnings recovery remains sluggish.

### Inflation, external sector, and near-term outlook
- Headline consumer price inflation rose to 7.4 percent in September; food inflation picked up to 8.4 percent; core inflation (excluding food and fuel) remained high at 6 percent.
- Inflation has been at or above the RBI’s tolerance band of 4±2 percent since January 2022.
- Real GDP growth projections:
  - FY2022/23: 6.8 percent
  - FY2023/24: 6.1 percent
- Inflation projection:
  - FY2022/2023: 6.9 percent
  - Inflation expected to moderate only gradually over the next year.
- Current account deficit projected to increase to 3.5 percent of GDP in FY2022/23 due to higher commodity prices and strengthening import demand.
- Balance of payments key figures (2018/19–2023/24 projections, select items):
  - Current account balance (in billions of U.S. dollars): -57.2, -24.5, 24.0, -38.7, -118.3, -109.7
  - Current account balance (percent of GDP): -2.1, -0.9, 0.9, -1.2, -3.5, -2.9
  - Gross reserves (in billions of U.S. dollars, end-period): 412.9, 477.8, 577.0, 607.3, 540.5, 558.3
  - Gross reserves (months of next year's imports): 8.2, 11.1, 9.0, 7.9, 6.7, 6.5
  - Exchange rate (rupee/U.S. dollar, end-period): 69.2, 75.4, 73.5, 75.8, ..., ...

### Policy responses and recommendations — fiscal
- Authorities responded with fiscal policy measures to support vulnerable groups and mitigate impact of high commodity prices on inflation.
- Central government overall balance (percent of GDP): -3.9, -4.8, -8.6, -6.7, -6.5, -6.2 (2018/19–2023/24).
- General government overall balance (percent of GDP): -6.4, -7.5, -12.8, -10.0, -9.9, -9.0.
- General government debt (percent of GDP): 70.4, 75.1, 89.2, 84.2, 83.5, 83.9.
- Policy recommendations:
  - Pursue a credible and clearly communicated medium-term fiscal consolidation anchored on stronger revenue mobilization and spending efficiency.
  - Protect high-quality spending on infrastructure, education and health.
  - Improve public financial management, fiscal institutions and transparency.
  - Harness digitalization to better target government services.

### Policy responses and recommendations — monetary
- Monetary policy accommodation has been gradually withdrawn; the main policy rate has been increased by 190 basis points so far in 2022.
- Directors (Executive Board Assessment) supported front-loaded monetary tightening to address elevated inflation.
- Policy recommendations:
  - Additional monetary policy tightening should be carefully calibrated and clearly communicated to balance inflation objectives and impact on economic activity.
  - Exchange rate should continue to act as a shock absorber with foreign exchange intervention limited to addressing disorderly market conditions.
  - Authorities’ plans to introduce a central bank digital currency were welcomed.

### Financial sector policies and stability
- Corporate and financial sector balance sheets have improved, but risks from tightening financial conditions remain.
- Financial sector recommendations:
  - Encourage banks to build additional capital buffers and recognize problem loans.
  - Use targeted prudential tools to strengthen resilience to rising interest rate risks.
  - Facilitate exit of non-viable firms.
  - Advance reforms to strengthen governance and reduce the government footprint in the financial sector.

### Structural reforms for green, inclusive, and productivity-enhancing growth
- India has made important progress on its climate agenda, increasing renewables and improving energy efficiency; further efforts, financing and technology transfer are needed to meet net zero objectives.
- Digital public infrastructure has enabled rapid deployment of pandemic support, efficient payments, and increased financial inclusion; narrowing the digital divide via access and literacy would further support productivity gains.
- Structural reform priorities:
  - Increase female labor force participation, reduce youth unemployment, and reduce informality.
  - Strengthen governance and regulatory frameworks to foster transparency and public accountability.
  - Further trade liberalization and tariff reductions to deepen integration in global value chains.
  - Strengthen health, education and social spending to recover human capital losses from the pandemic.

### Risks and uncertainty
- Outlook uncertainty is high with downside tilt:
  - Sharp global growth slowdown would affect India via trade and financial channels.
  - Intensifying spillovers from the war in Ukraine could disrupt global food and energy markets with significant impact on India.
  - Over the medium term, reduced international cooperation could disrupt trade and increase financial market volatility.
  - Domestically, rising inflation could further damp domestic demand and hit vulnerable groups.
- Upside potential: successful implementation of wide-ranging reforms or larger-than-expected gains from digitalization could raise India’s medium-term growth potential.

*Source: IMF staff report for the 2022 Article IV Consultation on India (November 4, 2022).*

### 4. Credit growth has increased, thus strengthening financial sector support to economic

### 4. Credit growth has increased, thus strengthening financial sector support to economic activity

### Credit growth and financial sector developments
- Non-food bank credit growth rose to 15.1 percent in July, up from 6.2 percent a year ago, driven by stronger credit growth by private banks.
- Sector and firm-size breakdown (July):
  - Credit to Micro Small and Medium-Sized Enterprises (MSMEs) in the industry sector led the pick-up.
  - Credit growth to medium-sized enterprises: 37 percent.
  - Credit growth to micro and small enterprises: 28.3 percent.
  - Credit to large enterprises: 5.2 percent (up from -3.8 percent a year ago).
- Sectoral and household credit:
  - Credit to the services sector grew 16.5 percent in July.
  - Personal loans rose by 18.8 percent.
- The credit-to-GDP gap remains negative.

### External position, reserves, and capital flows
- FY2021/22 external position: broadly in line with medium-term fundamentals and desirable policies (Appendix I).
- Current account developments:
  - FY2021/22: current account returned to a deficit of about 1.2 percent of GDP.
  - Staff assessed the current account gap at 1 percent of GDP (based on the EBA model, after accounting for transitory COVID-19 impacts).
- Reserves and coverage:
  - FX reserves decreased (reflecting valuation losses and RBI intervention) but remain at a relatively comfortable level, covering about 7 months of prospective imports and more than 150 percent of the IMF reserve adequacy metric.
- Recent external pressures:
  - Widening current account deficit and portfolio investment outflows put pressure on the exchange rate and contributed to FX reserves losses.
  - External shocks noted: global financial tightening and the war in Ukraine.
  - Authorities restricted exports of wheat, sugar, and rice in response to rising food prices and food security concerns.
  - Policy measures: RBI relaxed capital flow management measures by raising individual borrowing limits (for all borrowers) and cost ceiling (for investment-grade borrowers) on external commercial borrowings (temporary measure introduced in July, effective until end-2022), widened scope for foreign investment in government and corporate bonds, and expanded FDI in oil, gas, and life insurance sectors.

### Outlook, projections, and risks
- Growth projections (staff baseline):
  - Real GDP growth: 6.8 percent in FY2022/23 and 6.1 percent in FY2023/24.
  - Potential growth: expected at 6 percent over the medium term under the baseline.
- Current account projection:
  - Expected to increase to 3.5 percent of GDP in FY2022/23, then decline to around 2.5 percent over the medium term.
- Credit and inflation:
  - Credit growth is expected to strengthen, but further financial deepening would be needed to support medium-term economic growth.
  - Inflation projection: 6.9 percent in FY2022/23; expected to gradually return to within the tolerance band next year.
- Uncertainty and risk assessment:
  - Uncertainty about the economic outlook is high and risks are tilted to the downside (Appendix II).
  - External risks: sharp global growth slowdown; intensified spillovers from the war in Ukraine; supply and demand shocks causing disruptions in global food and energy markets; risk of persistently higher inflation and de-anchoring of inflation expectations; medium-term risk of deglobalization.
  - Domestic risks: rising inflation impacts on vulnerable groups; new COVID-19 variants; tightening financial conditions causing asset quality deterioration and financial sector stress; weakening fiscal position increasing financing costs; climate change-driven disasters.
  - Upside risks: resolution of the war in Ukraine; a “soft landing” in the U.S., Europe, and China; successful structural reforms or larger-than-expected digital dividends.
  - Downside scenario: joint realization of major external and domestic downside risks would significantly lower growth in FY2022/23 and FY2023/24 and markedly increase inflation, particularly in FY2022/23. Both exports and imports would decline, especially in FY2022/23, with muted overall impact on the trade balance and current account.

- Authorities’ view:
  - Authorities projected growth at about 7 percent in FY2022/23.
  - Expected inflation to fall below 6 percent in the last quarter of the fiscal year.
  - Expected a current account deficit within 3 percent of GDP this year, financed by steady FDI and resumption of portfolio investment inflows.
  - Considered fuel excise tax cuts necessary to manage inflation.

### Fiscal stance, sustainability, and recommendations
- FY2021/22 fiscal developments:
  - Central government deficit declined to 6.7 percent (due to higher revenues and lower spending).
  - State governments’ deficit estimated to have declined close to the medium-term target of 3 percent, with variation across states and some states facing debt burdens over 40 percent of state-level GDP.
- FY2022/23 budget and near-term stance:
  - Budget and additional support measures suggest a slightly contractionary fiscal stance, projected to tighten further in FY2023/24.
  - Measures to mitigate higher commodity prices (free food rations; reduction in fuel taxes; higher fertilizer subsidies; and a fuel subsidy for low-income households) are being offset by buoyant GST and income tax revenues.
  - Staff projection assumes a small under-execution of the substantial capital budget.
  - Additional support to vulnerable groups is warranted, but improving targeting is necessary.
  - Recommendation: phase out broad fuel excise tax cuts and provide targeted support through existing transfer systems.
- Medium-term fiscal outlook and risks:
  - Baseline projections: gradual decline in fiscal deficit and stabilization of public debt.
  - Public debt: 84 percent of GDP in FY2021/22.
  - Gross financing needs: 15 percent of GDP.
  - Risks increased by monetary policy tightening but mitigated by the bulk of public debt being fixed-rate, domestic-currency, and predominantly held by residents.
- Fiscal consolidation guidance:
  - Authorities reaffirmed commitment to a central government deficit target of 4.5 percent of GDP by FY2025/26, implying a general government deficit of 7.5 percent of GDP (down from 9.9 percent in FY2022/23).
  - Recommendation: a clearly communicated medium-term fiscal consolidation plan to enhance policy space and facilitate private sector-led growth; announcing further deficit-reduction measures would reduce uncertainty and lower risk premia.
  - Staff suggestion: fiscal consolidation should be more ambitious than the baseline, feasibly targeting an additional general government primary consolidation of around 1 percent of GDP by FY2027/28, bringing debt down to 80 percent of GDP.
  - Revenue measures proposed: reversing fuel excise tax cuts; further broadening corporate and personal income tax bases; simplifying the GST rate structure; rationalizing items subject to preferential GST treatment; continued improvements in tax administration.
  - Other recommendations: maintain momentum in asset monetization and privatization; better target subsidies and use Direct Benefit Transfer to reduce leakages; rationalize central schemes; reform electricity tariffs and improve financial viability of electricity distribution companies.
  - India’s estimated tax gap: around 5 percent of GDP.
- Protect high-quality spending:
  - Protect infrastructure, education, and health spending to support green and inclusive growth during consolidation.
- Public financial management and transparency:
  - Continue improving PFM, fiscal institutions, and transparency.
  - Digital solutions (e.g., e-procurement, faceless income tax assessments, e-bills) have improved transparency.
  - Development of an integrated Government Financial Management System and a dedicated platform for central, state, and local governments to share fiscal information recommended.
  - IMF support provided to select states to improve PFM areas including medium-term fiscal frameworks and commitment control systems.

### Monetary policy stance and recommendations
- Recent RBI actions:
  - RBI increased the policy rate three times since May 2022, by a cumulative 190 basis points.
  - Liquidity operations: absorbed liquidity using variable rate reverse repo auctions; raised the cash reserve ratio by 50 bps in May 2022; discontinued government securities purchase program in October 2021.
  - Surplus liquidity moderated due to capital outflows; overnight call money rate has risen, approaching the policy rate.
  - Long-term inflation expectations remain relatively well anchored at around 5 percent.
- Policy guidance:
  - Additional policy rate tightening is needed, but should be carefully calibrated and clearly communicated to balance inflationary pressures and economic activity.
  - Frontloading policy actions can anchor inflation expectations and reduce the need for more aggressive future increases.
  - Magnitude of additional tightening should be data-dependent and well-timed to avoid significant economic costs of over-tightening.
  - Improved monetary policy communication can enhance policy transmission and reinforce market confidence.

*Source: IMF staff chapter on India economic outlook (excerpts).*

### 23. Exchange rate flexibility should remain the main shock absorber, with intervention

### 23. Exchange rate flexibility should remain the main shock absorber, with intervention

### Exchange rate policy and external position
- Flexible exchange rate should continue to act as the first line of defense in absorbing external shocks, with interventions limited to preventing disorderly market fluctuations.
- Recent context:
  - A combination of severe external shocks led to U.S. Dollar appreciation and surges in commodity prices, exerting depreciation pressures on emerging market currencies including the Indian Rupee.
  - The RBI used previously accumulated foreign exchange reserves to accommodate the impact of extraordinary shocks and smooth excessive market volatility, resulting in more limited rupee depreciation vis-à-vis the U.S. Dollar in 2022 compared to many other emerging market currencies and precluding emergence of disorderly market conditions.
- Assessment: India’s external position remains sufficiently strong to withstand external shocks in the near term.

### Central Bank Digital Currency (CBDC)
- Authorities intend to begin phased implementation of both retail and wholesale CBDC within the current fiscal year to complement the domestic payment system and facilitate cross-border transactions.
- Expected benefits and conditions:
  - A CBDC would complement the already relatively efficient domestic payment system where private providers offer low cost, real-time payments.
  - Greater additional benefits may result from facilitating cross-border transactions, but delivery depends crucially on design features (Appendix VI) and requires strong international cooperation.
  - Important risks, such as threats to cyber security, warrant caution in implementation.

### Monetary policy stance and commitments
- The authorities reiterated commitment to bringing inflation back to target and to maintaining a flexible exchange rate.
- The RBI reaffirmed focus on withdrawal of accommodation and indicated further monetary policy actions would be carefully calibrated to incoming data.
- The RBI remains committed to maintaining the rupee’s flexible exchange rate regime and using FX reserves only to address excessive market volatility.
- Authorities confirmed intention to gradually implement both a retail and a wholesale domestic CBDC, which would provide the public with the benefit of virtual currencies while ensuring consumer protection.

### Financial sector policies during and after the pandemic
- Pandemic response and expiration:
  - Accommodative monetary policy and regulatory easing targeted lenders and borrowers played a key role in supporting the financial sector and avoiding a credit crunch.
  - Initiatives included moratoria on loan repayments and credit guarantee schemes for MSMEs; banks also benefitted from loan restructuring schemes and deferments in implementation of the net stable funding ratio and the last tranche of the capital conservation buffer.
  - Most measures have now expired, except government guarantees for MSMEs that have been extended to March 2023 with additional funds allocated to firms in the hospitality sector.
- Government guarantees:
  - These guarantees successfully sustained credit flow to viable MSMEs and only 2 percent of all guaranteed loans are currently non-performing.
  - Given the strong recovery in bank credit and to contain the risk of loan evergreening, a further extension of the scheme does not seem warranted.

### Credit quality, balance sheets, and vulnerabilities
- Improvements:
  - Banks have seen their non-performing asset (NPA) ratio decrease and capital ratio increase over the last fiscal year; NBFC balance sheets have also improved.
  - Declining leverage of listed firms and falling delinquency rates across sectors and borrower types confirm corporate sector recovery.
- Remaining vulnerabilities and stress-test findings:
  - RBI stress tests suggest financial sector resilience under an adverse scenario, but some banks and NBFCs may be vulnerable to liquidity shocks due to existing duration mismatches.
  - Banks, especially public ones, have substantial unrealized bond portfolio losses at the beginning of a monetary policy tightening cycle.

### Structural and policy priorities to improve asset quality and resolution
- Need to facilitate exit of non-viable firms and encourage early recognition of problem loans; banks’ aggregate NPA ratio remains relatively high from an international perspective.
- Insolvency reforms:
  - Recent reforms (including “pre-pack” processes for MSMEs) were expected to speed resolutions and increase recovery rates, but progress has been slow and additional resources may be needed to speed implementation.
- National Asset Reconstruction Company Limited (NARCL):
  - The NARCL is expected to purchase Rs. 2 trillion (about 28 percent of total bank gross NPAs) of distressed assets, but no purchases had occurred as of mid-September.
  - Initial purchases will cover fully provisioned NPA, with limited impact on banks’ balance sheets.
  - Clarifying valuation approaches for fully provisioned NPAs and supporting liquidity of NARCL-issued securities would facilitate implementation.
  - Background structure: NARCL would purchase NPAs with 15 percent of the sum paid in cash and 85 percent in tradable securities; the government will guarantee Rs 306 billion against these securities, valid for 5 years.

### Regulation of NBFCs and systemic oversight
- New scale-based regulatory framework for NBFCs (four-layered classification based on size and systemic importance) will become effective in October 2022; capital requirements and credit concentration limits tighten with each layer, converging regulation between banks and NBFCs.
- Existing pockets of vulnerabilities:
  - Credit risk: about 48 percent of bank loans are based on variable interest rates, exposing banks to higher NPAs as interest rates rise.
  - Interest-rate risk: share of fixed-rate loans and large holdings of government bonds (about 22 percent of bank assets) strengthen sovereign-bank interconnections.
  - Liquidity risk: some banks and NBFCs vulnerable to liquidity shocks while facing higher funding costs.
  - Interconnectedness: NBFCs account for about 8.5 percent of bank lending, raising likelihood of shock transmission.

### Prudential and supervisory recommendations
- Strengthen capital buffers to improve resilience amid rising interest rates.
- Promote prudent underwriting standards at banks and NBFCs, given sharp increases in unsecured retail credit.
- Consider calibrating loan-to-value ratios or introducing debt-service-to-income limits to taper issuance of new variable-rate loans.
- Incentivize banks to reduce exposure to the public sector over time (e.g., reduce regulatory incentives to hold government securities) to weaken sovereign-bank linkages and support private credit supply.
- Improve NBFC resilience through strengthened supervision and regulation of liquidity-risk exposures, especially beyond the current 30-day maturity horizon.
- Consider tightening limits on bank exposure to NBFCs to prevent idiosyncratic shocks from spreading.

### Digital advances, inclusion, and oversight
- Digital infrastructure and mobile banking have simplified account opening and loan access, extended services to remote areas, and expanded instant payments; offline and feature phone-based payments will further support inclusion.
- Digitalization facilitated underwriting and expanded credit to MSMEs.
- RBI measures: guidelines on digital lending increase transparency on loan conditions and prevent regulated entities from accepting credit guarantees issued by unregulated financial technology companies.
- Policy focus: ensure fintech advances are consistent with regulatory framework; strengthen consumer and data protection; improve financial and digital literacy; increase internet and smartphone access to ensure universal coverage and portability of safety nets.

### Structural reforms for medium-term growth and inclusion
- Public banks: underperformance on credit supply, profitability, and asset quality points to governance and risk management challenges; priorities include advancing governance reforms and reducing government footprint through privatization.
- Capital markets: digitalization has increased domestic equity participation; initiatives to facilitate repo transactions and create a backstop facility could spur bond market participation; continue efforts to develop corporate debt and climate financing markets.
- Climate-related measures and targets:
  - Updated NDC commits to lowering emissions intensity of GDP by 45 percent from 2005 levels and having 50 percent installed non-fossil fuel electric power capacity by 2030.
  - At COP26, India committed to reach Net Zero by 2070.
  - Policy options include sectoral policies (storage scale-up, coordination of power distribution, nationwide EV charging infrastructure), subsidies and taxes (boost renewables by 2030 and gradual carbon pricing), and adaptation policies (expand social safety nets, resilient infrastructure, R&D in climate-resilient agriculture).
- Education, labor, and administrative reforms:
  - Address pandemic-related learning losses and improve literacy; increase female labor force participation; reduce youth unemployment and informality.
  - Implement labor codes (by states), ease administrative bottlenecks, support formalization, improve targeting of social benefits, and advance agriculture and land reforms—while recognizing potential transition costs that may require targeted support.

_Italic: Source — 1indea2022001 - 23. Exchange rate flexibility should remain the main shock absorber, with intervention_

### 40. Strengthening governance, the regulatory framework and the rule of law can reduce

### 40. Strengthening governance, the regulatory framework and the rule of law can reduce

### Governance, transparency, and public financial management (PFM)
- Authorities enhanced transparency of COVID-19 related spending, including on procurement.
- IMF capacity development in PFM to select states is supporting improved governance.
- Further improvements suggested:
  - Publication of beneficial ownership information for awarded entities.
  - Publication of audits of emergency spending.
  - Continued digitalization of government service delivery (tax payments, contract enforcement, trading across borders) to improve transparency, efficiency and reduce scope for fraud.
  - Use of single-window clearance to start a business and to pay taxes.

### Regulatory framework, rule of law, and corporate environment
- Broader efforts needed to strengthen the corporate regulatory framework and the rule of law to reduce corruption and improve revenue outcomes.
- Potential measures:
  - Reduce overlap in the regulatory system to reduce compliance costs.
  - Improve efficiency of the judicial system.
  - Shorten regulatory approval timelines.

### Trade, global value chains (GVCs), and investment openness
- Recent trade agreements with the United Arab Emirates (UAE) and Australia are expected to facilitate bilateral trade and investments.
- Free trade agreements with other partners are being discussed.
- External tariff and non-tariff barriers remain elevated and above those in regional peers.
- Recommendations to deepen integration in GVCs:
  - Reduce tariffs and non-tariff barriers, including for intermediate goods (Appendix VIII).
  - Phase out recently introduced food export restrictions.
  - Further liberalize rules for FDI and portfolio investments as conditions allow, including by:
    - Further increasing limits on external borrowing.
    - Widening the scope of debt instruments available for foreign investors.
- Role in multilateral system:
  - Continue to work with other nations to strengthen WTO rules, support a functioning dispute settlement system, and conclude new mutually beneficial WTO agreements.

### Digitalization, social outcomes, and climate policy balance
- Authorities emphasized digitalization’s cross-cutting role in furthering social objectives, improving governance, and boosting productivity.
- Open Network for Digital Commerce (ONDC) initiative noted for its potential to transform e-commerce.
- Authorities stressed need to narrow the digital divide and highlighted state-level implementation of labor codes and expansion of PLI schemes to labor intensive and green sectors.
- Authorities view climate policies as balanced with development needs and stressed principles of equity and common but differentiated responsibilities and respective capabilities, and the importance of climate financing and technology transfer.

### Statistics and capacity development
- Macroeconomic statistics are adequate for Fund surveillance but upgrading statistics would help policy formulation.
- Needed statistical improvements:
  - Timely availability of quarterly general government fiscal data and expansion of its coverage.
  - Improved labor market data.
  - Updated CPI weights.
- IMF capacity development scaled up in recent years and supported by the government’s support to the South Asia Training and Technical Assistance Center (SARTTAC).
- IMF is working with authorities on improving (volume and price) statistics and providing tailored training on macro relevant topics; stands ready to provide further capacity development support, including through SARTTAC and by further integrating thematic areas that can help policy formulation.

### Staff appraisal — macro policy priorities and risks
- Economic rebound from the pandemic-related downturn is underway but new headwinds exist.
- Policy responses:
  - Fiscal: authorities responded with fiscal measures to support vulnerable groups and mitigate commodity price impacts.
  - Monetary: front-loaded monetary policy tightening to address elevated inflation.
- Outlook and risks:
  - Growth is expected to moderate somewhat this year and next, reflecting a less favorable external outlook and tighter financial conditions.
  - Inflation is expected to decline only gradually over the next two years.
  - Current account deficit is expected to increase this year due to higher commodity prices and strengthening import demand.
  - Uncertainty about the economic outlook is high, with risks tilted to the downside.

### Fiscal policy recommendations
- Additional focus needed on credible and clearly communicated fiscal consolidation.
- Observations:
  - Slightly contractionary fiscal stance this year, further tightening in FY2023/24 is welcome.
  - Baseline projections suggest only a gradual decline in the fiscal deficit; public debt is expected to stabilize over the medium-term, but debt sustainability risks have increased.
- Policy anchors:
  - Stronger revenue mobilization.
  - Improving expenditure efficiency while protecting high-quality spending on infrastructure, education and health.
  - Further improvements in public financial management, fiscal institutions and transparency.
  - Harness digital public infrastructure to improve government service delivery.

### Monetary and exchange rate policy recommendations
- Additional monetary policy tightening is needed.
- RBI actions to date:
  - Used liquidity management and interest rate tools to tighten monetary policy.
- Guidance:
  - Additional policy rate tightening needed, to be carefully calibrated and clearly communicated.
  - Exchange rate should act as the main shock absorber; intervention should be limited to addressing disorderly market conditions.
  - Phased implementation of retail and wholesale CBDC could complement the domestic payment system and facilitate cross-border transactions depending on design features.

### Financial sector and corporate balance sheet recommendations
- Corporate and financial sector balance sheets have improved; credit quality indicators have improved.
- Remaining policy needs:
  - Facilitate exit of non-viable firms.
  - Encourage banks to build capital buffers and recognize problem loans.
  - Use targeted prudential tools to mitigate risks from tightening financial conditions, including potential for NPAs to increase with the rise in interest rates.
  - Structural reforms to strengthen governance and reduce government footprint in the sector to support financial market development and medium-term growth.
  - Continue promoting digital advances that facilitate efficient payments and increase financial inclusion.

### Structural reforms and social priorities
- Progress in the structural reform agenda needed to:
  - Address pandemic-related output losses.
  - Reduce bottlenecks.
  - Maximize medium-term growth potential.
- Priority areas:
  - Education policies to support catch up from pandemic-related learning losses.
  - Investment-friendly policies to support capital accumulation and raise potential growth.
  - Increase female labor force participation.
  - Reduce youth unemployment and informality.
  - Strengthen health, education and social spending.
  - Narrow the digital divide through improved digital access and literacy.
- Reinforcement:
  - Strengthening governance, the regulatory framework and the rule of law to reduce scope for corruption, foster transparency and safeguard public accountability.

### Climate agenda
- India is increasing the share of energy production from renewables and improving energy efficiency.
- Additional efforts needed to meet objectives for a transition to a carbon-neutral economy, including sectoral policies, prudent use of subsidies and taxes, and adaptation policies.
- A global but differentiated minimum carbon price floor, facilitated by agreement on climate financing and technology transfers (including to cover adaptation costs), suggested as a possible way forward.

*Source: IMF staff report chapter excerpt.*

### 51. It is recommended that the next Article IV consultation take place on the standard 12-

### 1indea2022001 - 51. It is recommended that the next Article IV consultation take place on the standard 12-

### Recent macroeconomic developments
- Economic activities recovered from the severe initial impact of the pandemic.  
- Real GDP growth: 2020/21: -6.6; 2021/22: 8.7; 2022/23: 6.8; 2023/24: 6.1 (Table 1 / Table 6).  
- Private consumption, investment and exports rebounded in FY2021/22.  
- Industrial production, and manufacturing and services PMIs showed strong recovery in 2022Q.  
- Motor vehicle sales recovered gradually, but consumer credit remains below pre-pandemic.  
- Investment growth rebounded; goods exports and imports also recovered.

### External sector developments
- Current account balance returned to deficits in FY2021/22 on domestic demand recovery and surging oil import costs.  
- Oil (billions of U.S. dollars): 2018/19: 140.9; 2019/20: 130.6; 2020/21: 82.7; 2021/22: 161.8; 2022/23: 214.6; 2023/24: 199.0 (Table 2).  
- Merchandise exports (billions of U.S. dollars): 2018/19: 337.2; 2019/20: 320.4; 2020/21: 296.3; 2021/22: 429.2; 2022/23: 450.3; 2023/24: 462.8.  
- Merchandise imports (billions of U.S. dollars): 2018/19: 517.5; 2019/20: 477.9; 2020/21: 398.5; 2021/22: 618.6; 2022/23: 737.7; 2023/24: 769.6.  
- Current account balance (billions of U.S. dollars): 2018/19: -57.2; 2019/20: -24.5; 2020/21: 24.0; 2021/22: -38.7; 2022/23: -118.3; 2023/24: -109.7 (Table 2).  
- Foreign direct investment, net (billions of U.S. dollars): 2018/19: -30.7; 2019/20: -43.0; 2020/21: -44.0; 2021/22: -38.6; 2022/23: -47.7; 2023/24: -52.6.  
- Portfolio investment, net (billions of U.S. dollars): 2018/19: 2.4; 2019/20: -1.4; 2020/21: -36.1; 2021/22: 16.8; 2022/23: -8.2; 2023/24: -18.0.  
- Gross reserves (billions of U.S. dollars, end-period): 2018/19: 412.9; 2019/20: 477.8; 2020/21: 577.0; 2021/22: 607.3; 2022/23: 540.5; 2023/24: 558.3.  
- Gross reserves (months of next year's imports): 8.2; 11.1; 9.0; 7.9; 6.7; 6.5 (2018/19–2023/24).

### Financial markets developments
- Indian rupee came under depreciation pressure in 2022 but performed better than some other emerging market currencies.  
- Portfolio investment outflows in 2022H1 reversed inflows of 2020-21.  
- Stock market weakened in 2022H1 but was more resilient than indices in peer countries.  
- Both short and long-term yields increased after monetary policy tightening.  
- Long-term bond yields increased in all BRICS countries but China in 2022.  
- REER in 2019-22 moved in a tight range despite rupee’s nominal depreciation against US$.

### Monetary sector developments
- Inflation has remained above the RBI’s upper band, with sticky core inflation.  
- Consumer prices (period average): 2018/19: 3.4; 2019/20: 4.8; 2020/21: 6.2; 2021/22: 5.5; 2022/23: 6.9; 2023/24: 5.1.  
- Inflation expectations stabilized in recent months, while food and commodity prices remained high.  
- Monetary tightening cycle has commenced, aided by higher policy rates and liquidity absorption, resulting in some early reversal of significant pandemic-related easing.

### Fiscal sector developments
- Fiscal deficit narrowed in FY2021/22 following a sharp widening at the start of the COVID-19 pandemic.  
- General government overall balance (percent of GDP): 2018/19: -6.4; 2019/20: -7.5; 2020/21: -12.8; 2021/22: -10.0; 2022/23: -9.9; 2023/24: -9.0 (Table 1 / Table 5).  
- Central government overall balance (percent of GDP): 2018/19: -3.9; 2019/20: -4.8; 2020/21: -8.6; 2021/22: -6.7; 2022/23: -6.5; 2023/24: -6.2 (Table 4).  
- General government debt (percent of GDP): 2018/19: 70.4; 2019/20: 75.1; 2020/21: 89.2; 2021/22: 84.2; 2022/23: 83.5; 2023/24: 83.9.  
- Deficit narrowing in FY2021/22 driven by lower expenditure as pandemic-related measures phased out and revenues recovered.  
- Subsidies fell but remain elevated; higher interest expenses persist. Capital spending exceeded its pre-pandemic average.

### Corporate and banking sector developments
- Policy response supported the recovery of corporate and financial sectors, but weaknesses persist.  
- Pandemic-related measures improved firm balance sheets and ensured continued credit flow to households and MSMEs.  
- Ongoing recovery in bank credit is common across sectors, but lending by public banks remains subdued.  
- NPAs remain high despite declining recently; capital buffers have increased.  
- Selected banking indicators (2021/22): Risk-weighted CAR: 16.3; Net nonperforming assets (percent of outstanding net advances): 1.7; Gross nonperforming assets (percent of outstanding advances): 5.8; Return on assets: 0.9 (Table 8).

### Selected social and economic indicators (highlights)
- Nominal GDP (2021/22, in billions of U.S. dollars): 3,176.  
- GDP per capita (U.S. dollars) (IMF staff est.): 2,302.  
- Population total (in billions, 2020/21): 1.38.  
- Headcount ratio at $1.90 a day (2011): 22.5.  
- Undernourished (2019): 15.3.  
- Urban population (percent of total): 34.9.  
- Life expectancy at birth (years, 2019/20): 69.9.  
- Gini index (2011): 35.7.  
- Savings and investment (percent of GDP): Gross saving 2021/22: 30.0; Gross investment 2021/22: 31.2 (Table 1).

### Balance of payments and projections
- Current account balance (percent of GDP): 2018/19: -2.1; 2019/20: -0.9; 2020/21: 0.9; 2021/22: -1.2; 2022/23 (proj in Table 6): -3.5; 2023/24 (proj): -2.9.  
- Overall balance (percent of GDP): 2018/19: 0.1; 2019/20: -2.1; 2020/21: -3.3; 2021/22: -1.5; 2022/23: 0.6; 2023/24: -0.5 (Table 2).  
- Increase in gross reserve stock (including valuation changes): 2018/19: -11.7; 2019/20: 64.9; 2020/21: 99.2; 2021/22: 30.3; 2022/23: -66.9; 2023/24: 17.8 (Table 2).

### Reserve money and monetary aggregates (selected)
- Reserve money (in billions of rupees, end-period): 2018/19: 27,705; 2019/20: 30,297; 2020/21: 36,000; 2021/22: 40,689; 2022/23 (Aug): 40,596 (Table 3).  
- Broad money (M3, in billions of rupees, end-period): 2018/19: 154,321; 2019/20: 168,000; 2020/21: 188,446; 2021/22: 204,937; 2022/23 (Aug): 210,514.  
- Broad money (M3) twelve-month percent change: 2018/19: 10.5; 2019/20: 8.9; 2020/21: 12.2; 2021/22: 8.8; 2022/23 (Aug): 8.9.

### Central government operations (selected, percent of GDP)
- Revenue (percent of GDP): 2018/19: 8.4; 2019/20: 8.6; 2020/21: 4.8; 2021/22: 9.3; 2022/23: 8.6; 2023/24: 8.6 (Table 4).  
- Expenditure (percent of GDP): 2018/19: 12.3; 2019/20: 13.4; 2020/21: 17.0; 2021/22: 16.0; 2022/23: 15.1; 2023/24: 14.8.  
- Net acquisition of nonfinancial assets (percent of GDP): 2018/19: 1.6; 2019/20: 1.7; 2020/21: 2.2; 2021/22: 2.5; 2022/23: 2.5; 2023/24: 2.3.  
- Net lending / borrowing (overall balance, percent of GDP): 2018/19: -3.9; 2019/20: -4.8; 2020/21: -8.6; 2021/22: -6.7; 2022/23: -6.5; 2023/24: -6.2.

### General government operations (selected, percent of GDP)
- Revenue: 2018/19: 20.0; 2019/20: 19.9; 2020/21: 18.3; 2021/22: 20.2; 2022/23: 19.0; 2023/24: 19.2 (Table 5).  
- Expenditure: 2018/19: 26.3; 2019/20: 27.4; 2020/21: 31.1; 2021/22: 30.1; 2022/23: 28.9; 2023/24: 28.3.  
- Net lending (fiscal balance, percent of GDP): 2018/19: -6.4; 2019/20: -7.5; 2020/21: -12.8; 2021/22: -10.0; 2022/23: -9.9; 2023/24: -9.0.  
- General government debt (percent of GDP): 2018/19: 70.4; 2019/20: 75.1; 2020/21: 89.2; 2021/22: 84.2; 2022/23: 83.5; 2023/24: 83.9.

### Macroeconomic framework and projections (selected)
- Real GDP growth projections: 2022/23: 6.8; 2023/24: 6.1; 2024/25: 6.8; 2025/26: 6.8; 2026/27: 6.5; 2027/28: 6.2 (Table 6).  
- Potential GDP: 2018/19: 6.2; 2019/20: 5.9; 2020/21: 0.5; 2021/22: 4.5; 2022/23: 5.2; 2023/24: 5.7.  
- Output gap (percent of potential GDP): 2018/19: 1.7; 2019/20: -0.4; 2020/21: -7.4; 2021/22: -3.7; 2022/23: -2.2; 2023/24: -1.9.  
- Consumer prices (period average) projections: 2024/25: 4.4; 2025/26: 4.1; 2026/27: 4.0; 2027/28: 4.0.

### Indicators of external vulnerability
- General government debt (percent of GDP): 2018/19: 70.4; 2019/20: 75.1; 2020/21: 89.2; 2021/22: 84.2 (Table 7).  
- Broad money (percent change, 12-month basis): 2018/19: 10.5; 2019/20: 8.9; 2020/21: 12.2; 2021/22: 8.8.  
- Private sector credit (percent change, 12-month basis): 2018/19: 12.7; 2019/20: 6.3; 2020/21: 5.7; 2021/22: 8.1.  
- Foreign currency reserves (in billions of U.S. dollars): 2018/19: 412.9; 2019/20: 477.8; 2020/21: 577.0; 2021/22: 607.3.  
- Official reserves (in months of prospective imports): 2018/19: 8.2; 2019/20: 11.1; 2020/21: 9.0; 2021/22: 7.9.  
- Total external debt (percent of GDP): 2018/19: 20.1; 2019/20: 19.7; 2020/21: 21.5; 2021/22: 19.5.

### Financial soundness indicators (selected)
- Risk-weighted capital adequacy ratio (CAR) for scheduled commercial banks: 2018/19: 14.3; 2019/20: 14.8; 2020/21: 16.3; 2021/22: 16.9 (Table 8).  
- Net nonperforming assets (percent of outstanding net advances): 2018/19: 3.7; 2019/20: 2.8; 2020/21: 2.4; 2021/22: 1.7.  
- Gross nonperforming assets (percent of outstanding advances): 2018/19: 9.1; 2019/20: 8.2; 2020/21: 7.3; 2021/22: 5.8.  
- Return on assets (percent): 2018/19: -0.2; 2019/20: 0.1; 2020/21: 0.7; 2021/22: 0.9.

### High-frequency economic activity indicators (selected highlights)
- Domestic passenger vehicle sales (percent y-o-y): Apr 2021: 162.5; May 2021: 119.3; Jun 2021: 44.7; Apr 2022: 185.1; May 2022: 19.1; Jun 2022: 11.1 (Table 9).  
- CPI (percent y-o-y): Apr 2021: 4.2; May 2021: 6.3; Jun 2021: 6.3; Apr 2022: 7.8; May 2022: 7.0; Jun 2022: 6.7.  
- Industrial production (percent y-o-y): Apr 2021: 133.5; May 2021: 27.6; Jun 2021: 13.8; Apr 2022: 19.7; May 2022: 12.7; Jun 2022: 2.2.  
- Merchandise exports (monthly, in billions): example entries—Apr 2021: 202.7; May 2021: 68.3; Jun 2021: 47.9; Apr 2022: 220.9; May 2022: 30.4; Jun 2022: 8.2.  
- Change in FX reserves (USDbn, monthly): Apr 2021: 9.4; May 2021: 8.0; Jun 2021: 14.6; Apr 2022: -9.5; May 2022: 7.5; Jun 2022: -13.1.

*Prepared from the IMF staff report material in the provided content unit.*

### Box 1. Unleashing India’s Growth Potential

### Box 1. Unleashing India’s Growth Potential

### Overview
- The pandemic had a sizable impact on the key factors of production, with labor, TFP and capital all affected, leading to some medium-term adverse impact.
- Successful implementation of wide-ranging structural reforms could provide much-needed support to growth over the medium term.

### Growth accounting findings
- Labor was one of the most important drivers of economic growth in the 1970s and 1980s.
- The contribution of capital picked up from late 1990s and 2000s, when the role of labor declined.
- More recently, total factor productivity (TFP) growth played an important role in supporting growth, together with physical capital.
- Capital captures capital services provided by structures, machinery, transport equipment, and other assets (such as software and intellectual property products).

### Channels through which the pandemic can affect medium-term potential growth
- Capital growth:
  - Reflects the initial sharp contraction in investment and the subsequent impact on capital accumulation.
- Labor input growth:
  - Both the total employment ratio and hours per person declined sharply during the pandemic.
  - While the medium-term impact on labor inputs may be limited, structural challenges such as low female labor force participation and high youth unemployment rate could continue to weigh on medium-term growth.
- Human capital growth:
  - Expected to decline in the near term due to forgone on-the-job training.
  - The impact of schooling losses is expected to materialize over a longer horizon (beyond the five-year period analyzed here), especially for those in low-income households.
- TFP growth:
  - Could decline should the reallocation of labor from productive sectors (industries and services) to less productive sectors (such as agriculture) observed in the early stages of the pandemic prove durable.
  - Technology adoption including digitalization could play a mitigating role.

### Projection methodology and scenarios
- A production function approach is used to estimate medium-term potential growth under both baseline and upside scenarios, accounting for the impact of the pandemic, and reform dividends from structural reforms, respectively.
- Baseline scenario:
  - Potential growth is estimated to be about 6 percent in the medium term (2027).
  - Counterfactual without the pandemic is estimated at about 6.5 percent.
  - Capital and TFP are found to be the main drivers of medium-term growth, with relatively small contribution from labor inputs despite the sizeable demographic dividend.
- Upside (illustrative) scenario:
  - Assumes additional reforms in domestic and external finance that improve financial intermediation, increasing investment and capital accumulation.
  - Assumes further reforms in trade and product markets to attract higher foreign direct investment.
  - Assumes reforms to improve female labor force participation and reduce youth unemployment rate.
  - Assumes strengthening vocational training and education to enhance human capital accumulation.
  - Assumes creation of additional job opportunities in industries and services to facilitate labor shift toward more productive sectors and improve TFP growth.
  - Assumes further progress in digitalization to improve productivity.
  - Outcome: Successful implementation of broad-based structural reforms could raise medium-term potential growth to about 7 percent, more than offsetting the persistent impact of the pandemic.
- Uncertainty:
  - Uncertainty about potential growth estimates remains sizable under the current environment.

### Policy implications and reform priorities
- Improve financial intermediation to raise investment and capital accumulation (domestic and external finance reforms).
- Trade and product market reforms to attract higher foreign direct investment.
- Policies to raise labor participation, particularly:
  - Improve female labor force participation.
  - Reduce youth unemployment rate.
- Strengthen vocational training and education to enhance human capital accumulation.
- Create job opportunities in industries and services to shift labor to more productive sectors and boost TFP.
- Advance digitalization to mitigate TFP losses and support productivity gains.

*Source: Kotera and Xu (forthcoming) “Unleashing India’s Growth Potential”, IMF Working Paper.*

### Appendix II. Risk Assessment Matrix 1/

### Appendix II. Risk Assessment Matrix 1/

### External risks
- Intensifying spillovers from Russia’s war in Ukraine
  - Risk likelihood: High
  - Expected impact: Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility.
  - Policy response:
    - Diversify critical import sources.
    - Secure export market access through multilateral and bilateral trade agreements.
    - Accelerate transition towards renewable energy.
- Commodity price shocks
  - Risk likelihood: High
  - Expected impact: A combination of continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks causes recurrent commodity price volatility and social and economic instability.
  - Policy response:
    - Improve targeting of transfers to protect the most vulnerable and accelerate shift to renewable sources of energy.
    - Maintain exchange rate flexibility to absorb external shocks but intervene to prevent disorderly currency movements.
- De-anchoring of inflation expectations and stagflation
  - Risk likelihood: Medium
  - Expected impact: Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations.
  - Policy response:
    - Tighten fiscal and monetary policies to anchor inflation expectations and prevent second-round effects of commodity price shocks.
    - Increase transfers to the poor as needed to alleviate the impact of inflation.
- Abrupt global slowdown or recession
  - Risk likelihood: Medium
  - Expected impact: Global and idiosyncratic risk factors combine to cause a synchronized sharp growth slowdown, with outright recessions in some countries, spillovers through trade and financial channels, and downward pressures on some commodity prices.
  - Policy response:
    - Rebuild fiscal buffers and maintain strong external position to withstand external and domestic shocks.
    - Further enhance the environment for attracting FDIs and other stable non-debt creating capital flows as well as portfolio investments.
  - For EMDEs:
    - Risk likelihood: High
    - Expected impact: Sharp tightening of global financial conditions combined with volatile commodity prices leads to spiking risk premia, widening of external imbalances and fiscal pressures, and capital outflows.
    - Policy response:
      - Maintain exchange rate flexibility to absorb external shocks.
      - With adequate reserves, provide foreign exchange liquidity to prevent disorderly currency movements.
- Deepening geo-economic fragmentation and geopolitical tensions
  - Risk likelihood: High
  - Expected impact: Broadening of conflicts and reduced international cooperation accelerate deglobalization, resulting in a reconfiguration of trade, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial system, and lower potential growth.
  - Policy response:
    - Continue building capacity for the use of Indian rupee for international trade invoicing and settlement.
    - Play a stabilizing role in the region by promoting mutually beneficial cooperation.
- Cyberthreats
  - Risk likelihood: Medium
  - Expected impact: Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities.
  - Policy response:
    - Further improve protection of India’s digital assets against hacking attempts.
    - Maintain back-up copies of critical databases.

- Note on RAM likelihood definitions:
  - “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent.

### Domestic risks
- Large scale social discontent
  - Risk likelihood: Medium
  - Expected impact: Rising food and fuel prices, or the pursuit of difficult structural reforms could create social discontent, causing capital outflows, slowing economic growth, and giving rise to economically damaging policies.
  - Policy response:
    - Increase spending on social protection to the poorest segments.
    - Avoid sharp hikes of food and fuel prices or offset them with transfers to the poor.
    - Communicate clearly to explain the benefit from structural reforms and protect the most vulnerably from possible adverse impact.
- Local COVID-19 outbreaks
  - Risk likelihood: Medium
  - Expected impact: Emergence of more contagious vaccine-resistant variants forces new mobility restrictions or inhibit commerce. This results in extended supply chain disruptions, slower growth, capital outflows, and lower consumer and business confidence.
  - Policy response:
    - Increase public expenditure in health infrastructure, education, and social safety nets to mitigate the immediate impact of the pandemic and boost potential growth.
- Financial sector vulnerabilities
  - Risk likelihood: Medium
  - Expected impact: Tightening financial conditions can result in deterioration of bank and NBFC asset quality, which in turn would cause financial stress, limit credit provision, and weigh on long-term growth prospects.
  - Policy response:
    - Encourage banks to build capital buffers and to recognize problem loans.
    - Implement targeted prudential policies to reduce vulnerabilities.
    - Implement governance reforms in the PSB sector.
- Weakening fiscal position and materialization of fiscal risks
  - Risk likelihood: Medium
  - Expected impact: Further weakening of fiscal position leads to a sharp increase in financing costs and the realization of contingent liabilities, with broader implications for financial conditions and the financial system.
  - Policy response:
    - Enhance fiscal policy space through a credible medium-term fiscal consolidation strategy anchored on stronger revenue mobilization, increased expenditure efficiency and clear communication.
    - Reduce the interconnectedness between the sovereign and banks’ balance sheets.
- Natural disasters related to climate change
  - Risk likelihood: Medium
  - Expected impact: More frequent natural disasters deal severe damage to infrastructure and amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth.
  - Policy response:
    - Increase infrastructure investments to mitigate the impact of the natural disasters.
    - Accelerate transition to a carbon-neutral green economy.
    - Strengthen social safety net.
    - Support climate resilient agriculture.

*Source: Appendix II. Risk Assessment Matrix 1/ (India) — IMF staff assessment as presented in the source document.*

### Appendix III. Debt Sustainability Analysis — key findings
- Overall assessment
  - Debt sustainability risks have increased for India due to high debt levels and elevated gross financing needs amidst monetary policy tightening.
  - Public debt to GDP ratio is expected to increase from 83 percent of GDP in FY2021/22, remaining at around this level, before gradually declining from FY2025/26 onwards.
  - Gross financing needs remain high at around 15 percent of GDP over the next five years.
  - Debt dynamics remain favorable in the medium term and support a sustainable debt path.
  - Rising interest rates and slowing growth underline the need for a credible fiscal consolidation strategy to reduce public debt and regain fiscal space.
  - Mitigating factors: bulk of public debt are fixed rate instruments denominated in domestic currency and, due to regulatory requirements, predominantly held by residents.
  - Long-term debt dynamics depend on structural reforms to lift India’s growth potential and on maintaining fiscal discipline.
- Key historical and projected figures
  - India’s debt-to-GDP ratio peaked at 89 percent in FY2020/21 and is projected to remain elevated over the medium term.
  - Debt was 83.4 percent of GDP at the end of FY2021/22.
  - Nominal GDP growth is projected to increase to 15.4 percent in FY2022/23, before moderating to around 11 percent in the medium term.
  - Inflation is expected to decline 6.0 percent in FY2023/24.
  - Inflation is expected to reach around 4 percent by FY2027/28.
  - Effective interest rate around 7.6 percent (increases in policy rates reflected).
  - India’s debt-stabilizing primary deficit is estimated at 2.3 percent of GDP.
- Macroeconomic and fiscal assumptions
  - Growth assumptions: Growth projected at 6.8 percent on FY2022/23 and declining to about 6 percent by FY2027/28.
  - Fiscal assumptions: General government fiscal deficit projected to remain at around 10 percent of GDP in FY2022/23. Primary deficit projected to decline to 1.7 percent of GDP by FY2027/28.
- Risks and stress test results
  - Despite mitigating factors, debt sustainability risks have increased due to higher effective interest rates combined with high gross financing needs and slowing growth.
  - Gross financing needs estimated at 16 percent of GDP in the short term, before moderating to around 15 percent of GDP.
  - Nominal GDP growth expected to moderate to 11 percent of GDP over the forecast horizon.
  - Effective interest rates expected to increase from 7 percent in FY2021/22 to 7.7 percent by F2024/25 before moderating to 7.6 percent in the medium term.
  - Stress test — growth shock:
    - Output growth 3.4 percentage points lower than the baseline in FY2023/24 and FY2024/25.
    - Debt-to-GDP peaking at about 93 percent of GDP.
    - Gross financing needs reaching a peak of about 18 percent of GDP.
  - Combined macro-fiscal shock:
    - Incorporates same growth shock, a primary balance shock with a cumulative impact on the primary deficit of about 5 percent of GDP relative to baseline, and an interest rate shock that leads to a 315 basis points increase in interest rate relative to baseline through the medium term.
    - Debt increases to 95 percent of GDP in the medium term.
  - Contingent liability shock:
    - Central government non-financial SOEs hold 22 percent of GDP in assets, while public sector banks hold 60 percent of GDP in assets.
    - Debt would peak at just below 100 percent of GDP and would decline very gradually in the medium term.
- Vulnerabilities and thresholds
  - Vulnerabilities are high in the heat map, reflecting the high baseline debt-to-GDP ratio and gross financing needs.
  - Under all shocks, debt sustainability metrics signal high risks, reflecting the breach of the debt and gross financing risk thresholds of 70 percent and 15 percent of GDP, respectively.
  - Risks from market perception (measured by bond spreads) and external financing requirements (defined as the current account balance and amortization of short-term external debt) are assessed at a medium level of vulnerabilities.

*Source: Appendix III. Debt Sustainability Analysis (India) — IMF staff assessment as presented in the source document.*

### 6. Factors driving India’s favorable debt dynamics are eroding hence fiscal consolidation

### 6. Factors driving India’s favorable debt dynamics are eroding hence fiscal consolidation

### Debt dynamics and key numerical scenarios
- Growth is projected as "slowing to 6 percent of GDP" under the baseline.
- Under a constant primary balance of -1.7 percent of GDP (its projected level at the end of staff’s medium-term horizon), and an interest-rate and growth differential of 3.5 percentage points, gross public debt would decline to 70 percent of GDP (its average level before the pandemic) in about 17 years.
- A primary balance of about -0.5 percent of GDP would bring the debt-to-GDP ratio to 70 percent in about seven years under the same interest-rate and growth differential of 3.5 percentage points.
- If the interest-rate and growth differential is higher by 1 percentage point, bringing debt down to 70 percent in seven years would require a considerably larger fiscal consolidation—a primary balance of about 0.3 percent of GDP.
- These scenarios underscore the importance of further fiscal consolidation and fiscal discipline in the medium term to achieve a meaningful reduction in public debt.

### Dependence on growth and structural reforms
- Long-term debt dynamics depend critically on the economy’s growth potential.
- Strong implementation of the structural reform agenda is needed to support long-term growth prospects and to avoid placing a greater burden on fiscal policy to achieve debt sustainability.

### Debt sustainability analysis highlights (DSA outputs summarized)
- The DSA baseline targets a gross public debt reference point of 70 percent of GDP (noted as the average level before the pandemic).
- The analysis emphasizes the sensitivity of debt paths to:
  - the primary balance trajectory,
  - the interest-rate minus growth differential,
  - and the pace of structural reforms that affect growth potential.
- Stress testing (multiple shocks including primary balance, real GDP growth, real interest rate, real exchange rate, combined shocks, and contingent liability shocks) is used to assess how alternative macro-fiscal scenarios affect gross nominal public debt and public gross financing needs over 2022–2027.

### Capacity development and technical assistance (recent and planned)
- Fund capacity development (CD) activities with India have been scaled up in recent years, supported by a large financial contribution to SARTTAC.
- SARTTAC since February 2017:
  - delivered training to more than 6,000 officials (excluding webinars) at some 250 events,
  - conducted approximately 350 technical assistance (TA) missions.
- During the pandemic, engagement was largely virtual; in-person training at SARTTAC restarted in March 2022.
- In FY2021, SARTTAC provided extensive training and TA in areas including macro-fiscal forecasting, financial programming, national accounts, government finance statistics, revenue administration, public financial management, monetary operations, and financial sector supervision.
- A total of 751 Indian officials received training in FY2021 through SARTTAC, up 75 percent from the previous year.
- Ongoing/planned TA at subnational level includes PFM (cash and commitment control, fiscal reporting, budget execution and control), compilation and dissemination of government finance statistics, and a subnational Public Investment Management Assessment (PIMA) planned for Tamil Nadu.
- New regional courses and webinars addressed digitalization and climate change issues, nowcasting and near-term forecasting, gender inequality and macroeconomics, climate risk in the financial sector, and cybersecurity. Cohort training for civil servants was provided through LBSNAA and revenue administration training supported the Central Board of Direct Taxes’ learning program. SARTTAC also supported RBI training needs.

### Uptake of previous IMF advice and policy implications
- Monetary policy: recalibration and tightening has been appropriate as recovery gained momentum and in response to external shocks.
- Fiscal policy: the fiscal deficit narrowed in FY2021/22 after deteriorating sharply during the pandemic, reflecting recovery and phasing out of pandemic-related expenditures. Nonetheless, medium-term fiscal consolidation has been delayed by pandemic waves.
- Staff advice: a credible and clearly communicated medium-term fiscal consolidation remains critical to enhance policy space, reduce crowding out, and facilitate a private sector‑led recovery.
- Financial sector: pandemic-era support was important, but most measures have been discontinued. Policies are now shifting toward facilitating the exit of non-viable firms, encouraging banks to build capital buffers and recognize problem loans. Steadfast implementation of financial sector reforms, including on public sector banks (PSBs), is urgent to support a more durable and inclusive recovery.

*Source: IMF staff.*

### 5. The authorities’ responses to external sector developments have been in line with past

### 5. The authorities’ responses to external sector developments have been in line with past Fund advice

### Response to external shocks and trade/investment integration
- The RBI appropriately relied on exchange rate flexibility, while foreign exchange reserves were used to smooth excessive market volatility.
- Some progress on further liberalization to facilitate trade and investment has been made, but more is needed to reduce trade barriers and promote India’s integration in GVCs.
- Privatization milestones achieved: sale of Air India and listing of The Life Insurance Corporation of India; other privatizations delayed.
- India announced the sale of two state-owned banks in the FY2021/22 budget; the sales are yet to happen and may require amendments to the Bank Nationalization Act.
- The FY2022/23 Budget did not announce any new privatization initiatives.
- Increased use of digital government services is a significant governance reform; the launch of the single window system is welcome and should be expanded to further reduce bottlenecks.
- Further strengthening of the judicial system, in line with previous staff advice, is needed.

### Structural reforms — implementation challenges
- Passage of four new labor codes should help enhance inclusive and sustainable growth; implementation, which is the responsibility of states, has been delayed.
- Agricultural reforms, essential for modernizing the sector and adapting to climate change, remain in planning stages.
- The increased use of digital government services and the single window system are positive governance developments, but broader implementation and judicial strengthening remain priorities.

---

### Appendix VI. Options for Central Bank Digital Currency for India

### Objectives and general assessment
- The Indian authorities have announced the launch of a Central Bank Digital Currency (CBDC), which is expected to help achieve several objectives, including improving the domestic payment system and facilitating cross-border transactions.
- The extent to which CBDC can deliver on these objectives depends on selected design features; different characteristics imply different advantages and risks.
- Presence of potentially competing private providers could limit benefits and make it more difficult to justify the cost of adopting a CBDC.

### A. Different CBDCs for Different Goals

CBDC to Improve the Domestic Payment System
- A retail CBDC, accessible to households and firms, appears most relevant to improve the domestic payment system.
- A wholesale CBDC would provide limited advantages compared with central bank reserves for domestic transactions, though it could allow new forms of conditional payments and reduce settlement risks.
- Among operational models, the intermediated model—where the central bank issues digital money but delegates functions to financial intermediaries interacting with end users—is mostly being explored.
  - Example: RBI could handle issuance, settlement, maintenance, and R&D; distribution and client service could be undertaken by the private sector.
  - Success depends on offering the right incentives for banks to cooperate with the RBI.
  - A CBDC could generate beneficial competition in the private payments sector and advance financial inclusion.
- Remuneration of a CBDC may not be required initially given Indian macroeconomic conditions.
  - A remunerated retail CBDC could in theory help overcome the zero-lower bound, but that issue appears more prominent in advanced economies with a lower natural rate.
  - A digital version of physical cash could be a good first step; remuneration could be added later if deemed optimal.
- Potential gains in currency management are limited:
  - Market analysts estimate overall operating costs associated with physical cash amount to about $3.4 bn, which amounts to about 0.1 percent of GDP. This represents a theoretical upper bound since RBI does not aim to end cash circulation.
  - Costs of managing a CBDC are not currently available.
- Uncertain improvement to payments efficiency given the success of private providers on UPI:
  - Private providers offer real-time payments at relatively low cost for peer-to-peer and peer-to-merchant transactions and allow offline transactions.
  - About 80 percent of retail transactions now take place via the UPI platform.
  - Around 400 million people are estimated to own feature phones but no smartphones, making offline capability important.
- Lower-than-expected demand for a retail CBDC is possible unless it offers clear advantages over private providers.

CBDC to Facilitate Cross-Border Payments
- International payments are slower, costlier, less transparent, and less accessible compared with domestic payments; India faces these challenges, possibly at larger magnitude given the high volume of remittances.
- A CBDC could be used to enhance cross-border payments; both retail and wholesale CBDC could address inefficiencies for retail and wholesale transactions.
- International cooperation is key to ensure compatibility between national CBDCs.
  - India could contribute to international efforts and establish bilateral agreements with major economic and financial partners in the region.
  - Collaboration with domestic financial intermediaries would be warranted to expand access.
- Remuneration is not necessary as long as the CBDC is cheaper than alternative international payment means.
- A relevant risk is lower-than-expected demand for CBDC if transactions to/from India are limited; ongoing efforts to connect UPI platforms to systems in other countries could affect CBDC demand for cross-border transactions.

### B. Other Risks and Final Considerations
- Adoption of a CBDC involves risks related to banking disintermediation, capital flow management, operational disruption, and legal foundations.
- It is not clear to which extent authorities can guarantee the same degree of anonymity that physical cash provides; full anonymity would generally not be compatible with AML/CFT.
- Safeguards governing collection, use, and sharing of confidential information could partially protect privacy but financial integrity implications should be carefully considered.
- Operational costs and reputational risks are significant; there are no current estimates for costs to develop, establish, and maintain CBDC infrastructures.
- Risks handling personal data and cyber-attacks could harm the credibility of a CBDC-issuing central bank.
- A relatively low demand combined with high implementation costs could negatively affect the central bank’s reputation.
- Recommendation: adopt a prudent and gradual implementation approach.
- Priority suggestion: efforts should prioritize a CBDC that facilitates cross-border payment, as domestic payments are already efficient.
- Capacity for analysis and testing of different CBDC types should be enhanced, with particular attention to evaluating incentives for public adoption.
- Clear and transparent communication about expected benefits, costs, and risks should support the process to align stakeholders’ and authorities’ expectations and mitigate reputational risks.

---

### Appendix VII. Inequality and Poverty in India: Impact of the Pandemic and Policy Response

### Recent trends in poverty and inequality
- India has made significant progress in reducing poverty in recent decades.
  - World Bank estimates suggest poverty declined from 40 percent in 2004 to 22.5 percent in 2011 — the year of the latest official household expenditure survey.
  - World Bank estimates differ from official measures which suggest poverty was around 12.2 percent in 2011-12.
- Various estimates suggest continued poverty reduction since 2011, albeit with uncertainty.
- Existing estimates of inequality based on recent, albeit unofficial household surveys point to a modest decline over the last decade, after increasing during preceding decades.

### Pandemic impact on poverty and inequality
- The economic downturn associated with the COVID-19 pandemic is estimated to have temporarily increased poverty and inequality in the near term.
- A privately provided nationally representative household survey (CMIE’s CPHS), adjusted with NFHS data for representativeness, suggests:
  - The number of people with daily consumption expenditures below 1.9 $PPP increased sharply in 2020 but declined toward the end of 2021 to close to pre-pandemic levels.
  - All income groups experienced income declines during the pandemic, with larger impacts on lower income groups, suggesting a temporary increase in income inequality.
  - Consumption inequality temporarily improved because top earners cut consumption by a larger magnitude than bottom earners.
- Estimated determinants of becoming poor (probability of becoming below 3.2 $PPP at least one month during Apr-Dec 2020):
  - Higher probability for households headed by young and less educated persons.
  - Higher probability for households headed by casual workers and workers with temporary contracts.
  - Employment in physical or manual jobs associated with slightly higher incidence of poverty.
  - Conducting learning activities and having savings had a positive impact on consumption, preventing a fall below the poverty line.

### Policy response and simulations
- The government expanded social assistance during the pandemic, including additional food subsidies, cash transfers, and the rural employment guarantee scheme.
- Simulation approach: estimate monthly per capita value of food subsidies and add to household consumption expenditures, targeting the bottom 50 percent and 75 percent of households in urban and rural areas respectively, using current month’s income distribution to determine eligibility.
- Impact of food subsidies is uncertain and depends on assumptions on leakage of benefits.
- Preliminary estimates suggest that food subsidies significantly lowered the increase in poverty during the pandemic, by about 30-40 percent based on the 1.9 $PPP threshold.

*Source: IMF staff report content provided in the supplied PDF chapter.*

### References

### 1indea2022001 - References

### References (selected citations)
- Bhalla, S., K. Bhasin, and A. Virmani, 2022, “Pandemic, Poverty, and Inequality: Evidence from India”, IMF Working Paper No: WP/22/69, April 2022.
- Bhalla, S. and T. Das, 2022, “What does the evidence show? Consumption, poverty and the labour market in India    -2011/12-present”, National Council of Applied Economic Research.
- Carta, F., and M. De Philippis. 2021, “The impact of the COVID-19 shock on labour income inequality: Evidence from Italy”, Bank of Italy Occasional Paper, 606.
- Chetty, R., J.N. Friedman, N. Hendren, and M. Stepner, 2020, “The economic impacts of COVID-19: Evidence from a new public database built using private sector data”, National Bureau of Economic Research.
- Galasso, V., V. Pons, P. Profeta, M. Becher, S. Brouard, and M. Foucault, 2020, “Gender differences in COVID-19 attitudes and behavior: Panel evidence from eight countries”, Proceedings of the National Academy of Sciences, 117(44), 27285-27291.
- Mahlernishant, D. G., N. Yonzan., R. Hill., C. Lakner., H. Wu., and N. Yoshida. 2022, “Pandemic, prices, and poverty”, World Bank Blogs, April 13 2022.
- Roy, S. S. and R. Van Der Weide, 2022, “Poverty in India Declined over The Last Decade but not as Much as Previously Thought”, Policy Research Working Papers, April 2022.
- Stantcheva, S. 2022, “Inequalities in the Times of a Pandemic”, National Bureau of Economic Research.
- Estefania Flores, Julia, Davide Furceri, Swarnali Hannan, Jonathan D. Ostry, and Andrew K Rose, 2022. “A Contribution to the Measurement of Aggregate Trade Restrictions.” —IMF Working Paper 2022/001, International Monetary Fund, Washington, DC.

### Evolution of India’s Trade Policy — key findings and timeline
- 1990–2010: India’s global trade integration increased dramatically.
  - India’s average import tariff rate decreased from over 80 percent in 1990 to about 13 percent in 2008.
  - India’s trade openness (ratio of external trade in goods and services to GDP) increased from 15 percent 40 years ago to about 56 percent in 2012.
  - Share of foreign value added (FVA) in India’s exports reached nearly 17 percent by 2011.
- 2000s: Regional and bilateral FTAs were signed.
  - India joined Asia-Pacific Trade Area (APTA) in 2005 and South Asia Free Trade Area (SAFTA) in 2006.
  - Agreements with MERCOSUR in 2009 and an FTA with ASEAN in 2010.
  - Bilateral FTAs negotiated with Afghanistan, Australia, Bhutan, Chile, Japan, Malaysia, Nepal, Singapore, Sri Lanka, South Korea, and Mauritius.
- 2010s–2021: Policy shift toward self-reliance and “Make in India”.
  - Simple average import tariff rose from about 13 percent in 2015 to about 18 percent in 2021.
  - Trade openness ratio declined to a low of 38 percent in 2020.
  - Integration in GVCs (share of FVA in exports) broadly stable but stalled; non-tariff barriers remained elevated and above peer countries.
  - India did not join RCEP at its formation in 2020.
- Tariff asymmetry in 2020–2021:
  - India’s average trade-weighted import tariff was about 12.6 percent in 2020.
  - Simple average applied import tariff for MFN was 18.3 percent in 2021.
  - India’s applied weighted tariff faced in major markets was 2.9 percent in 2020.
- Foreign Trade Policy (FTP) 2015–2020 (extended to September 2022):
  - FTP aimed to increase India’s share of global trade from about 2.1 percent to 3.5 percent and double exports to US$900 billion by 2020.
  - Incentive schemes included:
    - Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS): tax and customs duties rebates for up to 5 percent of export value.
    - Export Promotion Capital Goods (EPCG) scheme: allowed imports of capital goods at zero customs duty.
    - Interest Equalization Scheme (IES): provided capital loans to export producers at subsidized low interest rates of 2-3 percent.
- Scheme adjustments and WTO compliance (from 2021):
  - MEIS effectively replaced by RoDTEP; SEIS and some other schemes suspended in part due to WTO rulings.
  - Government engaged industry consultations to develop new export promotion schemes for the new trade policy.
- Export infrastructure and direct-output incentives:
  - Trade Infrastructure for Export Scheme (TIES) (launched 2017) focused on export infrastructure, logistics, quality, and export facilitation (e.g., border trading posts, quality-testing units, certification labs, export warehousing and packaging, cold storage, trade promotion centers, dry ports, SEZs, ports and airports cargo terminals).
  - Production-linked Incentive (PLI) schemes (introduced March 2020) initially targeted mobile manufacturing and electronic components, pharmaceutical, and medical device manufacturing; expanded to multiple sectors.
    - PLIs provide incentives (subsidies) amounting to up to 20 percent of the incremental increase in sales of eligible products (compared with the base year) for a 4-6-year period.
- New bilateral/regional agreements in 2022 and ongoing negotiations:
  - 2022: Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE); interim Economic Cooperation and Trade Agreement (ECTA) with Australia.
  - Active negotiations with Canada, the UK, the EU, and other countries.
- Export restrictions and trade measures in 2022 in response to inflation and food/energy security concerns:
  - Restricted wheat exports in mid-May 2022, then relaxed to allow shipments backed by letters of credit already issued and to countries requesting supplies for food security (e.g., Egypt).
  - Cap on sugar exports in May 2022 to ensure domestic availability.
  - Raised import duties on gold from 10.75 percent to 15 percent in July.
  - Restricted wheat flour export by requiring exporters to obtain permissions.
  - Increased export duties on fuel exports and required fuel product exporters to supply the domestic market; oil companies exporting gasoline (or diesel) required to sell to the domestic market the equivalent of 50 percent (for diesel, 30 percent) of the amount sold overseas in FY2022/23.
  - September 2022: restricted export of broken rice and introduced a 20 percent duty on exports of all other varieties of rice except basmati and parboiled rice.
- Russian oil imports and price discounts (2022):
  - Discount on Russian oil URALS compared to BRENT increased to about 30-35 US$/bbl from about 2-3 US$/bbl in regular times.
  - Share of Russian crude oil in India’s total volume of oil imports increased from 1 percent in 2021 to about 20 percent in June 2022.
  - This could have reduced India’s average-weighted oil import price by up to 6-7 US$/bbl in that month.
  - Ministry of Commerce data: Russia’s share in India’s crude oil imports increased from 2.2 percent in 2021 to 16.8 percent in June 2022.
  - Illustrative calculation note: if India imports 80 percent of oil at the international price benchmark and remaining 20 percent at a price discount of 30 US$/bbl, then the average-weighted oil import price will be by 6 US$/bbl less than the international price benchmark.
- Policy recommendation / overarching assessment:
  - Further tariff reduction (especially on intermediate goods) and lowering of non-tariff barriers (including for services imports), alongside investment regime liberalization and comprehensive structural reforms, could deepen integration in GVCs, attract FDI, boost exports, and support resilient growth.

### Trade and tariff data sources (as cited)
- WTO, World Tariff Profiles 2022; and WTO databases.
- Thomson Reuters; https://www.neste.com/investors/market-data/urals-brent-price-difference#8eaa100b.

### IMF — Fund relations and selected financial statistics (as of September 30, 2022)
- Membership Status: Joined December 27, 1945; Article VIII.
- General Resources Account:
  - Quota: 13,114.40 SDR Million (100.00 percent Quota)
  - Fund Holdings of Currency (Holdings Rate): 9,354.29 SDR Million (71.33 percent)
  - Reserve Tranche Position: 3,770.41 SDR Million (28.75 percent)
- SDR Department:
  - Net cumulative allocation: 16,547.82 SDR Million (100.00 percent Allocation)
  - Holdings: 13,658.43 SDR Million (82.54 percent)
- Outstanding Purchases and Loans: None
- Financial Arrangements (historical):
  - Stand-By 10/31/91–06/30/93: Amount Approved 1,656.00 SDR Million; Amount Drawn 1,656.00 SDR Million.
  - Stand-By 01/18/91–04/17/91: Amount Approved 551.93 SDR Million; Amount Drawn 551.93 SDR Million.
  - EFF 11/9/81–05/01/84: Amount Approved 5,000.00 SDR Million; Amount Drawn 3,900.00 SDR Million.
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/interest: 2022: 12.87; 2023: 58.20; 2024: 58.23; 2025: 58.17; 2026: 58.20.
  - Principal: 2022–2026: 0.00 each year.
  - Total: 2022: 12.87; 2023: 58.20; 2024: 58.23; 2025: 58.17; 2026: 58.20.
- Exchange Rate Arrangement:
  - Classified as floating. The exchange rate of the rupee is determined in the interbank market, with Reserve Bank of India (RBI) intervening at times to modulate excessive volatility and maintain orderly conditions.
- Article IV Consultation:
  - Previous Article IV consultation discussions were held in July 2021. The Staff Report (IMF Country Report No. 21/230) was discussed by the Executive Board on September 17, 2021.
- FSAP Participation:
  - Concluding meetings for the latest FSAP Update held in Delhi and Mumbai in July 2017; FSSA Update report published December 2017 (Country Report No. 17/390).
  - Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision issued in January 2018 (Country Reports No. 18/4).

*Source: 1indea2022001 - References (IMF staff report and appended material).*

### Appendix IV of the staff report.

### Appendix IV of the staff report

### Resident Representative
- A resident representative’s office was opened in November 1991.
- Mr. Luis Breuer has been the Senior Resident Representative since July 2019.

### Information on the activities of other IFIs
- World Bank: http://www.worldbank.org/en/country/india/overview
- Asian Development Bank: Asian Development Bank and India: Fact Sheet (adb.org)

### I. Assessment of Data Adequacy for Surveillance (As of October 1, 2022)
General
- Data provision is broadly adequate for surveillance.
- Upgrading and expanding statistics would help policy formulation.

National Accounts and employment statistics
- In January 2015 the Central Statistical Office (CSO) released a new series of national accounts, with base year 2011/12.
- Revisions reflected a review of source data and compilation methods, and implementation of the 2008 System of National Accounts.
- For current price estimates, data sources provide adequate coverage of economic activities; methodology is broadly consistent with international standards and best practices.
- Weaknesses and issues:
  - An indirect -tax -based extrapolation of trade turnover value from the base year does not provide an accurate gauge of growth of economy -wide value added from trade.
  - Supply-side data are deemed to be of better quality than expenditure-side data.
  - Weaknesses in the deflation method used to derive value added.
  - Compilation of constant price GDP deviates from conceptual requirements of the national accounts, in part due to the use of the Wholesale Price Index (WPI) as a deflator for many economic activities.
  - The appropriate price to deflate GDP by type of activity is the Producer Price Index (PPI), which is under development.
  - Large revisions to historical series, relatively short time span of the revised series, major discrepancies between GDP by activity and GDP by expenditure, and lack of official seasonally-adjusted quarterly GDP series complicate analysis.
  - Long-standing deficiencies in employment data: they cover the formal sector and informal sector but are available only with a substantial lag.

Price statistics
- Early 2011: an all-India Consumer Price Index (CPI) with updated weights was released, covering rural and urban India, with 2009/10 as a base year. Separate urban and rural CPI series also published.
- Early 2015: CPI weights updated using 2011/12 expenditure data and CPI series revised from January 2015.
- The CPIs are published with a lag of about one month.
- Four other CPIs exist for narrow consumer categories (industrial workers, urban and non-manual employees, agricultural laborers, and rural laborers); with the exception of the industrial workers’ CPI (based on weights from 2016), the other indices are based on weights that are over ten years old.
- WPI weights are from 2011/2012.
- A recent TA mission supported development of a new PPI for agricultural and industrial activities, with a target release date of December 2023.
- RBI publishes a quarterly House Price Index (HPI) based on transaction-level data from housing registration authorities in ten major cities; geographic coverage remains limited; price data for commercial real estate are not available.
- Labour Bureau, Ministry of Labour and Employment has started producing a series covering rural wage data; economy-wide wage data are scant.

Government finance statistics
- Ministry of Finance (MoF) is responsible for compiling and disseminating Government Financial Statistics (GFS).
- Under the G-20 Data Gaps Initiative, authorities engaged on expanding GFS reporting coverage to include state government and to compile quarterly consolidated general government data; these have not been formalized.
- Discussions on general government operations yet to include extra-budgetary funds, local governments, and social security funds.
- Scope to improve analytical usefulness of presentation of fiscal accounts from which GFS are derived.

Monetary and financial statistics
- RBI website and RBI Bulletin publish a wide array of monetary and financial statistics: reserve money and components, RBI’s survey, monetary survey, liquidity aggregates (outstanding amounts), interest rates, exchange rates, foreign reserves, results of government securities auctions.
- In 2011 RBI started publishing a weighted-average lending interest rate and other lending rates at annual frequency.
- Frequency and quality of data dissemination have improved substantially in recent years.
- RBI reports data on several series of the Financial Access Survey (FAS), including mobile and internet banking, mobile money, gender-disaggregated data, and indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) adopted by the UN to monitor Target 8.10 of the SDGs.
- RBI reports monetary data to STA in non-standard format and provides "test" data using standardized reporting forms; test data lack sufficient details (e.g., instrument, currency and counterparty sector breakdowns) to construct a complete and analytically useful picture consistent with the Monetary and Financial Statistics Manual.
- Data reported cover depository corporations only; other financial corporations such as insurance corporations, pension funds, and investment funds are not covered.
- RBI reports 13 core Financial Soundness Indicators (FSIs) and nine additional FSIs for deposit takers as well as one core and two additional FSIs on real estate markets quarterly for publication on the IMF’s FSI website.
- RBI could improve coverage of additional FSIs to include other sectors: other financial corporations, nonfinancial corporations, and households.

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

External sector statistics
- Concepts and definitions broadly in line with BPM6.
- Trade data have valuation, timing, and coverage problems:
  - Imports of goods in the balance of payments are registered in c.i.f. prices while BPM6 requires f.o.b. pricing.
  - Data on trade in goods prices, volumes, and composition are not regularly available on a timely basis.
- External debt statistics are available on a quarterly basis with a one quarter lag.
- Estimates of short-term external debt are presented on an original maturity basis; short-term maturity attribution on a residual maturity basis is available quarterly (and includes residual maturity of medium- and long-term nonresident Indian accounts).
- IIP statistics cover sectors prescribed in BPM6 and are disseminated within three months of the reference period for quarterly data.
- Coverage of direct investment positions data is hampered by the absence of appropriate legal or institutional authority.
- India disseminates monthly the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS.
- Weekly statistical supplement on the RBI web site provides more up-to-date information on variables such as total foreign reserve assets, foreign currency assets, gold, and SDRs.
- Footnote: The IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences.

### II. Data Standards and Quality
- Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since December 1996.
- Uses flexibility options on the timeliness of employment, unemployment, and general government operations.
- A Report on Observance of Standards and Codes—Data Module; Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework was published on April 2, 2004.

### India: Table of Common Indicators Required for Surveillance (As of October 1, 2022)
- Exchange Rates
  - Date of latest observation: 10/01/22
  - Date received: 10/01/22
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: 09/23/22
  - Date received: 09/30/22
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: W
- Reserve/Base Money
  - Date of latest observation: 09/23/22
  - Date received: 09/28/22
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: W
- Broad Money
  - Date of latest observation: 09/09/22
  - Date received: 09/22/22
  - Frequency of Data: BW
  - Frequency of Reporting: BW
  - Frequency of Publication: BW
- Central Bank Balance Sheet
  - Date of latest observation: August 2022
  - Date received: 09/16/22
  - Frequency of Data: W
  - Frequency of Reporting: W
  - Frequency of Publication: W
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: 09/09/22
  - Date received: 09/22/22
  - Frequency of Data: BW
  - Frequency of Reporting: BW
  - Frequency of Publication: BW
- Interest Rates
  - Date of latest observation: 10/01/22
  - Date received: 10/01/22
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- Consumer Price Index
  - Date of latest observation: August 2022
  - Date received: 09/12/22
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing – General Government
  - Date of latest observation: 2021/22
  - Date received: 02/16/22
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government
  - Date of latest observation: August 2022
  - Date received: 09/30/22
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Date of latest observation: Apr-Jun 2022
  - Date received: 09/30/22
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance
  - Date of latest observation: Apr-Jun 2022
  - Date received: 09/29/22
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Exports and Imports of Goods and Services
  - Date of latest observation: August 2022
  - Date received: 09/14/22
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of latest observation: Apr-Jun 2022
  - Date received: 08/31/22
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross External Debt
  - Date of latest observation: Apr-Jun 2022
  - Date received: 09/29/22
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- International Investment Position
  - Date of latest observation: Apr-Jun 2022
  - Date received: 09/30/22
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

### Statement by Krishnamurthy Venkata Subramanian, Executive Director for India; Sanjay Hansda, Senior Advisor to Executive Director; and Simanchala Dash, Advisor to Executive Director (November 28, 2022)
1. The Indian Authorities thank the Staff for constructive discussions and convey their appreciation to the Management and the Staff for their continued engagement. The Authorities look forward to continuing this healthy partnership. This BUFF statement focuses on providing a complete and true picture of the Indian economy.

2. This statement brings together our current perspectives as well as those gathered from last year’s Article IV discussions. Like every other economy in the world, the Indian economy was impacted adversely by the pandemic, the conflict in Europe, the imposition of sanctions, and the synchronized tightening of monetary policy in advanced economies. However, it witnessed a V-shaped recovery in 2021-22 despite the devastating 2nd wave in Q1 and the 3rd wave in Q4. This was largely due to robust and swift policy initiatives by the Authorities. In the first quarter of the current year 2022-23, the economy has posted an impressive 13.5% growth, notwithstanding the drag from net exports in the wake of the global slow-down.

3. Driven by the surge in crude oil and other commodity prices, and adverse supply shocks emanating from geopolitical tensions, inflation has persisted at elevated levels. In a cross-country framework, we observe a strong positive relationship between 3-year growth and change in inflation, implying that fiscal stimulus, which is now causing unprecedented inflation world-wide, drove 3-year GDP growth in all countries barring India and Germany. India thus stands out as the positive outlier because of supply-side measures and the sharply targeted demand-side stimulus. India’s fiscal stance during the pandemic was a calibrated expansion in public expenditures with a sharp focus on boosting capex to strengthen the supply side, which also helped to restrain inflationary pressures. The economy increasingly adapted to the new remote work environment, beginning with COVID, with enhanced use of digitalization.

4. The policy package that included fiscal, monetary, and financial measures, which provided support to businesses and households during the pandemic, has turned even more focused and targeted now. India, in contrast to most other economies, continued its agenda of structural reforms during the pandemic and beyond. These wide-ranging structural reforms, which are focused on enhancing the efficiency of all factor markets, include labour reforms, an ambitious program of privatization and asset monetization.

5. While the IMF expects GDP to grow at 6.8% in 2022-23 and 6.1% in 2023-24, RBI projects it to grow at 7.0% and 6.5% respectively. The ongoing structural reforms also suggest that the economy will continue to perform. The September 2022 IIP (Index of Industrial Production) data is now above the pre-pandemic level.

6. Headline consumer price inflation is projected at 6.7% during 2022-23 and is expected to soften to 5.8% by Q4 of 2022-23 and further to 5.0% in Q1:2023-24 [currently at 6.8% y-o-y in October 2022]. Thus, after the blip set in recent months (supply disruptions, oil prices), inflation is projected to remain above the upper bound of the Reserve Bank’s target of 4 (+/- 2)% in Q3:2022-23. Inflationary trends are being closely monitored, and the monetary authorities have decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Structural Reforms (paragraphs 7–8)
7. The Government has been steadfast in pursuing structural reforms even during the pandemic. Wide-ranging structural reforms are currently being implemented by the Government. Expansion of domestic production-linked incentive schemes to labour-intensive and green sectors, state renewable purchase obligations, and agriculture and labour-market reforms are expected to support sustainable and equitable growth. Labour market reforms are expected to improve labour market functioning, support formalization, enhance female participation, and expand social security benefits for workers.

8. Authorities agree with Staff observations that advancing agriculture and land reforms would address market distortions, increase efficiency, and improve productivity. Implementation of climate-friendly policies is critical for long-term structural reforms towards achieving green and inclusive growth. India continues to play a leading role in the implementation of the climate goals under the Paris agreement. India has recently updated its NDCs (Nationally Determined Contributions) and seeks to achieve Net Zero status by 2070. The drive towards renewable sources of energy and reducing carbon footprint in the economy has yielded significant results on the ground. However, the Authorities believe that implementation of the Paris Agreement on climate change must be based on the principles of equity and common but differentiated responsibilities and respective capabilities, as agreed to, and be accompanied by climate financing and technology transfer. Further, the idea of a carbon price floor, mooted by the Staff, may not be a feasible option as it has huge welfare implications, particularly considering the high indirect fuel taxes on carbon in India.

Fiscal Issues (paragraph 9)
9. The Authorities largely agree with the Staff for maintaining an accommodative fiscal policy stance in the near term until uncertainties ease, and to have a credible medium-term fiscal consolidation plan, including amendments to the FRBM Act thereafter, to maintain market confidence and fiscal space. The central government fiscal deficit is budgeted at 6.4% of GDP in the current year and the Authorities are strongly committed to reducing it to 4.5% of GDP by 2025-26. Authorities do not share the staff’s view that India’s fiscal space is at risk. Public debt remains very much sustainable given favourable growth dynamics and the strong commitment to consolidation. Given real growth of about 7%, inflation of about 4% expected this decade (i.e., nominal growth of about 11%), and interest rate of about 7%, the r-g differential will be sharply negative, which will drive the debt/GDP ratio down sharply. In fact, the Economic Survey 2020-21 showed that in a worst-case scenario where the real growth is only 4% in the next 10 years, public debt is sustainable. The results also showed that even at high primary deficits, low real growth, and high nominal interest rates, India’s debt will remain sustainable. Debt sustainability risks are also mitigated as the bulk of the public debt is domestic currency denominated, contracted at fixed rates and held by residents. Overall, revenue performance has been buoyant in the current year driven by better compliance. Streamlining of GST with an e-invoice system, GST audits, closer scrutiny of returns and rate rationalization are reflected in augmented tax revenues. Personal income tax and corporate tax collections have been strong.

- Monetary Policy

*Appendix IV of the staff report (1indea2022001) — IMF staff report appendix.*

### 10. RBI has tightened monetary policy in view of persistent inflationary pressures – a

### 10. RBI has tightened monetary policy in view of persistent inflationary pressures – a

### Monetary policy tightening and exchange rate
- Cumulative increase of 190 bps in the policy repo rate (currently at 5.90%).
- A 50-bps increase in the cash reserve ratio.
- Discontinuation of the government securities purchase program.
- Systemic liquidity moderated due to capital outflows.
- The Reserve Bank of India would "stay the course in its continued focus on withdrawal of accommodation to ensure that inflation remains within the target going forward," despite:
  - Spillover from advanced economies’ monetary policy actions.
  - Difficulties with consistent forward guidance in a highly uncertain environment.
- Limited Rupee depreciation vis-à-vis USD in 2022 so far as compared with many other emerging market currencies.
- Exchange rate flexibility will "continue to be the first line of defence in absorbing external shocks, with interventions limited to addressing disorderly market conditions."
- Assessment: "India’s external position remains sufficiently strong with the current level of reserves and strong FDI and portfolio flows to withstand external shocks in the near term."
- Current staff projection of CAD at 3.5% of GDP is considered "on the higher side" by the Authorities.
- Authorities’ view: moderation in crude oil prices (Indian basket below US$ 100 since August 2022), and resilience of services exports and remittances may keep the CAD within 3% of GDP in 2022-23.

### CBDC pilots and payments infrastructure
- RBI launched the first pilot project in CBDC - Wholesale segment on November 1, 2022, for settlement of secondary market transactions in government securities.
- Expected benefit: settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.
- Future focus: other wholesale transactions, and cross-border payments will be the focus of future pilots, based on learnings from this pilot.
- CBDC - Retail segment is planned for a launch shortly.

### Financial sector resilience and supervision
- Financial sector described as "robust and resilient" with banks well-capitalized and a strong regulatory framework for supervision.
- Credit quality indicators have improved, reflecting stronger corporate and financial sector balance sheets and overall resilience.
- India’s insolvency regime emphasizes resolution rather than liquidation.
- Asset quality review is an ongoing supervisory feature for early detection and identification of potential and actual NPAs, which are then sought to be resolved under the IBC (Insolvency and Bankruptcy Code).
- Authorities’ position: concerns expressed by staff that "incentives to recognize and address problem loans at an early stage are crucial’ to ‘structurally improve banks’ asset quality” are unfounded because "there are already robust systems in place to identify/recognize NPAs."
- On the 'pre-pack' route for MSME resolution: Authorities do not agree with staff that slow progress is due to a lack of resources; rather "there have been hardly any filings under this route."
- Staff concern on banks’ exposure to sovereign bonds in a rising interest rate scenario is seen as "overstretched" given:
  - Substantial HTM holding.
  - Mitigating effect of investment fluctuation reserves with banks.
- New scale-based regulatory framework for NBFCs, effective October 2022, aims to "further reduce potential regulatory arbitrage between banks and NBFCs."
- Digitalisation, including offline and feature-phone-based payments, expected to improve access to financial services, but Authorities believe fintech advances "need to be consistent with the regulatory framework, containing potential vulnerabilities."

### Pandemic response, poverty alleviation, and social protection
- Pandemic led to a decline in economic activity, affected inequality, and hurt the poor the most.
- Authorities significantly expanded income support to combat expected poverty increase:
  - Food subsidies increased five times in FY 2020-21 (April-March) from the pre-pandemic 2019-20 level.
  - Food subsidies declined in 2021-22 but remained nearly three times its pre-pandemic level.
  - In 2022-23, food subsidies were budgeted to decline marginally; however, with the extension of the free food program to end-December 2022, the level of support is expected to sustain in 2022-23.
- Implementation of One-Nation-One-Ration Card policy: the bottom two-thirds of the population eligible for food subsidy could access it from anywhere in India rather than be restricted to the state of their registration — especially beneficial for migrant and poor workers.
- Authorities' assessment: given large human capital and limited pandemic-related learning losses, they "do not see any impact on potential growth over the medium term," while policies are being implemented to ensure catch-up for learning losses.
- Observation: Fund’s Article IV report may not fully reflect the "significant support provided by the government to mitigate the impact of the COVID-induced declines in economic activity and their effect on poverty."

### Data, risk assessment, and measurement issues
- Authorities express reservations about the data used to estimate poverty, employment, and inequality:
  - Poverty estimates in the report rely on the World Bank methodology using the URP (i.e., uniform resource period) method.
  - Official estimates use the MMRP (i.e., modified mixed reference period) method.
  - Although weights from unofficial data sources have been adjusted, reliance on URP raises concerns.
- Under the risk assessment matrix, regarding "large-scale social discontent," Authorities indicate "there is no such evidence of inflation causing social discontent in India," noting India has not experienced hyperinflation and "even during the current pandemic, inflation has not increased abruptly reflecting coordinated monetary-fiscal measures."

### Potential growth and labour market measurement
- Staff estimates of potential growth:
  - About 6% in the medium term in the baseline scenario.
  - 7% in the upside scenario.
- RBI's estimate: range of 6.5-8.6%.
- Staff analysis based on unofficial employment surveys yields a very low female labour force participation rate (FLFPR) estimate.
- Authorities argue that FLFPR based on official statistics, if adjusted in line with the UN SNA, would be closer to levels in South Asian and Middle Eastern economies.
- Authorities contend staff analysis "appears to have missed out on improvements in the quality of employment."
- Authorities dispute the envisaged declining employment-to-population ratio given policy emphasis on manufacturing going forward.

### Analytical approach and recommendations to Fund staff
- Emerging Market Economies are evolving and more complex, requiring greater analytical rigour to comprehend economic dynamics and underlying growth impulses, especially when key structural reforms are changing economic paths.
- Authorities "appreciate staff efforts and urge an approach where the different boundary conditions of such economies are incorporated into the standard paradigms that are primarily focused on describing advanced economies."

*IMF-India Article IV staff report excerpt (content unit: 1indea2022001 - 10. RBI has tightened monetary policy in view of persistent inflationary pressures – a).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1indea2022001.pdf_