## 1. Inflation Dynamics in India ## Source details **Canonical URL:** [1. Inflation Dynamics in India](https://www.imf.org/-/media/files/publications/cr/2023/english/1indea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1indea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1indea2023001.pdf.json) --- ### Context and recent macroeconomic developments - India rebounded strongly from the pandemic and has been "among the fastest growing economies in the world." - FY2022/23 GDP growth: 7.2 percent (down from 9.1 percent in FY2021/22). - FY2023/24Q1 GDP growth: 7.8 percent. - Headline inflation surged in mid-2022 but, on average, moderated thereafter while remaining volatile. - Employment has surpassed the pre-pandemic level; the informal sector continues to dominate while formalization has progressed. - Financial sector: resilient and largely unaffected by global financial stress in early 2023. - Budget deficit has eased but public debt remains elevated and fiscal buffers need rebuilding. - India held the 2023 G20 presidency; general elections expected in April 2024. - Structural potential: favorable demographics, foundational digital public infrastructure, and government investment program expected to raise potential growth through capital accumulation. ### Inflation patterns and drivers - Headline inflation returned to the RBI’s tolerance band of 4±2 percent between March and June 2023 after peaking in mid-2022. - July 2023 shock: tomato prices rose 202-percent year-on-year in July 2023, contributing to headline inflation of 7.4 percent in that month. - September 2023 headline inflation: 5 percent; core inflation: 4.5 percent. - Wholesale prices: declining since April 2023. - India’s inflation dynamics differ from many other economies: - India saw inflation increase in late 2019 due to vegetable price shocks and was above the RBI tolerance band in December 2019, remaining above 6 percent for most of 2020. - India did not experience the same large inflation increase in 2022 as many countries, reflecting extensive government interventions (examples noted: restrictions on wheat, sugar, and rice exports; removal of tax on import of lentils; reversal of excise duty increases on petrol and diesel). - Core inflation in India rose earlier than elsewhere, reaching close to 6 percent as early as October 2020 and oscillating around 6 percent until a sharp decline began in March 2023. - Core inflation drivers: transportation first, then clothing; likely reflected exchange rate depreciation, increase in fuel excise duties in 2020, and pass-through of higher food prices. - Core inflation definition used: excludes food and fuel and lighting. - Core components represent 47 percent of the CPI basket in India ("just 47 percent"), much lower than in other emerging market peers practicing inflation targeting. - Evidence from Granger causality tests: bidirectional causality between food and core inflation; food inflation can influence inflation expectations and core inflation. ### Labor market developments - Labor force participation rate (LFPR): increased to 54.6 percent in AY2022/23. - Unemployment rate: declined to 5.1 percent (based on PLFS Current Weekly Status). - LFPR increase primarily driven by own-account, casual, and unpaid family workers. - Sectoral employment increases: agriculture and construction increased the most since AY2017/18; services picked up more recently. - Real wages recovered from the pandemic-driven decline; nominal wages for regular workers broadly kept up with inflation since AY2017/18; casual workers saw gains in real terms. - Youth unemployment: remains high for the most educated but has declined significantly. ### Financial and monetary conditions - Bank credit growth (September 2022–August 2023 average): 15.6 percent y/y. - NBFC lending accelerated to 16.1 percent y/y in March 2023. - Rapid lending growth to personal borrowers; strong bank credit to services; low credit to the industrial sector. - Lending to MSMEs: normalized after a surge in 2021-2022; strong loan inquiries from MSMEs suggest demand remains high. - Domestic corporate bond issuance increased since late 2022; domestic equity indices up about 10 percent as of end-September (FY2023/24). - Systematic Investment Plans monthly inflows: INR158 bn ($1.9 bn) in August 2023, an increase of 37 percent since January 2022. - Since May 2022, the RBI raised the policy rate by a total of 250 basis points (bps). - Policy rate unchanged at 6.5 percent since February 2023. - Natural real interest rate (r*) is estimated at 1 percent. A projected average inflation rate of 5.4 percent in FY2023/24 and a policy rate of 6.5 percent implies a real interest rate of 1 percent. - Liquidity management: surplus interbank liquidity expanded in the first half of FY2023/24, partly reflecting deposit of INR 2,000 banknotes in banks and RBI’s FX purchases; RBI conducted variable reverse repo rate auctions and implemented an incremental cash reserve ratio (ICRR) of 10 percent on the increase in banks’ NDTL between May 19, 2023, and July 28, 2023, then unwound the ICRR in a phased manner in September-October. ### External sector developments - FY2022/23 current account deficit (CAD): 2 percent of GDP (from 1.2 percent of GDP in previous FY). - Cyclically-adjusted CAD (EBA model) for FY2022/23: 0.9 percent of GDP, 1.5 percentage points below estimated long-term norm of 2.3 percent of GDP. - Net FDI inflows in FY2022/23: 0.8 percent of GDP (covering almost half of the CAD). - Net international investment position at end-March 2023: about -11 percent of GDP (marginal improvement). - FX reserves as of end-September 2023: US$587 billion (covering more than 7 months of prospective imports). - Note: In 2022-23, about 2/3 of the decline in reserves was due to valuation changes from an appreciating US dollar and higher US bond yields. - India increased share of oil imports from Russia from about 1 percent in 2021 to more than 40 percent in mid-2023 (data source: Kpler and Vortexa). - Trade policy actions: restrictions on wheat, sugar, and rice exports introduced in 2022 and remained in place through 2023; rice export restrictions widened July-August 2023; import regulations for laptops, tablets, and personal computers announced August 2023. ### Outlook, projections, and risks - Growth projection: 6.3 percent in both FY2023/24 and FY2024/25. - Projection rationale: as pent-up demand wanes and monetary policy pass-through proceeds, consumption growth is expected to soften; robust public capex agenda expected to boost growth and crowd-in private investment. - Output gap: estimated to remain broadly closed. - Inflation projections: - FY2022/23 inflation: 6.7 percent. - FY2023/24 projected inflation: 5.4 percent. - Core inflation FY2022/23: 6.1 percent. - Core inflation projected FY2023/24: 4.7 percent. - Both headline and core inflation projected to converge gradually to the RBI’s 4-percent target over the medium term. - Current account projections: - CAD projected to narrow to 1.8 percent of GDP in FY2023/24, reflecting lower oil import costs and resilient services exports. - Subsequently, CAD is expected to widen and converge to long-term norm of around 2.3 percent of GDP as imports rise with strong investment and services exports normalize. - Potential growth revised up to 6.3 percent, reflecting larger-than-expected capital spending and higher employment. - Alternative estimates: other studies estimate potential growth between 7.1 to 7.7 percent (cited as Subramanian, 2023, mimeo). - Risks: disinflation vulnerable to exogenous shocks (e.g., weather-driven food price spikes); policy trade-offs due to food price volatility; fiscal buffers need rebuilding. ### Policy implications and recommended stances - Monetary policy stance: - RBI targets headline CPI inflation while remaining vigilant over core inflation. - Given food price volatility and the potential spillover to core inflation, RBI may need to tighten policy in the case of sizable and persistent exogenous weather shocks to avoid de-anchoring of inflation expectations and transmission to core inflation. - Achieving headline target sustainably requires core inflation hovering around 4 percent and allowing the tolerance bands to handle food price shocks. - Staff assessment: given moderating inflation, a closed output gap, and well-anchored inflation expectations, a broadly neutral monetary policy stance is appropriate; further actions should be data dependent and carefully calibrated to safeguard price stability and avoid premature easing. - FX intervention and exchange rate guidance: - IMF IPF guidance: flexible exchange rate should act as first line of defense; FXI warranted only when shocks are strong enough to disrupt market functioning. - Scenario analysis: - Scenario 1 (supply-side shock, no risk-off): FXI not warranted. - Scenario 2 (severe risk-off shock): FXI can help limit excessive rupee depreciation and soften adverse impact on domestic demand; simulated intervention of about 2.5 percent of GDP moderates depreciation from 15 percent to 5 percent at peak. - Staff finding: Rupee-USD depreciated by about 15 percent between December 2019 and November 2022; during December 2022-October 2023, Rupee-USD moved within a very narrow range, prompting staff reclassification of India’s de facto exchange rate regime from “floating” to “stabilized arrangement” for that period. Authorities strongly disagreed. - Fiscal and administrative measures: - Government administrative interventions to mitigate food price pressures can be appropriate on a temporary basis to address major emergencies, but they negatively impact global food markets and should be removed expeditiously to allow market forces to restore adequate incentives. - Structural reforms: - Broad-ranging reforms to raise labor and human capital, increase female labor force participation, and implement productivity-enhancing measures would significantly enhance medium-term growth and create jobs to meet population needs. - Continued public-capital accumulation is expected to be complementary to private-sector investment and can crowd-in private investment. - Statistics/sectoral reform priorities: - Revision of CPI basket (based on 2011/12 household expenditure survey) is important to reflect current consumption patterns. ### Risks to the outlook (external, domestic, upside) and policy buffers - External risks: - Global and idiosyncratic risks could cause a synchronized growth slowdown, with adverse spillovers through trade and financial channels and market fragmentation. - Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures and prompting economic instability. - Broader and deeper conflict(s) and weakened international cooperation may lead to a more rapid reconfiguration of the global economy with knock-on effects on India. - Domestic risks: - Pressure to address cost of living increases may lead to fiscal slippages or under-execution of government capex which could slow growth. - Weather shocks could weigh on agricultural output and raise food prices, reigniting inflationary pressures. - Rapid and persistent growth of personal loans could lead to financial sector stress in a future downturn. - Uncertainty related to upcoming elections could negatively impact investment. - Policy buffers and conditional responses: - Available policy buffers and relevant structural policies should be used if downside risks materialize. - Actions to contain a significant growth slowdown with rising inflation could include drawing upon available fiscal space to provide targeted support to the vulnerable and standing ready to tighten monetary policy should inflationary pressures from supply shocks appear entrenched. - Upside risks: - Stronger-than-expected consumer demand and private investment would raise growth. - Further liberalization of foreign investment could increase India’s role in global value chains, boosting exports. - Implementation of labor market reforms could raise employment and growth. - Lower-than-expected commodity prices can lower inflation, boosting household purchasing power and lowering business input costs, thereby supporting consumption and investment. --- ### Fiscal policy: rebuilding buffers ### FY2022/23 fiscal developments and FY2023/24 budget stance - Central government deficit declined to 6.5 percent of GDP, meeting the budgeted target. - Additional expenditures to mitigate cost of living increases were estimated at 1.2 percent of GDP and were offset by revenue outperformance driven by strong economic growth and buoyant GST revenue. - State governments’ combined deficit declined to 2.8 percent of GDP, below the medium-term deficit target of 3 percent. - Eight states met reform benchmarks for electricity distribution companies in FY2022/23 compared with 12 states in FY2021/22 due to tougher reform standards. - FY2023/24 central government budget prioritizes capital spending while tightening the fiscal stance. - Fiscal deficit expected to improve by 0.5 percentage point of GDP, notwithstanding strong growth in capital expenditure. - Deficit reduction expected via spending restraint in current expenditure and a reduction in subsidies, reflecting moderating commodity prices and cessation of temporary cost of living measures. ### Selected central government fiscal figures (percent of GDP) — figures preserved from source table - Total Revenues: 9.4 8.7 8.9 8.9 8.9 8.9 - Net tax revenues: 7.7 7.5 7.8 7.7 7.8 7.6 - Non-tax revenues: 1.7 1.2 1.1 1.2 1.1 1.3 - Total Expenditure: 16.2 15.2 15.4 15.4 15.0 14.9 - Revenue expenditure: 13.7 12.3 12.7 12.7 11.6 11.6 - Food Subsidy: 1.2 0.8 1.1 1.1 0.7 0.7 - Fertilizer Subsidy: 0.7 0.4 0.8 0.9 0.6 0.6 - Capital expenditure: 2.5 2.9 2.7 2.7 3.3 3.3 - Central Government (CG) Fiscal Deficit: 6.8 6.6 6.5 6.5 6.1 6.0 - Memo: Nominal GDP (Rs billions) 234,710 259,562 273,078 272,407 301,751 300,983 - General Government Fiscal Deficit: 9.6 10.8 9.4 9.2 9.1 8.8 - State Government Fiscal Deficit: 2.8 4.2 2.9 2.8 3.1 2.8 - General Government Debt (% of GDP): 83.8 ...... 81.0 ... 82.0 ### Medium-term projections, consolidation scenario and risks - Under the baseline, the central government deficit is projected to be higher than the target of 4.5 percent of GDP by FY2025/26; additional policies will be needed to reach the target. - Public debt is expected to rise to 82.3 percent of GDP by FY2024/25 before falling, leading to substantial gross financing needs (15 percent of GDP in the medium-term). - Proposed consolidation scenario (selected outcomes): - General government structural primary deficit projected at 0.4 percent of GDP in FY2027/28. - Implies a general government deficit of 5.7 percent of GDP. - Public debt would fall to 74 percent of GDP by FY2028/29, 6 percentage points of GDP lower than the baseline. - Gross financing needs 2.2 percentage points lower, of which 0.4 percentage points due to a reduction in debt servicing. - Growth supported by maintaining a high level of capital expenditure; smaller financing needs reduce crowding out and create room for private investment. - Stylized fiscal numbers under consolidation (source table preserved): - GST: change 1.1; baseline 0.3; difference 0.9 - Excise: change 0.2; baseline -0.2; difference 0.4 - Income tax: change 0.4; baseline 0.2; difference 0.2 - Subsidies: change -1.2; baseline -0.9; difference -0.3 - Capital Expenditure: change 0.3; baseline 0.3; difference 0.0 - Cyclically adjusted primary balance: 3.7 1.9 1.7 (presented as Change between FY2022/23 and FY2027/28 (% of GDP)) - Outcome in FY2027/28 under Consolidation Scenario: Cyclically adjusted primary balance -0.4; General Government Balance -5.7; General Government Balance (Authorities' Definition) -5.6 - Risks to consolidation path: - Contingent liabilities risk: electricity distribution companies’ deficits and weak viability could require state rescues; another rescue package could cost 2.3 percent of GDP (with fiscal cost range 0.5 to 5.2 percent of state-level GDP). - Government guarantees estimated at 2.2 percent of GDP for the Center and 4.5 percent of GDP for the States. - Realization of contingent liabilities would raise gross financing needs to over 20 percent of GDP and raise debt levels to 88 percent of GDP. ### MTFF and fiscal governance recommendations - Review of the FRBM Act provides an opportunity to revamp India’s medium-term fiscal framework (MTFF) to align with international best practice and incorporate pandemic lessons. - Suggested PFM and governance reforms: - Stronger link between MTFF, fiscal objectives and budget process. - Comprehensive assessment of fiscal risks and mitigation strategies. - Closing data gaps and expanding institutional coverage of fiscal reports to consolidated general government. - Releasing sub-national fiscal data more timely and transitioning to accrual accounting. - Publishing a fiscal strategy ahead of the budget (to replace current Macroeconomic Framework Statement and Medium-Term Fiscal Policy Statement). - Strengthening public investment management, PFM, public procurement, transparency of beneficial ownership for public contracts, and publishing audits of emergency spending. - Authorities’ commitments and views: - Authorities remain committed to achieving the central government deficit target of 4.5 percent of GDP by FY2025/26; adjustment to be implemented approximately evenly over FY2024/25 and FY2025/26. - State government deficits expected to remain below the 3 percent of GDP ceiling. - Authorities intend to restrain growth in recurrent expenditure to below nominal GDP growth while prioritizing infrastructure investment. - Authorities do not consider a reversal of the fuel excise tax cut appropriate when inflation is hovering around the upper range of RBI’s tolerance band and remains volatile. --- ### Financial sector stability, market infrastructure, and structural reforms ### Financial sector health and vulnerabilities - Capital-to-risk-weighted asset ratios: 17.2 percent for the banking system in March 2023; public sector banks continue to lag private peers. - Return on assets: 1.2 percent (best in a decade). - Gross nonperforming asset ratios (as of March 2023): 3.9 percent for banks and 4.3 percent for NBFCs; net nonperforming assets at 1 percent among banks. - HTM securities accounted for 64 percent of securities in March 2023; bank holdings of government bonds are around 22 percent of assets. - Ten-year government bond yields have risen by 145 bps and 88 bps since the beginning of 2021 and 2022 respectively; unrealized losses account for 65 bps of CET1 for the median bank; dispersion high (179 bps for the weakest 5th percentile). - Emerging risks: - Rapid growth in personal lending: - Personal credit accounts for 30 percent of total bank credit outstanding in FY2022/23. - Personal credit averaged close to 20 percent y/y growth from January 2023 to August 2023. - NBFC personal lending expanded 30 percent y/y in June 2023. - Unsecured loans averaged 25.8 percent y/y growth for banks in 2023 through August; unsecured lending accounts for close to 10 percent of total bank credit. - RBI stress tests suggest resilience to adverse macro shocks but a weaker tail of NBFCs remains vulnerable to liquidity risks; urban cooperative banks (UCBs) remain susceptible to credit, market, and liquidity risks. - Policy recommendations: - Consider prudential tools to preempt buildup of risks (e.g., increasing risk weights, debt-service-to-income limits), emphasize prudent underwriting standards, and encourage diversified long-term funding for NBFCs. - Address data gaps to reduce regulatory arbitrage and monitor NBFC liquidity risks beyond the 30-day horizon. - Continue integrating climate considerations into stress tests and supervision. ### Financial markets infrastructure and crisis preparedness - CCIL stress testing and default fund sizing: multiple revisions since July 2018 to adopt more conservative stress loss assumptions, increase member contribution weightages, and raise prefunded default handling resources to 125% of Cover 1/Cover 2 stress loss. - Crisis management: proposed legislative framework (FSDRR Bill, 2021) under reconsideration; Deposit Insurance and Credit Guarantee Corporation Act amendments effective September 1, 2021, mandate payment timelines to depositors and give DICGC additional powers. - Market integrity and PSL: - Statutory Liquidity Ratio (SLR) reduced from 22.5 percent in June 2014 to 18 percent of NDTL since April 2020. - Revised Priority Sector Lending guidelines issued September 4, 2020, expand eligible activities and adjust incentive frameworks. ### Insolvency, corporate sector, capital markets and MSME finance - NARCL had purchased INR 263 billion as of mid-September, compared to INR 2 trillion initially planned. - IBC procedures remain relatively slow (NCLT admission averages one year vs benchmark 14 days; resolution takes an additional year vs benchmark 180-270 days). - India debuted sovereign green bonds (INR 160 billion) in early 2023. - Financing for MSMEs: improve information, collect comprehensive MSME data, streamline state/central support measures, and address legacy asset quality issues to enhance credit provision. - Digital lending and fintech developments: RBI digital lending framework September 2022; clarification on First Loss Default Guarantees June 2023 (5 percent cap). ### Structural reform priorities beyond finance - Job creation challenge: staff estimate India will need to create between 145 and 330 million jobs by 2050 to meet growing population demand for work. - Female labor force participation: female LFPR at 28.6 percent in 2022; tertiary-educated female LFPR at 33 percent; 59 percent of employed females classified as unpaid or self-employed. - Recommendations to boost LFPR: invest in childcare, electricity, running water; improve skilling and education quality; promote non-agriculture rural sectors; address safety and mobility constraints. - Productivity gaps: agriculture labor productivity at 2.9 percent of the global frontier by 2019; services business/health/information remain at less than 20 percent of the global frontier. - Policy levers: invest in productivity-enhancing technology and skills training; facilitate worker flow to higher value-added sectors; land and product market reforms in agriculture. - Trade, FDI, and external integration: - New Foreign Trade Policy aims to nearly triple exports to US$ 2 trillion by 2030. - FTP measures include digitization, promotion of trade settlement in Indian rupees, and provisions for merchanting trade. - FTAs with UAE and Australia effective in 2022; negotiations ongoing with UK and EU. - Staff advise phasing out recent export/import restrictions expeditiously and reducing high tariff and non-tariff import barriers. - Climate policy: - Nation-wide Carbon Credit Trading Scheme (CCTS) announced; includes mandatory emissions intensity scheme for hard-to-abate sectors and voluntary mechanism for others. - Near-term priorities: expand solar and wind capacity, increase subsidies on renewable energy use gradually, progress on green hydrogen production, higher taxes on pollution, and improvements in energy storage. --- ### Debt sustainability, DSA findings and medium-term outlook ### DSA coverage and baseline projections (selected exact figures preserved) - Chosen coverage: central and state government. - Public debt (percent of GDP; fiscal year): - 2022: 81.0 - 2023: 81.9 - 2024: 82.3 - 2025: 82.1 - 2026: 81.5 - 2027: 80.8 - 2028: 79.9 - 2029: 79.1 - 2030: 78.2 - 2031: 77.3 - 2032: 76.4 - Change in public debt (percent of GDP): -2.7 (2022); 0.9 (2023); 0.4 (2024); -0.2 (2025); -0.6 (2026); -0.8 (2027); -0.8 (2028); -0.8 (2029); -0.9 (2030); -0.9 (2031); -0.9 (2032). - Primary deficit (percent of GDP): 4.1 (2022); 3.4 (2023); 2.9 (2024); 2.5 (2025); 2.3 (2026–2032 range mostly 2.2–2.3). - Gross financing needs (percent of GDP): - 2022: 15.8 - 2023: 15.1 - 2024: 15.2 - 2025: 15.2 - 2026: 14.9 - 2027: 13.9 - 2028: 13.7 - 2029: 13.5 - 2030: 13.6 - 2031: 13.2 - 2032: 12.3 - Debt service (percent of GDP) and composition (selected): - Debt service: 11.7 (2022); 11.7 (2023); 12.4 (2024); 12.8 (2025); 12.6 (2026); 11.7 (2027); 11.6 (2028); 11.3 (2029); 11.4 (2030); 11.0 (2031); 10.1 (2032). - Local currency debt service: 11.5 (2022) ... 10.0 (2032). - Foreign currency debt service: 0.3 (2022) ... 0.1 (2032). - Memo macro assumptions: - Real GDP growth (percent): 7.2 (2022), 6.3 (2023–2032). - Inflation (GDP deflator; percent): 8.2 (2022), 3.9 (2023), 4.1 (2024–2025), 4.0 (2026–2032). - Nominal GDP growth (percent): 16.1 (2022), 10.5 (2023), around 10.6–10.7 in subsequent years. - Effective interest rate (percent): 7.2 (2022), 7.4 (2023), trending down to 6.3 by 2032. ### DSA assessments and risk signals - Staff commentary summary: - Public debt will gradually decline over the medium term, reflecting continued favorable interest-growth differential and lower contribution from primary deficits due to fiscal consolidation. - Economic growth is at potential, inflation expected to return to the RBI's central target and the monetary policy tightening cycle has paused. - Debt remains high by the end of the medium term. - Gross financing needs are substantial, averaging 15 percent of GDP over the medium term. - Medium-term risk assessment (selected): - Debt fanchart width: 35.8 0.5 - Debt fanchart index (DFI): 1.8 (Risk signal: Moderate) - Average baseline GFN: 14.7 5.0 (percent of GDP) - GFN financeability index (GFI): 13.7 (Risk signal: Moderate) - Final assessment: Medium-term index indicates "Moderate" risk. - Prob. of missed crisis, 2023-2028, if stress not predicted: 18.2 pct. - Prob. of false alarms, 2023-2028, if stress predicted: 21.6 pct. - Climate scenarios: - Adaptation investment needs estimated at 3 percent of GDP (customized scenario). With traditional financing sources, debt expected to reach over 100 percent of GDP. - Climate mitigation investment needs estimated between 4-8 percent of GDP per year; if financed using same instruments as general government deficit, debt could reach as high as 136 percent of GDP. --- ### Statistical, surveillance, and capacity-development priorities ### Data and statistical weaknesses to address - National accounts: current base year 2011/12 is outdated; GDP should be rebased as soon as feasible. - Employment statistics: PLFS questionnaire can be strengthened; quarterly employment data available only for urban areas; rural employment data available only annually and with substantial lag. - Price statistics: CPI basket based on 2011/12 household expenditure survey; authorities conducting a new household survey to update CPI basket over the medium term. - Government finance statistics: general government operations data exclude extra-budgetary funds, local governments, and social security funds; scope to improve timeliness and analytical usefulness and move to GFSM 2014 basis. - Monetary and financial statistics: RBI reports some data in non-standard formats to STA; coverage limited to depository corporations; other financial corporations not covered. - External statistics: trade data have valuation, timing, and coverage problems; imports recorded c.i.f. while BPM6 requires f.o.b. ### Capacity development and planned TA (selected) - TA on fiscal-related issues at the state level: MTFF and fiscal strategy, cash management, commitment control, strategic budgeting, performance measures, budget documentation. - Technical mission to review RBI’s stress testing model framework. - Closing G20 data gaps, including a customized GFS workshop. - TA on compilation of producer price index for services and on compiling financial accounts and balance sheets. - Ongoing engagement with states (examples: Odisha, Tamil Nadu) on MTFF and fiscal risk assessments. --- *Source: 1. Inflation Dynamics in India (1indea2023001).* ### 1. Inflation Dynamics in India _____________________________________________________________________ 5 ### 1. Inflation Dynamics in India ### Context and recent macroeconomic developments - India rebounded strongly from the pandemic and has been "among the fastest growing economies in the world." - FY2022/23 GDP growth: 7.2 percent (down from 9.1 percent in FY2021/22). - FY2023/24Q1 GDP growth: 7.8 percent. - Headline inflation surged in mid-2022 but, on average, moderated thereafter while remaining volatile. - Employment has surpassed the pre-pandemic level; the informal sector continues to dominate while formalization has progressed. - Financial sector: resilient and largely unaffected by global financial stress in early 2023. - Budget deficit has eased but public debt remains elevated and fiscal buffers need rebuilding. - India held the 2023 G20 presidency; general elections expected in April 2024. - Structural potential: favorable demographics, foundational digital public infrastructure, and government investment program expected to raise potential growth through capital accumulation. ### Inflation patterns and drivers - Headline inflation returned to the RBI’s tolerance band of 4±2 percent between March and June 2023 after peaking in mid-2022. - July 2023 shock: tomato prices rose 202-percent year-on-year in July 2023, contributing to headline inflation of 7.4 percent in that month. - September 2023 headline inflation: 5 percent; core inflation: 4.5 percent. - Wholesale prices: declining since April 2023. - India’s inflation dynamics differ from many other economies: - India saw inflation increase in late 2019 due to vegetable price shocks and was above the RBI tolerance band in December 2019, remaining above 6 percent for most of 2020. - India did not experience the same large inflation increase in 2022 as many countries, reflecting extensive government interventions (examples noted: restrictions on wheat, sugar, and rice exports; removal of tax on import of lentils; reversal of excise duty increases on petrol and diesel). - Core inflation in India rose earlier than elsewhere, reaching close to 6 percent as early as October 2020 and oscillating around 6 percent until a sharp decline began in March 2023. - Core inflation drivers: transportation first, then clothing; likely reflected exchange rate depreciation, increase in fuel excise duties in 2020, and pass-through of higher food prices. - Core inflation definition used: excludes food and fuel and lighting. - Core components represent 47 percent of the CPI basket in India (noted as "just 47 percent"), much lower than in other emerging market peers practicing inflation targeting. - Evidence from Granger causality tests: bidirectional causality between food and core inflation; food inflation can influence inflation expectations and core inflation. ### Labor market developments - Labor force participation rate (LFPR): increased to 54.6 percent in AY2022/23. - Unemployment rate: declined to 5.1 percent (based on PLFS Current Weekly Status). - LFPR increase primarily driven by own-account, casual, and unpaid family workers. - Sectoral employment increases: agriculture and construction increased the most since AY2017/18; services picked up more recently. - Real wages recovered from the pandemic-driven decline; nominal wages for regular workers broadly kept up with inflation since AY2017/18; casual workers saw gains in real terms. - Youth unemployment: remains high for the most educated but has declined significantly. ### Financial and monetary conditions - Bank credit growth (September 2022–August 2023 average): 15.6 percent y/y. - NBFC lending accelerated to 16.1 percent y/y in March 2023. - Rapid lending growth to personal borrowers; strong bank credit to services; low credit to the industrial sector. - Lending to MSMEs: normalized after a surge in 2021-2022; strong loan inquiries from MSMEs suggest demand remains high. - Domestic corporate bond issuance increased since late 2022; domestic equity indices up about 10 percent as of end-September (FY2023/24). - Systematic Investment Plans monthly inflows: INR158 bn ($1.9 bn) in August 2023, an increase of 37 percent since January 2022. ### External sector developments - FY2022/23 current account deficit (CAD): 2 percent of GDP (from 1.2 percent of GDP in previous FY). - Cyclically-adjusted CAD (EBA model) for FY2022/23: 0.9 percent of GDP, 1.5 percentage points below estimated long-term norm of 2.3 percent of GDP. - Net FDI inflows in FY2022/23: 0.8 percent of GDP (covering almost half of the CAD). - Net international investment position at end-March 2023: about -11 percent of GDP (marginal improvement). - FX reserves as of end-September 2023: US$587 billion (covering more than 7 months of prospective imports). - Note: In 2022-23, about 2/3 of the decline in reserves was due to valuation changes from an appreciating US dollar and higher US bond yields. - India increased share of oil imports from Russia from about 1 percent in 2021 to more than 40 percent in mid-2023 (data source: Kpler and Vortexa). - Trade policy actions: restrictions on wheat, sugar, and rice exports introduced in 2022 and remained in place through 2023; rice export restrictions widened July-August 2023; import regulations for laptops, tablets, and personal computers announced August 2023. ### Outlook, projections, and risks - Growth projection: 6.3 percent in both FY2023/24 and FY2024/25. - Projection rationale: as pent-up demand wanes and monetary policy pass-through proceeds, consumption growth is expected to soften; robust public capex agenda expected to boost growth and crowd-in private investment. - Output gap: estimated to remain broadly closed. - Inflation projections: - FY2022/23 inflation: 6.7 percent. - FY2023/24 projected inflation: 5.4 percent. - Core inflation FY2022/23: 6.1 percent. - Core inflation projected FY2023/24: 4.7 percent. - Both headline and core inflation projected to converge gradually to the RBI’s 4-percent target over the medium term. - Current account projections: - CAD projected to narrow to 1.8 percent of GDP in FY2023/24, reflecting lower oil import costs and resilient services exports. - Subsequently, CAD is expected to widen and converge to long-term norm of around 2.3 percent of GDP as imports rise with strong investment and services exports normalize. - Potential growth revised up to 6.3 percent, reflecting larger-than-expected capital spending and higher employment. - Alternative estimates: other studies estimate potential growth between 7.1 to 7.7 percent (cited as Subramanian, 2023, mimeo). - Risks: disinflation vulnerable to exogenous shocks (e.g., weather-driven food price spikes); policy trade-offs due to food price volatility; fiscal buffers need rebuilding. ### Policy implications and recommended stances from the text - Monetary policy stance: - RBI targets headline CPI inflation while remaining vigilant over core inflation. - Given food price volatility and the potential spillover to core inflation, RBI may need to tighten policy in the case of sizable and persistent exogenous weather shocks to avoid de-anchoring of inflation expectations and transmission to core inflation. - Achieving headline target sustainably requires core inflation hovering around 4 percent and allowing the tolerance bands to handle food price shocks. - Fiscal and administrative measures: - Government administrative interventions to mitigate food price pressures can be appropriate on a temporary basis to address major emergencies, but they negatively impact global food markets and should be removed expeditiously to allow market forces to restore adequate incentives. - Structural reforms: - Broad-ranging reforms to raise labor and human capital, increase female labor force participation, and implement productivity-enhancing measures would significantly enhance medium-term growth and create jobs to meet population needs. - Continued public-capital accumulation is expected to be complementary to private-sector investment and can crowd-in private investment. - Statistics/sectoral reform priorities highlighted: - Revision of CPI basket (based on 2011/12 household expenditure survey) is important to reflect current consumption patterns. *Source: 1. Inflation Dynamics in India (1indea2023001).* ### 14. Risks to the outlook are balanced. Important risks include (Annex III). ### 14. Risks to the outlook are balanced. Important risks include (Annex III). ### External risks - Global and idiosyncratic risks could cause a synchronized growth slowdown, with adverse spillovers through trade and financial channels and market fragmentation. - Further global supply disruptions—e.g., due to conflicts or natural disasters—could cause recurrent commodity price volatility, increasing fiscal pressures for India and prompting economic instability. - Broader and deeper conflict(s) and weakened international cooperation may lead to a more rapid reconfiguration of the global economy with knock-on effects on India. ### Domestic risks - Pressure to address cost of living increases may lead to fiscal slippages or under-execution of government capex to meet the budgeted fiscal deficit, which could slow growth. - Weather shocks could weigh on agricultural output and raise food prices, reigniting inflationary pressures. - Rapid and persistent growth of personal loans could lead to financial sector stress in a future downturn. - Uncertainty related to upcoming elections could negatively impact investment. ### Policy buffers and conditional responses - Available policy buffers and relevant structural policies should be used if downside risks materialize. - Actions to contain a significant growth slowdown with rising inflation could include: - Drawing upon available fiscal space to provide targeted economic support to the vulnerable. - Standing ready to tighten monetary policy should inflationary pressures from supply shocks appear to become entrenched. ### Upside risks - Stronger-than-expected consumer demand and private investment would raise growth. - Further liberalization of foreign investment could increase India’s role in global value chains, boosting exports. - Implementation of labor market reforms could raise employment and growth. - Broad-based structural reforms would lift potential growth over the medium term. - Lower-than-expected commodity prices can lower inflation, boosting household purchasing power and lowering business input costs, thereby supporting consumption and investment. ### Authorities’ outlook and assessments (paras 15–16) - Authorities projected growth at 6.5 percent in FY2023/24, driven by domestic factors—capital spending resulting from government spending on infrastructure with widening crowding in of private capital expenditure in related areas and robust consumption. - Authorities expect inflation to moderate, averaging 4.5 percent in FY2024/25. - Over the medium term, authorities expect growth to remain robust and above staff’s projections, with potential growth around 7-8 percent. - Authorities expect weakening FDI trends will be temporary and that global interest in investing in India, supported in part by the PLI schemes in key sectors, is expected to boost domestic manufacturing, exports, and employment. - The RBI noted staff’s external sector assessment only relied on the EBA-CA methodology; a net foreign assets approach would be preferable and would show the economy aligned with fundamentals. RBI’s own analysis delivers an equilibrium CA estimate of -2.5 percent of GDP, very close to the EBA result. - Authorities assessed risks to be balanced, highlighting rising international oil prices and a slowdown in China as main external risks; adverse weather shocks as the only notable domestic risk and did not see elections-related economic uncertainty. ### FISCAL POLICY: REBUILDING BUFFERS ### FY2022/23 fiscal developments (paras 17–18) - The central government deficit declined to 6.5 percent of GDP, meeting the budgeted target. - Additional expenditures to mitigate cost of living increases were estimated at 1.2 percent of GDP and were offset by revenue outperformance driven by strong economic growth and buoyant GST revenue. - State governments’ combined deficit declined to 2.8 percent of GDP, below the medium-term deficit target of 3 percent. - Eight states met reform benchmarks for electricity distribution companies in FY2022/23 compared with 12 states in FY2021/22 due to tougher reform standards. India: Summary Central Government Fiscal Developments (In percent of GDP) — selected figures preserved - Total Revenues: 9.4 8.7 8.9 8.9 8.9 8.9 (table headings FY 2021/22 ... FY2023/24 presented in source) - Net tax revenues: 7.7 7.5 7.8 7.7 7.8 7.6 - Non-tax revenues: 1.7 1.2 1.1 1.2 1.1 1.3 - Total Expenditure: 16.2 15.2 15.4 15.4 15.0 14.9 - Revenue expenditure: 13.7 12.3 12.7 12.7 11.6 11.6 - Food Subsidy: 1.2 0.8 1.1 1.1 0.7 0.7 - Fertilizer Subsidy: 0.7 0.4 0.8 0.9 0.6 0.6 - Capital expenditure: 2.5 2.9 2.7 2.7 3.3 3.3 - Central Government (CG) Fiscal Deficit: 6.8 6.6 6.5 6.5 6.1 6.0 - Memo: Nominal GDP (Rs billions) 234,710 259,562 273,078 272,407 301,751 300,983 - General Government Fiscal Deficit: 9.6 10.8 9.4 9.2 9.1 8.8 - State Government Fiscal Deficit: 2.8 4.2 2.9 2.8 3.1 2.8 - General Government Debt (% of GDP): 83.8 ...... 81.0 ... 82.0 Notes in source: - Additional FY2022/23 measures outside the budget were estimated at 1.2 percent of GDP. - For FY2020/21, certain food subsidy accounting exceptions noted. - Additional borrowing of up to 0.5 percent of state-level GDP is available each year between FY2021/22 and FY2024/25 for states implementing power sector reforms. ### FY2023/24 Budget stance (para 18) - FY2023/24 central government budget prioritizes capital spending while tightening the fiscal stance. - Fiscal deficit expected to improve by 0.5 percentage point of GDP, notwithstanding strong growth in capital expenditure. - Deficit reduction is expected via spending restraint in current expenditure and a reduction in subsidies, reflecting moderating commodity prices and cessation of temporary cost of living measures. - Budget adjustments include making the preferred broad-based PIT schedule more attractive and setting it as the default; and tax rate changes on certain personal payments and travel services effective October 2023, which introduce exchange restrictions as additional burdens on current international payments and transfers. ### Medium-term projections and risks (paras 19–20) - Under the baseline, the central government deficit is projected to be higher than the target of 4.5 percent of GDP by FY2025/26; additional policies will be needed to reach the target. - Public debt is expected to rise to 82.3 percent of GDP by FY2024/25 before falling, leading to substantial gross financing needs (15 percent of GDP in the medium-term). - Mitigating factors: bulk of public debt is long-dated, fixed-rate, domestic-currency instruments held predominantly by residents; bid-cover ratios averaged 2.6 between April and September 2023. - National Small Savings Funds contributions increased, supported by a lift in deposit limits and new schemes. - India benefits from a favorable interest-growth differential. - Baseline carries the risk that, should similar shocks to those experienced historically materialize, debt would exceed 100 percent of GDP in the medium term. ### Need for ambitious consolidation (para 20) - Reaching the authorities’ deficit target in FY2025/26 and maintaining further fiscal tightening would rebuild buffers faster and reduce the interest burden on the budget (currently at around one third of tax revenue). - Lower interest burden would create room for expenditure supporting long-term growth (infrastructure, health, climate change mitigation and adaptation). ### Proposed consolidation scenario (paras 21–22) — measures and outcomes - Revenue mobilization measures discussed: - GST Council is discussing GST rationalization of rates and exemptions; staff analysis provides alternative simplification options. - Other measures: reversing fuel excise tax cuts, further broadening corporate and personal income tax bases, continued improvements in tax administration. - Expenditure efficiency measures: - Better targeting of subsidies; greater utilization of digital infrastructure to deliver social support; use of direct, targeted cash transfers where possible. - Example: digital ID combined with land records to allocate subsidized fertilizer to farmers based on land size (being trialed in selected states). - Use of e-Shram portal and socio-economic data exchange to make social assistance more resilient and adaptable (Alonso and other, 2023). - Consolidation scenario outcomes: - General government structural primary deficit projected at 0.4 percent of GDP in FY2027/28. - Implies a general government deficit of 5.7 percent of GDP. - Public debt would fall to 74 percent of GDP by FY2028/29, 6 percentage points of GDP lower than the baseline. - Gross financing needs 2.2 percentage points lower, of which 0.4 percentage points due to a reduction in debt servicing. - Growth supported by maintaining a high level of capital expenditure; smaller financing needs reduce crowding out and create room for private investment. - Stylized fiscal numbers under consolidation (source table preserved): - GST: change 1.1; baseline 0.3; difference 0.9 - Excise: change 0.2; baseline -0.2; difference 0.4 - Income tax: change 0.4; baseline 0.2; difference 0.2 - Subsidies: change -1.2; baseline -0.9; difference -0.3 - Capital Expenditure: change 0.3; baseline 0.3; difference 0.0 - Cyclically adjusted primary balance: 3.7 1.9 1.7 (presented as Change between FY2022/23 and FY2027/28 (% of GDP)) - Outcome in FY2027/28 under Consolidation Scenario: Cyclically adjusted primary balance -0.4; General Government Balance -5.7; General Government Balance (Authorities' Definition) -5.6 - Note: India’s tax gap is estimated at 5 percent of GDP (De Mooij and others, 2019); alternative consolidation scenarios could include greater spending on health coupled with higher domestic revenue mobilization. ### Risks to consolidation path (para 23) - Contingent liabilities risk: electricity distribution companies’ deficits and weak viability could require state rescues; another rescue package could cost 2.3 percent of GDP (with fiscal cost range 0.5 to 5.2 percent of state-level GDP). - Government guarantees estimated at 2.2 percent of GDP for the Center and 4.5 percent of GDP for the States. - Realization of contingent liabilities would raise gross financing needs to over 20 percent of GDP and raise debt levels to 88 percent of GDP. ### Review of FRBM Act and MTFF opportunities (para 24) - The review of the FRBM Act provides an opportunity to revamp India’s medium-term fiscal framework (MTFF) to align with international best practice and incorporate pandemic lessons. - Public financial management (PFM) status and improvements: - Central government PFM is sound with a strong financial compliance basis. - Areas for improvement: (i) stronger link between MTFF, fiscal objectives and budget process; (ii) comprehensive assessment of fiscal risks and mitigation strategies; (iii) closing data gaps. - IMF capacity development is supporting selected states in MTFF development. - Fiscal rule and medium-term anchor: - Revamped MTFF should include a medium-term anchor and fiscal rule consistent with development goals, rebuild buffers at an appropriate pace, and maintain flexibility in face of shocks. - New MTFF should incorporate checks and balances to support accountability and credibility via institutional or procedural reforms, including greater transparency of the fiscal path. - Fiscal governance reforms suggested: - Expanding institutional coverage of fiscal reports to consolidated general government. - Releasing sub-national fiscal data more timely. - Transitioning to accrual accounting. - Publishing a fiscal strategy ahead of the budget (to replace current Macroeconomic Framework Statement and Medium-Term Fiscal Policy Statement). - Improving access to fiscal information, particularly at the state level. - Strengthening public investment management, PFM, public procurement, transparency of beneficial ownership for public contracts, and publishing audits of emergency spending. ### Authorities’ commitments and views (paras 25–26) - Authorities remain committed to achieving the central government deficit target of 4.5 percent of GDP by FY2025/26; adjustment to be implemented approximately evenly over FY2024/25 and FY2025/26. - State government deficits expected to remain below the 3 percent of GDP ceiling. - Authorities acknowledged that from FY2026/27 a further reduction in the debt-to-GDP ratio is desirable. - Authorities intend to restrain growth in recurrent expenditure to below nominal GDP growth while prioritizing infrastructure investment. - Buoyancy in tax revenues expected from further formalization of the economy and continued improvements in tax administration. - Authorities do not consider a reversal of the fuel excise tax cut appropriate when inflation is hovering around the upper range of RBI’s tolerance band and remains volatile. - Central government guarantees have declined over time and incremental increases are capped. - A significant proportion of state guarantees are to the electricity sector; improving the financial viability of the sector would mitigate state-level contingent liability risks. - States have been provided budget incentives to reform the electricity sector and milestones such as electricity tariff revisions have been achieved. - On MTFF recommendations, authorities believe demonstrated commitment to the fiscal deficit target, first announced in the FY2021/22 Budget, achieves similar purposes regarding credibility and transparency. *Source: IMF staff compilation from the provided chapter content.* ### 27. The authorities strongly disagreed with staff assessment of exchange restrictions ### 27. The authorities strongly disagreed with staff assessment of exchange restrictions ### Exchange restrictions and taxes on outward remittances - Authorities view taxes on outward remittances as not limiting the availability or use of foreign exchange by resident individuals in India. - The total amount of tax collected at source is available for full credit or refund when filing an income tax return; authorities characterize the only cost as a cash-flow timing issue and consider it nominal, not an exchange restriction. ### Monetary policy: securing price stability - RBI actions and stance: - Since May 2022, the RBI raised the policy rate by a total of 250 basis points (bps). - Policy rate unchanged at 6.5 percent since February 2023. - Authorities reaffirmed firm commitment to bringing inflation down to the 4-percent target. - Natural real interest rate (r*) is estimated at 1 percent. A projected average inflation rate of 5.4 percent in FY2023/24 and a policy rate of 6.5 percent implies a real interest rate of 1 percent. - Staff assessment and guidance: - Given moderating inflation, a closed output gap, and well-anchored inflation expectations, a broadly neutral monetary policy stance is appropriate. - Further monetary policy actions should be data dependent and carefully calibrated to safeguard price stability and avoid premature easing. - RBI should continue to communicate policy in a transparent way to guide market expectations. ### Liquidity management - Surplus interbank liquidity expanded significantly in the first half of FY2023/24, partly reflecting deposit of INR 2,000 banknotes in banks and RBI’s FX purchases. - RBI operations and measures: - Conducted variable reverse repo rate auctions alongside the standing deposit facility to absorb surplus liquidity. - Implemented an incremental cash reserve ratio (ICRR) of 10 percent on the increase in banks’ net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023, then unwound the ICRR in a phased manner in September-October. - Recommendation: Manage system liquidity through market-based tools to ensure resources to productive sectors and further develop money markets. ### FX intervention (FXI), exchange rate flexibility, and regime classification - IPF guidance and market characteristics: - IMF’s Integrated Policy Framework (IPF) provides guidelines for when FXI would be appropriate, subject to a country’s characteristics, frictions, and types of shocks. - India’s FX markets generally show relatively stable UIP premium, high FX turnover, and narrow bid-ask spread, suggesting a deep FX market, notwithstanding the presence of FXI. - Model-based analysis favors a mostly deep but occasionally shallow market, including during the GFC and COVID-19 outbreaks. - Scenario analysis on FXI usefulness: - Scenario 1 (supply-side shocks from global trade fragmentation/a wider geopolitical conflict, no risk-off shock): Under a deep FX market and well-anchored inflation expectations, exchange rate flexibility absorbs the shock; no additional benefit from FXI. - Scenario 2 (severe risk-off shock due to global financial market turbulence inducing a domestic risk premium): FXI can help limit excessive rupee depreciation, absorb pressure from monetary tightening to contain inflation, and soften adverse impact on domestic demand—reducing the decline in output. Effectiveness depends on FXI’s ability to stabilize the exchange rate and may require large reserve use. - Staff findings: - Given India’s generally deep FX markets, FXI would be warranted only when shocks are strong enough to disrupt market functioning. - Over the past two years, the Rupee-U.S. Dollar depreciated by about 15 percent between December 2019 and November 2022. - During December 2022-October 2023, the Rupee-U.S. Dollar exchange rate moved within a very narrow range, suggesting FXI likely exceeded levels necessary to address disorderly market conditions; staff reclassified India’s de facto exchange rate regime from “floating” to “stabilized arrangement” for that period (de jure classification remained “floating”). - FX reserves are assessed at just above 100 percent of the IMF composite reserve adequacy metric for a stabilized exchange rate regime. - Recommendation: A flexible exchange rate should act as the first line of defense in absorbing external shocks. - Authorities’ dissenting view: - RBI strongly disagreed with staff’s assessment that FXI likely exceeded levels necessary to address disorderly market conditions and that it contributed to the narrow rupee movement since December 2022. - RBI contends staff used data selectively, took a short-term 6–8 month view without rationale, and that a longer-term 2–5 year perspective would not support staff’s conclusion. - Authorities assert FXI is used only to curb excessive exchange rate volatility, that FXI data dissemination complies with SDDS standards, and that the rupee remains market determined with no explicit/implicit target/band. - They attribute exchange rate stability in 2023 to macroeconomic fundamentals: significant moderation in the current account deficit (CAD), revival of capital flows, and a comfortable foreign exchange reserves buffer. ### Central bank digital currency (CBDC) pilots - Pilots in progress since November/December 2022: - As of August 2023, the digital rupee has 1.46 million users, including 0.31 million merchants, that carry out between 5,000-10,000 transactions per day. - Authorities aim for the number of digital rupee transactions to surpass 1 million per day by end-2023 through integration with UPI. - RBI is exploring cross-border payments via CBDC with other countries; progress has been incremental due to macroeconomic implications and potential risks. - Any adjustments to capital flow management measures impacting CBDC cross-border use should align with the IMF’s Institutional View on CFMs. - Authorities intend to move cautiously toward full-scale CBDC implementation. ### External position and reserves - Authorities and staff concur external position remains strong and can withstand near-term shocks. - Published data highlights: - Current account deficit and external financing requirement are modest at 1.1 percent of GDP during April-June 2023. - Foreign exchange reserves increased by US$ 24.4 billion excluding valuation effects. - Authorities view reserves as comfortable and emphasize benefits (including lower risk premia) when weighing costs of holding FX reserves. ### Financial sector policy: preserving stability and strengthening reform for growth - Systemic resilience and key metrics: - Capital-to-risk-weighted asset ratios reached a record high of 17.2 percent for the banking system in March 2023; public sector banks continue to lag private peers. - Return on assets reached 1.2 percent—the best in a decade. - Gross nonperforming asset ratios (as of March 2023) are 3.9 percent for banks and 4.3 percent for NBFCs; net nonperforming assets at 1 percent among banks. - HTM securities accounted for 64 percent of securities in March 2023; bank holdings of government bonds are around 22 percent of assets. - Ten-year government bond yields have risen by 145 bps and 88 bps since the beginning of 2021 and 2022 respectively; unrealized losses account for 65 bps of CET1 for the median bank; dispersion high (179 bps for the weakest 5th percentile). - Emerging risks and supervisory needs: - RBI stress tests suggest resilience to adverse macro shocks but a weaker tail of NBFCs remains vulnerable to liquidity risks; urban cooperative banks (UCBs) remain susceptible to credit, market, and liquidity risks. - Rapid growth in personal lending: - Personal credit accounts for 30 percent of total bank credit outstanding in FY2022/23. - Personal credit averaged close to 20 percent y/y growth from January 2023 to August 2023. - NBFC personal lending expanded 30 percent y/y in June 2023. - Unsecured loans averaged 25.8 percent y/y growth for banks in 2023 through August; unsecured lending accounts for close to 10 percent of total bank credit. - Recommendation: Consider prudential tools to preempt buildup of risks (e.g., increasing risk weights, debt-service-to-income limits), emphasize prudent underwriting standards, and encourage diversified long-term funding for NBFCs. - Address data gaps to reduce regulatory arbitrage and monitor NBFC liquidity risks beyond the 30-day horizon. - Climate risk: Continue integrating climate considerations into stress tests and supervision following RBI discussion paper (July 2022) and green deposit framework (April 2023). - Structural reform priorities: - Strengthen regulatory and supervisory standards; implement Expected Credit Loss Framework in line with IFRS9; improve stress testing framework and develop macro-financial scenarios and network analysis. - Renew efforts to establish a bank resolution framework and enhance AML/CFT effectiveness, addressing technical compliance gaps per 2017 FSAP recommendations. - Facilitate exit of non-viable firms and promote asset resolution: - NARCL had purchased INR 263 billion as of mid-September, compared to INR 2 trillion initially planned. - IBC procedures remain relatively slow (NCLT admission averages one year vs benchmark 14 days; resolution takes an additional year vs benchmark 180-270 days). - Promote alternatives to formal procedures and consider reforms such as greater access to ‘prepack’ for unincorporated enterprises. - Deepen capital markets: - India debuted sovereign green bonds (INR 160 billion) in early 2023; additional issuances expected in second half of FY2023/24. - Newly announced corporate bond backstop not yet tested; inclusion into JPMorgan’s Government Bond Index expected to increase nonresident ownership. - Promote governance and privatization momentum in public sector banks to close gaps in asset quality, profitability, credit provision, and capital buffers. - Financing for MSMEs: Improve information, collect comprehensive MSME data, streamline state/central support measures, and address legacy asset quality issues to enhance credit provision. *Source: 1indea2023001 - 27. The authorities strongly disagreed with staff assessment of exchange restrictions* ### 41. The authorities highlighted that the financial sector is strong, with robust balance ### STRUCTURAL REFORMS: INVIGORATING INCLUSIVE AND SUSTAINABLE GROWTH ### Financial sector resilience and monitoring - Authorities view the financial sector as strong, "with robust balance sheets and asset quality across institutions." - Rapid growth in personal loans noted; borrower quality "has been relatively good" and nonperforming assets are low, with continued close monitoring planned. - All possible macroprudential measures can be considered, "including borrower level measures." - Transunion SIBIL MSME Pulse data showed that in FY223Q2, delinquency rates among MSMEs had fallen to 3 percent when excluding doubtful, loss and 720 days past due accounts, but as high as 12.5 percent otherwise. - Scale-based regulatory framework placed large systemic NBFCs under close supervision; some data gaps remain among smaller institutions. - Governance at public sector banks has greatly improved but remains "work in progress." - Insolvency and Bankruptcy Code (IBC) resolution timelines expected to improve as capacity increases; IBC has been successful as evidenced by the significant decline in gross NPAs over the past two years. ### Job creation challenge and required scale - India shifted from agrarian to services-led growth and "would need to significantly expand" job opportunities to absorb a young and growing workforce. - Staff estimate that India will need to create between 145 and 330 million jobs by 2050 to meet its growing population’s demand for work. - Existing low-productivity sectors (agriculture, construction, trade) employ over half of the workforce and show limited catchup to the global productivity frontier. ### Female labor force participation and barriers - Gender gaps in LFPR remain high, with female LFPR at 28.6 percent in 2022. - LFPR of women with advanced (tertiary) education is 33 percent, "well below the global average." - 59 percent of employed females are classified as either participating in unpaid activities or self-employed. - Supply-side constraints: domestic work time constraints, inadequate quality of education, safety concerns, social norms. - Demand-side constraints: limited opportunities (especially rural), agricultural mechanization, gender-biased occupational segregation. - Policy recommendations: invest in childcare, electricity, running water; improve skilling and education quality; promote non-agriculture rural sectors. ### Labor market reforms, skilling, and ALMPs - Major central labor regulation streamlining in 2020; implementation lagging. - Active labor market policies (ALMP) can raise suitability for hiring and productivity; effects depend on macro conditions and complementary reforms. - Reducing employment protection during strong growth could be beneficial if preceded by strong social safety nets and product market reforms and combined with worker mobility programs. - Authorities revamping skilling framework and National Career Services Portal employee-employer matching tools. ### Productivity gaps and global frontier catch-up - India remains behind the global labor productivity frontier in most industries; catch-up uneven. - Agriculture labor productivity was at 2.3 percent of the global technological frontier in 1995 and rose to 2.9 percent by 2019. - Services (business, health, information) remain at less than 20 percent of the global frontier. - Policy levers: invest in productivity-enhancing technology and skills training; facilitate worker flow from low-value-added jobs to higher value-added manufacturing and services; land and product market reforms in agriculture to spur transition and attract FDI. ### Human capital: health and education - Need to build on enrollment gains and gender parity by improving learning outcomes, which were below grade level pre-COVID. - Ongoing learning recovery programs should assist; policies should reduce dropouts, track and measure learning, and prepare teachers. - High quality health spending prioritized to leverage demographics, reduce poverty, and boost long-term growth. ### Other growth-enhancing reforms and infrastructure - Sustained public infrastructure investment and removal of private investment obstacles needed. - Improvements in public physical and digital infrastructure (e.g., National Single Window System) will raise private sector productivity. - Production-Linked Incentive schemes (PLIs) total 0.72 percent of FY2022/23 GDP over its lifetime, and are projected to create only 2-4 percent of estimated needed jobs. - Authorities estimate PLIs could create up to 6 million jobs. - Recommendations: assess PLIs as data become available, ensure they address market failures, remain time-bound, and foster private competition; decriminalize minor economic offenses; remove disincentives to firm size expansion. ### Data, statistics, and monitoring improvements - Progress on sectoral producer price indices with publication expected in coming months. - Collaboration with ILO to strengthen employment statistics methodology welcomed. - Need for more frequent and timely employment statistics for rural areas. - Swift progress needed on household expenditure and unincorporated business surveys to improve national accounts and price statistics. - Rebasing GDP and releasing seasonally adjusted quarterly national accounts recommended. - Conducting the decennial census, delayed by COVID-19, remains a priority. ### Trade, FDI, and external integration - New Foreign Trade Policy (FTP) aims to nearly triple exports of goods and services to US$ 2 trillion by 2030. - FTP measures include digitization of export-import license applications, promotion of trade settlement in Indian rupees, and provisions for merchanting trade. - FTAs with UAE and Australia became effective in 2022; negotiations ongoing with UK and EU. - Since mid-2022, some export and import restrictions tightened; staff advice is to phase out recent restrictions expeditiously and reduce high tariff and non-tariff import barriers. - Import Management System introduced for IT equipment to encourage imports from trusted sources and develop local production; staff flag potential frictions and administrative costs. - Further liberalizing the FDI regime and improving investment climate recommended to attract FDI; continue working with partners to strengthen the WTO and promote deeper integration, especially for services and investment. ### Climate policy and carbon markets - Recently announced nation-wide Carbon Credit Trading Scheme (CCTS) is welcome; will include a mandatory emissions intensity scheme for hard-to-abate sectors and a voluntary mechanism for other sectors. - Near-term priorities: expand solar and wind capacity, gradually increase subsidies on renewable energy use, progress on green hydrogen production, higher taxes on pollution, and improvements in energy storage. - These measures support reduction in transition costs, greater energy security, reduced health effects from pollution, and progress toward the 2070 net zero target. - Access to financing and global technology transfer, particularly storage technology, highlighted as important enablers. ### Governance, anti-corruption, and rule of law - Continued strengthening of governance, anti-corruption, and rule of law recommended to reduce corruption risks, support economic progress and financial stability, and increase efficiency. - Authorities have used digitization to reduce leakages (e.g., faceless tax assessments, Direct Benefit Transfers). - Scope to strengthen corporate regulatory framework and improve fiscal and financial governance. - Suggested measures: reduce administrative and regulatory burdens, shorten approval timelines, implement single-window clearance more widely, and strengthen judiciary efficiency and integrity. ### Authorities’ perspectives and recent reforms - Authorities emphasized efforts to improve logistics, education and skill development, formalization, and expansion of social security schemes. - Authorities questioned staff’s job-need estimates, citing remote work and the gig economy, and suggested female LFPR may be underestimated due to methodological issues. - Noted recent reforms: implementation of online National Single Window and approval of the Jan Vishwas Act, 2023 to decriminalize minor economic offenses. - Authorities consider PLIs as temporary supports while broader structural reforms proceed. - On climate finance and technology, authorities stressed developed countries’ responsibilities under UNFCCC and Paris Agreement to provide new financial resources and technology transfer; India expects its due share to meet adaptation and transition needs. - Authorities cited food and data security as main reasons for recent trade restrictions and emphasized their temporary nature. ### Staff appraisal and macro outlook - India’s strong economic performance, supported by macroeconomic and financial stability, is expected to continue with balanced risks. - India is one of the fastest growing economies globally, with projected growth at 6.3 percent. - Headline inflation expected to gradually decline towards the target though volatile due to food price shocks. - Growth could be faster and more sustainable with a comprehensive structural reform agenda. - Risks: global growth slowdown and adverse weather shocks on the downside; more resilient consumption and private investment on the upside. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1indea2023001.pdf* ### 58. The tightening fiscal stance in FY2023/24 is appropriate, and an ambitious ### The tightening fiscal stance in FY2023/24 is appropriate, and an ambitious ### Fiscal policy, debt sustainability, and MTFF reforms - Finding: A projected improvement in the fiscal deficit is expected despite a strong push in capital spending in FY2023/24. - Assessment: The tightening fiscal stance in FY2023/24 is appropriate. - Concern: India’s elevated public debt calls for additional revenue and expenditure measures. - Policy recommendations: - Implement further GST and subsidy reforms. - Continue to prioritize public investment and targeted support for the vulnerable. - Use plans to reform the MTFF to promote transparency and accountability and align policies with India’s development goals. ### Monetary policy and exchange rate stance - Finding: The RBI’s monetary policy tightening has been effective in addressing inflation. - Assessment: Given declining inflation and a closed output gap, a broadly neutral monetary stance is appropriate; premature easing of monetary policy should be avoided. - Recommendation: Monetary policy should remain data dependent given high uncertainty surrounding the outlook. - Liquidity management: - The temporary increase in the ICRR was justified given a "one-off surge in excess liquidity". - Market-based liquidity management tools would be preferable during normal circumstances. - External position and exchange rate: - The external position in FY 2022/23 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - Fiscal consolidation, development of export infrastructure, and negotiation of free trade agreements would facilitate external rebalancing over the medium term. - Greater exchange rate flexibility is warranted to help absorb external shocks, with intervention limited to addressing disorderly market conditions. - Recommendation on exchange restrictions: Staff do not recommend the approval of the newly identified and previously existing exchange restrictions at this time. ### Financial sector stability and vulnerabilities - Finding: Systemic financial risks have declined; the financial sector appears healthy and its performance is the strongest in several years. - Caveat: Some emerging vulnerabilities call for careful monitoring. - Policy recommendations: - Continue vigilant supervision and use prudential tools to preserve stability. - Manage the rapid growth in personal loans. - Continue to strengthen regulatory and supervisory standards. - Encourage public sector banks to build capital buffers. - Further facilitate the exit of nonviable firms. - Longer-term reforms: Promote governance of public sector banks, deepen capital markets, and expand MSMEs’ access to financing to support medium-term growth. ### Structural reforms to boost inclusive growth - Objective: Leverage India’s demographics to boost sustainable and inclusive growth and promote high quality job-rich growth. - Recommended reform areas: - Improve the labor market and boost female labor force participation. - Reforms to health, education, land, and agriculture. - Strengthen governance and the rule of law. - Promote a sound business environment. - Continue progress on designing and implementing climate policies to achieve climate goals. - Upgrade statistics and data monitoring to support timely policy design. ### Trade, tariffs, and integration into global value chains - Finding: India’s recent restrictive trade policies should be unwound expeditiously. - Recommendation: Agricultural sector reforms would provide a more durable solution to fostering domestic food security. - Trade policy measures: - Reduce high tariff and non-tariff import barriers, including recently announced regulation of imports of laptops, tablets, and personal computers. - Further liberalize the FDI regime. - Improve the investment climate through structural reforms to catalyze foreign and domestic investments and develop vibrant and competitive industries. *Source: INDIA — INTERNATIONAL MONETARY FUND* ### 63. It is recommended that the next Article IV consultation take place on the standard 12 ### 1indea2023001 - 63. It is recommended that the next Article IV consultation take place on the standard 12 months cycle. ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12 months cycle. ### Recent macroeconomic developments - India recovered strongly from the pandemic, partly driven by robust domestic demand. - Industrial production and PMIs recovered, largely catching up to pre-pandemic levels. - Motor vehicle sales have normalized post-pandemic, as consumer credit surged. - Investment remains strong, supported by record high capital expenditure. - Goods export and import has contracted in recent months. ### External sector developments - The current account balance has improved in recent quarters, partly driven by easing global commodity prices. - The financial account remained in surplus in FY2022/23 and FY2023/24. Portfolio investment inflows have resumed. - India has low level of external debt compared to peers and adequate FX reserves mitigating external vulnerabilities. ### Financial market developments - The Indian rupee has traded in a narrow range, as volatility has fallen sharply. - Equity inflows have reached [$14 bn] through YTD through September. - Indian equity markets have recently outperformed other emerging markets. - Bond yields have broadly declined since March 2023, trading in a relatively narrow range. - Real and nominal bond yields are comparable to other emerging markets. - The REER and NEER have appreciated in 2023, although remain somewhat below their pre-pandemic levels. ### Monetary sector developments - Inflation declined in September 2023, as a temporary uptick in vegetable prices eased. - A broad-based decline in inflation persists. - Food prices remain very volatile, but vegetable price shocks tend to be short-lived. - Household Inflation expectations have declined in recent months, while consensus expectations remained well-anchored. - The central bank has focused on managing bank liquidity, including temporary ICRR enforcement during September-October to mop up one-off surge in excess liquidity, resulting in tightening financial conditions. ### Fiscal sector developments - The deficit narrowed slightly in FY2022/23 due to buoyant revenues driven in part by improvements in tax compliance and continued reduction in expenditure from pandemic peaks. - Subsidies remain elevated as measures to address cost of living pressures were introduced, while the jump in interest expenses persists. - Capital spending continues to exceed its pre-pandemic average. ### Corporate and banking sectors - Corporate balance sheets and liquidity have improved. - Bank credit growth has averaged near 15% y/y, led by services and personal loans. - Personal lending share has expanded, particularly for unsecured loans. - Lending rates have slowly moved higher, but still lag the recent tightening cycle. - NPAs have continued to decline to multiyear lows; capital buffers remain high, despite lingering disparity between public and private sector banks. ### Climate developments - India is significantly impacted by climate change and is an increasingly important contributor to global GHGs, but remains one of the lowest emitters on a per-capita basis. - India’s energy sector, largely coal-powered, has disproportionately high emissions intensity. - While modern renewables are the fastest growing energy source, fossil fuels still dominate installed capacity. - Green bond issuance is gradually gaining pace, which should help in financing the energy transition. ### Key statistics and projections (selected exact figures preserved) - Nominal GDP (in billions of U.S. dollars): 3,390 (GDP (2022/23)) - GDP per capita (U.S. dollars) (IMF staff est.): 2,408 - Poverty rate $2.15 a day (2019): 10.0 - Undernourished (2020): 16.3 - Population total (in billions): 1.41 - Urban population (percent of total): 35.4 - Life expectancy at birth (years, 2020/21): 70.2 - Gini index (2019): 35.7 - Real GDP growth (2023/24): 6.3 - Consumer prices (period average, 2023/24): 4.6 - Gross saving (percent of GDP, 2023/24): 29.9 - Gross investment (percent of GDP, 2023/24): 31.7 - Central government overall balance (percent of GDP, 2023/24): -6.0 - General government overall balance (percent of GDP, 2023/24): -8.8 - General government debt (percent of GDP, 2023/24): 82.0 - Broad money (M3) twelve-month percent change (2023/24): 10.8 - Bank credit growth (y/y percent change, end-period, 2023/24): 14.3 - Merchandise exports (in billions of U.S. dollars, 2023/24): 436.1 - Merchandise imports (in billions of U.S. dollars, 2023/24): 701.1 - Current account balance (in billions of U.S. dollars, 2023/24): -65.5 (In percent of GDP: -1.8) - Foreign direct investment, net (2023/24): -32.8 (negative sign denotes inflow) - Portfolio investment, net (2023/24): -30.6 (negative sign denotes inflow) - Gross reserves (in billions of U.S. dollars, end-period, 2023/24): 619.2 (In months of next year's imports (goods and services): 7.7) - External debt (in billions of U.S. dollars, end-period, 2023/24): 681.1 (External debt percent of GDP, end-period, 2023/24): 18.7 - Reserve money (in billions of rupees, selected): 30,297; 36,000; 40,689; 43,868; 44,556 (series shown) - Broad money (M3) (in billions of rupees, selected): 168,000; 188,446; 204,937; 223,438; 233,208 - Central government net lending / borrowing (overall balance, percent of GDP): -4.8 (2019/20), -8.6 (2020/21), -6.8 (2021/22), -6.5 (2022/23), -6.0 (2023/24), -5.8 (2024/25) - General government net lending/borrowing (percent of GDP): -7.7 (2019/20), -12.9 (2020/21), -9.6 (2021/22), -9.2 (2022/23), -8.8 (2023/24), -8.5 (2024/25) - General government debt (percent of GDP): 75.0 (2019/20), 88.5 (2020/21), 83.8 (2021/22), 81.0 (2022/23), 82.0 (2023/24), 82.4 (2024/25) ### Balance of payments and reserves (selected exact figures) - Current account balance (in billions of U.S. dollars): -24.6 (2019/20), 24.0 (2020/21), -38.7 (2021/22), -67.0 (2022/23), -65.5 (2023/24), -73.0 (2024/25) - Merchandise exports (in billions of U.S. dollars): 320.4 (2019/20), 296.3 (2020/21), 429.2 (2021/22), 456.1 (2022/23), 436.1 (2023/24), 460.6 (2024/25) - Merchandise imports (in billions of U.S. dollars): 477.9 (2019/20), 398.5 (2020/21), 618.6 (2021/22), 721.4 (2022/23), 701.1 (2023/24), 751.7 (2024/25) - Reserve assets, net (in billions of U.S. dollars, annual changes): 59.5 (2019/20), 87.3 (2020/21), 47.5 (2021/22), -9.1 (2022/23), 40.8 (2023/24), 54.7 (2024/25) - Overall balance (in billions of U.S. dollars): -59.5 (2019/20), -87.3 (2020/21), -47.5 (2021/22), 9.1 (2022/23), -40.8 (2023/24), -54.7 (2024/25) - Increase in gross reserve stock (including valuation changes, in billions of U.S. dollars): 64.9 (2019/20), 99.2 (2020/21), 30.3 (2021/22), -28.9 (2022/23), 40.8 (2023/24), 54.7 (2024/25) - Gross reserves (in billions of U.S. dollars, end-period): 477.8 (2019/20), 577.0 (2020/21), 607.3 (2021/22), 578.4 (2022/23), 619.2 (2023/24), 673.9 (2024/25) ### Macroeconomic framework projections (selected) - Real GDP (at market prices) projections: 6.3 (2023/24), 6.3 (2024/25), 6.3 (2025/26), 6.3 (2026/27), 6.3 (2027/28), 6.3 (2028/29) - Consumer prices (period average) projections: 4.6 (2023/24), 4.1 (2024/25), 4.1 (2025/26), 4.0 (2026/27), 4.0 (2027/28), 4.0 (2028/29) - Current account balance projections (in billions of U.S. dollars): -73.0 (2024/25), -83.0 (2025/26), -97.9 (2026/27), -116.9 (2027/28), -135.1 (2028/29) - Gross reserves (in billions of U.S. dollars, end-period, projections): 722.6 (2025/26), 777.6 (2026/27), 837.6 (2027/28), 906.8 (2028/29) - External debt (in billions of U.S. dollars, end-period, projections): 823.4 (2025/26), 907.1 (2026/27), 1,000.3 (2027/28), 1,103.9 (2028/29) - GDP in billions of U.S. dollars (projections): 4,037 (2024/25), 4,459 (2025/26), 4,917 (2026/27), 5,415 (2027/28), 5,959 (2028/29) ### Financial soundness indicators (selected exact figures) - Risk-weighted capital adequacy ratio (CAR) for scheduled commercial banks: 14.3 (2018/19), 14.8 (2019/20), 16.3 (2020/21), 16.8 (2021/22), 17.2 (2022/23) - Net nonperforming assets (percent of outstanding net advances) (all scheduled commercial banks): 3.7 (2018/19), 2.8 (2019/20), 2.4 (2020/21), 1.7 (2021/22) - Gross nonperforming assets (percent of outstanding advances, all scheduled commercial banks): 9.1 (2018/19), 8.2 (2019/20), 7.3 (2020/21), 5.8 (2021/22), 3.9 (2022/23) - Return on assets (net profit percent of total assets): -0.2 (2018/19), 0.1 (2019/20), 0.7 (2020/21), 0.9 (2021/22), 1.2 (2022/23) - NBFCs: risk-weighted capital adequacy ratio (CAR) 20.1 (2018/19), 23.7 (2019/20), 25.0 (2020/21), 26.8 (2021/22), 27.5 (2022/23) *Source: IMF staff compilation from the India: Selected Social and Economic Indicators, Balance of Payments, Reserve Money and Monetary Survey, Central Government Operations, General Government Operations, Macroeconomic Framework, and Financial Soundness Indicators tables in the provided chapter.* ### Annex I. Uptake of Previous IMF Advice ### Annex I. Uptake of Previous IMF Advice ### Overall uptake - The take up of past Fund advice has been mixed. - Monetary and fiscal policies since the last Article IV have been broadly consistent with IMF advice. - Challenges remain elevated for structural and financial sector reforms and medium-term fiscal consolidation. ### Monetary policy - The recalibration of monetary policy has been appropriate. - After a monetary policy tightening cycle, the authorities appropriately paused policy rate actions as inflation began to moderate, while providing strong commitment to returning inflation to target. ### Fiscal policy - The tight fiscal stance in the FY2023/24 Budget and continued focus on infrastructure investment is in line with Staff advice. - Remaining needs and recommendations: - Communicate credible measures that will underpin fiscal consolidation over the medium term. - Adopt a more ambitious consolidation strategy to rebuild buffers. - Revenue mobilization, particularly through reform of the GST, and better targeting of social support can help lower debt while supporting inclusive growth. - Transparency and fiscal management steps implemented: - Brought previously off-budget food subsidies on budget for FY2020/21, improving fiscal transparency. - The government stopped issuing fully serviced bonds to SOEs and public agencies. ### Financial sector policies - Policies have been broadly well calibrated and have largely moved beyond pandemic support measures. - Shifts in policy in line with staff advice: - Facilitating the exit of non-viable firms. - Encouraging banks to build capital buffers and recognize problem loans. - Progress and outstanding reforms: - Progress on financial sector reforms, including improving the governance of PSBs. - Other reforms, including privatization, remain pending. ### External sector responses - The authorities’ responses to external sector developments have not always been aligned with Fund advice. - Actions and observations: - Amid severe external shocks in 2022, the RBI used previously accumulated foreign exchange reserves to smooth excessive market volatility. - More recently, FXI has contributed to the exchange rate moving within a very narrow range. - Some progress on further liberalization to facilitate portfolio investment and FDI and promote India’s integration in GVCs. - Import and export restrictions continued to be tightened, despite Fund advice to phase out such policies. ### Structural reforms and governance - Implementation challenges persist across several structural reforms: - Limited progress on the implementation of four new labor codes. - Agricultural reforms remain pending. - Land reforms have not progressed. - Privatization efforts have been limited. - Further strengthening of the judicial system is needed, in line with previous staff advice. - Gender gaps in the labor market remain high and wide-ranging reforms are needed to address barriers to participation and to encourage women out of unpaid activities and into paid or higher productivity jobs. - Positive governance and administrative reforms: - Increased use of digital government services represents a significant governance reform. - The launch of the single window system for business approvals is welcome and should be expanded to further reduce bottlenecks and scope for corruption. *Source: Annex I. Uptake of Previous IMF Advice.* ### 1. De bt cove rage in the DSA: 1/CGGGN ### 1. Debt coverage in the DSA: 1/CGGGN ### Coverage and consolidation - Chosen coverage: central and state government. - Subsector inclusion (baseline): - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): No - State governments: Yes - Local governments: No - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No - Commentary: Authorities are working to expand the perimeter of public debt statistics to include local government and recently released a publication on municipal finances which covers 70 percent of urban local bodies in India. The debt of these municipal corporations are small, estimated at 0.05 percent of GDP in 2019/20. The SRDSA includes debt issued by SOEs that are fully serviced by the Government of India. - Reported sectoral holdings (nominal holder/issuer table excerpt): - State govt. (holder): 4,618 - Budget. central govt (issuer): 3,037 - Total reported (sum shown): 7,655 ### Instrument coverage, accounting and valuation (as reported) - Basis of recording: Non-consolidated / Consolidated distinctions shown (CPS, NFPS, GG expected); specific rows indicate non-cash basis and cash basis, nominal value, face value, and market value distinctions. - Debt categories referenced: Debt securities; Loans; IPSGSs; Currency & deposits; Other accounts payable. - Valuation notes: Nominal value; Face value; Market value; accrual recording/commitment/due for payment options are referenced. ### Reporting on intra-government debt holdings - Nonfinancial public corp., Central bank, Other public financial corp, Extra-budgetary funds, Social security funds, Local govt. rows shown with dashes indicating non-inclusion or not applicable in the reporting table. --- ### Public debt structure and financing characteristics (Figure 3 commentary) - Key structural points: - Bulk of financing needs expected to continue to be met by issuance of medium and long-term debt denominated in domestic currency and held by residents. - Distribution of issuances across maturities follows those observed in FY2022/23. - Foreign-currency denominated debt largely on concessional terms. - Inclusion of India in global bond indices expected to increase nonresident ownership in India’s bond market. - Residual maturity (2022): 11. years - Projection note: Projections shown for currency composition, holder composition, governing law, instrument type, and maturity with projections through 2031. --- ### Baseline scenario projections and fiscal dynamics (Figure 4) - Public debt (percent of GDP; fiscal year): - 2022: 81.0 - 2023: 81.9 - 2024: 82.3 - 2025: 82.1 - 2026: 81.5 - 2027: 80.8 - 2028: 79.9 - 2029: 79.1 - 2030: 78.2 - 2031: 77.3 - 2032: 76.4 - Change in public debt (percent of GDP): - 2022: -2.7 - 2023: 0.9 - 2024: 0.4 - 2025: -0.2 - 2026: -0.6 - 2027: -0.8 - 2028: -0.8 - 2029: -0.8 - 2030: -0.9 - 2031: -0.9 - 2032: -0.9 - Contribution of identified flows (percent of GDP): mirrors Change in public debt row for same periods (values above). - Primary deficit (percent of GDP): - 2022: 4.1 - 2023: 3.4 - 2024: 2.9 - 2025: 2.5 - 2026: 2.3 - 2027: 2.3 - 2028: 2.2 - 2029: 2.2 - 2030: 2.3 - 2031: 2.3 - 2032: 2.3 - Noninterest revenues (percent of GDP): 19.3 repeated across projection years with slight variations shown as 19.3, 19.4, 19.5, 19.6, 19.7. - Noninterest expenditures (percent of GDP): 23.4, 22.7, 22.2, 21.9, 21.8, 21.9, 21.9, 21.9, 21.9, 22.0, 22.0 - Automatic debt dynamics (percent of GDP): -6.2, -2.3, -2.1, -2.4, -2.6, -2.7, -2.7, -2.8, -2.9, -2.9, -2.9 - Real interest rate and relative inflation (percent): - Row: -0.7, 2.6, 2.7, 2.5, 2.3, 2.2, 2.0, 1.9, 1.8, 1.7, 1.6 - Real interest rate: -0.7, 2.6, 2.7, 2.4, 2.3, 2.1, 2.0, 1.9, 1.8, 1.7, 1.6 - Relative inflation: 0.0, 0.0, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Real growth rate (percent): -5.7, -4.8, -4.9, -4.9, -4.9, -4.9, -4.8, a.-4.7, -4.7, -4.6, -4.6 (as shown) - Other identified flows (percent of GDP): -0.3 each year across the projection, with last two years -0.2 and -0.2 - Contingent liabilities (percent of GDP): 0.0 across projection - (minus) Interest Revenues (percent of GDP): -0.1 repeated - Other transactions (percent of GDP): -0.2 repeated; last year -0.1 - Contribution of residual (percent of GDP): -0.4, 0.0, -0.1, 0.0... zeros thereafter - Gross financing needs (percent of GDP): - 2022: 15.8 - 2023: 15.1 - 2024: 15.2 - 2025: 15.2 - 2026: 14.9 - 2027: 13.9 - 2028: 13.7 - 2029: 13.5 - 2030: 13.6 - 2031: 13.2 - 2032: 12.3 - Of which: debt service (percent of GDP): 11.7, 11.7, 12.4, 12.8, 12.6, 11.7, 11.6, 11.3, 11.4, 11.0, 10.1 - Local currency debt service: 11.5, 11.4, 12.1, 12.6, 12.4, 11.5, 11.4, 11.2, 11.3, 10.9, 10.0 - Foreign currency debt service: 0.3, 0.3, 0.3, 0.3, 0.3, 0.2, 0.2, 0.2, 0.2, 0.1, 0.1 - Memo: Macro assumptions - Real GDP growth (percent): 7.2, 6.3, 6.3, 6.3, 6.3, 6.3, 6.3, 6.3, 6.3, 6.3 - Inflation (GDP deflator; percent): 8.2, 3.9, 4.1, 4.1, 4.1, 4.0, 4.0, 4.0, 4.0, 4.0 - Nominal GDP growth (percent): 16.1, 10.5, 10.6, 10.7, 10.7, 10.6, 10.5, 10.5, 10.5, 10.5 - Effective interest rate (percent): 7.2, 7.4, 7.7, 7.4, 7.1, 6.9, 6.8, 6.6, 6.5, 6.4, 6.3 - Staff commentary summary: - Public debt will gradually decline over the medium term, reflecting continued favorable interest-growth differential and lower contribution from primary deficits due to fiscal consolidation. - Economic growth is at potential, inflation expected to return to the RBI's central target and the monetary policy tightening cycle has paused. - Debt remains high by the end of the medium term. - Gross financing needs are substantial, averaging 15 percent of GDP over the medium term. - Other transactions capture proceeds from asset sales. --- ### Realism and historical track record (Figure 5 summary) - Forecast track record: does not flag realism issues; shows a mix of optimism and pessimism within accepted bounds. - Debt-creating flows: medium-term flows reflect fiscal consolidation and sound economic growth; historically they largely reflect pandemic response. - Spreads: narrow over projection as India paused monetary policy tightening; Laubach rule less applicable over projection period. - Three-year debt adjustment: around median of comparator countries. - Adjustment in cyclically-adjusted primary balance: ambitious compared to peers but feasible relative to India's historical experience. - Fiscal consolidation effects on GDP growth offset by recovery in investment with higher multipliers. --- ### Medium-term risk assessment (Figure 6) - Debt fanchart module: - Fanchart width: 35.8 0.5 - Debt fanchart index (DFI): 1.8 - Risk signal: Moderate (per figure legend) - Gross financing needs (GFN) module: - Average baseline GFN: 14.7 5.0 (percent of GDP) - Banks' claims on the govt (pct bank assets): 23.2 7.5 - Change in banks' claims in stress (pct banks' assets): 3.5 1.2 - GFN financeability index (GFI): 13.7 - Risk signal: Moderate - Final assessment: - Medium-term index: Risk signal 5/ (final assessment indicated "Moderate") - Prob. of missed crisis, 2023-2028, if stress not predicted: 18.2 pct. - Prob. of false alarms, 2023-2028, if stress predicted: 21.6 pct. - Commentary: Analysis suggests a moderate risk of sovereign stress over the medium term. While debt is likely to stabilize in the medium term, it does so at an elevated level. Gross financing needs are substantial and banks' claim on government are high compared to peers. The increase in GFN under a stress test is sizeable. Contingent liabilities, including those related to electricity distribution companies, increase debt sustainability and financing risks. --- ### Long-term risk assessment and climate scenarios (Figure 7) - Baseline long-run outlook: Favorable interest-growth differential and fiscal consolidation expected to gradually reduce debt and gross financing needs; primary deficit at end of projection period below debt-stabilizing primary deficit. - Climate adaptation (customized scenario): - Adaptation investment needs estimated at 3 percent of GDP (customized scenario). - With traditional financing sources, debt expected to reach over 100 percent of GDP, indicating need for concessional financing and greater private sector involvement. - Climate mitigation: - Investment needs estimated between 4-8 percent of GDP per year (Ghosh and others, 2023). - If financed using same instruments as the general government deficit, debt could reach as high as 136 percent of GDP, indicating need for concessional financing, greater private sector involvement and carbon pricing or equivalent mechanisms. --- ### Annex V — India’s Medium Term Fiscal Framework (MTFF) background and policy context - MTFF purpose: Statement of fiscal strategy with fiscal aggregates (revenue, expenditure, financing) to inform annual budget process. - FRBM Act 2018 targets: - Target debt-to-GDP ratio for central and state governments: 40 and 20 percent, respectively, to be achieved by 2024/25. - Ceiling on the fiscal deficit for the central government: 3 percent. - Historical note: - Initial FRBM Act 2003 did not specify a debt target; it directed the Union government to present a 3-year rolling plan for elimination of the revenue deficit and reduction of the fiscal deficit to 3 percent of GDP. - States mirrored the FRBM Act; many states do not have a debt anchor or it may not be aligned with the central general government debt target. - Pandemic-related suspension and adjustments: - 2021/22 Budget: FRBM Act targets not applicable due to COVID-19; Act to be amended; 3 percent deficit ceiling removed; medium-term expenditure framework not presented to parliament. - Framework includes escape clause allowing expansion of the deficit by at most an additional 0.5 percent of GDP under specified conditions; judged insufficient for the pandemic response. - De-facto anchors post-pause: - Center: de-facto fiscal anchor of a deficit target of 4.5 percent of GDP by 2025/26. - States: follow annual deficit path recommended by the 15th Finance Commission (for FY2023/24 it is 3.5 percent of GDP, of which 0.5 percent is contingent on achieving power sector reforms). *Source: IMF staff estimates and projections as presented in the content unit.* ### 3. Prior to the pandemic, the target for the ### 1indea2023001 - 3. Prior to the pandemic, the target for the ### Fiscal performance and reporting issues - Prior to the pandemic, the center’s deficit targets were repeatedly breached; outturns fell short of the desired medium-term consolidation path, partly due to overoptimistic revenue projections. - Since FY2021/22 revenue projections have been based on conservative macroeconomic projections and the central government’s deficit targets have been met. - State deficits have generally been below 3 percent of GDP since FY2005/06, since borrowing of states is regulated by the center. - Off-budget spending by the center and states reduces the meaningfulness of adherence to headline deficit targets. - The center brought previously off-budget food subsidies on budget in FY2021/22. - India is one of three G20 countries which does not report general government data in line with GFS; consolidated center and state data in Indian Public Finance Statistics come with a one-year lag. - RBI published municipal state finances covering 70 percent of urban local bodies; progress is being made on publishing quarterly central government GFS-standard data. ### Implementing an effective Medium-Term Fiscal Framework (MTFF) - MTFFs operationalize fiscal rules, explicitly manage fiscal risks, provide forward guidance to annual budgets, and can reduce borrowing costs (references in source). - Effective MTFF characteristics (Caselli and others, 2022): realistic and internally consistent medium-term macroeconomic projections; a feasible fiscal path; flexibility in response to shocks; transparency on fiscal anchors and guardrails; risk-based debt sustainability approach; assessment of fiscal risks; checks and balances; integration with the budget process. - Recommended institutional change: replace the Macroeconomic Framework Statement and Medium-Term Fiscal Policy Statement with a Fiscal Strategy Statement to be discussed by Cabinet early in the budget cycle (e.g., August), tabled in Parliament and published as a pre-budget statement to launch top-down budgeting and require three-year budget estimates from line ministries. ### Fiscal risks and data gaps - A comprehensive assessment of fiscal risks should include: macroeconomic conditions; policy delays; financial sector risks (notably public sector banks); state-owned enterprises; PPPs; pension liabilities; environmental risks; guarantees and contingent liabilities. - Specific fiscal risk figures highlighted for India: - Central government guarantees: 2.2 percent of GDP in March 2022. - SOE loan guarantees by state government: 4.5 percent of GDP. - Possible bail out of state electricity distribution companies: 2.3 percent of GDP (based on past bailouts). - Closing data gaps and shortening reporting lags requires closer coordination across government levels, common reporting standards, a shared calendar, and a dedicated platform to share fiscal information. ### Role of sub-national governments - State-level expenditure accounts for approximately 57 percent of total recurrent spending and 67 percent of capital expenditure (excluding defense). - States face substantial contingent liability risks (e.g., electricity distribution companies). - State fiscal responsibility laws should align fiscal anchors with the post-pandemic FRBM Act; anchors could be differentiated across states by fiscal position and debt sustainability risk, with the finance commission recommending appropriate anchors and medium-term adjustment paths. - States currently have limited market incentive for ambitious consolidation because yields of state government securities are within a narrow band despite large fiscal performance variation. ### Checks, balances, and credibility mechanisms - New MTFF should include checks and balances to support accountability and build credibility; discuss addressing repeated deviations or non-compliance. - Independent fiscal councils provide ex-ante assessment, monitor adherence, evaluate forecasts, and cost measures; in 2021 there were 49 countries with fiscal councils. - Increase transparency by reporting assumptions underlying adjustment paths, explicitly costing policy measures, and presenting comprehensive risk assessments and contingency plans. - Options to improve revenue forecasting credibility: use independent economic projections (examples: Canada, United Kingdom, Netherlands) or compare budget forecasts to consensus forecasts with explanations for large deviations. ### Fiscal rules, anchors, and policy choices - Post-pandemic, the FRBM Act’s debt target is no longer appropriate; need a medium-term numerical anchor and fiscal strategy consistent with development goals while rebuilding buffers. - Empirical thresholds and current levels: - General government debt above 66 percent of GDP estimated to have detrimental effect on growth. - Current debt levels around 81 percent of GDP. - Since FY2022/23, the de-facto fiscal anchor for India has been a general government deficit target of 7.5 percent of GDP by FY2025/26. - Fiscal rule design considerations: - Debt anchor should be set well below the debt limit so breaching probability under shocks is low. - Deficit limits can be pro-cyclical; cyclically adjusted (structural) balances mitigate this but pose estimation and communication challenges. - Expenditure rules are less pro-cyclical but may mute incentives to raise revenues. - India’s estimated annual public and private expenditure needs to reach SDG targets: 6.2 percent of GDP per year. - Quantitative fiscal simulations indicate it is possible to increase capital expenditure while maintaining fiscal objectives. ### Debt dynamics, baseline and reform scenarios - Under currently announced policies: - Primary deficit gradually narrows to around 2 percent of GDP by FY2028/29. - Assuming nominal economic growth of 10.5 percent and interest rate at 6.25 percent implies debt would eventually stabilize at around 57 percent of GDP (SRDSA Annex IV assumptions). - Starting from current debt levels, it would take decades to reach 57 percent; in ten years debt remains above 76 percent of GDP. - Authorities’ de-facto fiscal anchor (primary deficit of 1.5 percent of GDP) would see debt reach 71 percent of GDP by FY2032/33 if maintained. - Staff’s proposed reform scenario: target a primary deficit of 0.4 percent of GDP by FY2027/28, which would yield: - Debt reaching 74 percent of GDP in FY2028/29. - Debt reaching 65 percent of GDP by FY2032/33. - Likely keeping debt below 100 percent of GDP over the next five years. - Long-term investment for net zero by 2070 estimated at between 4 and 8 percent of GDP per year; financing it with current funding mix would push debt to over 130 percent of GDP and increase annual financing needs to around 27 percent of GDP per year (Annex IV Figure 6). ### Escape clauses and flexibility - Escape clauses should specify: limited and clearly defined triggering events; the authority who can activate; timeline and procedures to return to the rule; an effective control mechanism; and a communication strategy. - India’s pandemic escape clause limited deviation to 0.5 percent of GDP and was insufficient for a shock of the pandemic’s magnitude; the allowed deviation size should be reviewed. - Activation of escape clauses must be accompanied by a medium-term plan to return to the anchor or review the anchor, demonstrating how fiscal sustainability will be restored. ### Summary of recommended reforms - Strengthen linkage between MTFF, fiscal objectives, and the budget process (use a Fiscal Strategy Statement as pre-budget top-down guidance). - Conduct comprehensive assessment of fiscal risks and design mitigation strategies, incorporating guarantees, SOE liabilities, contingent liabilities, and climate-related investment needs into scenarios. - Close fiscal data gaps, align reporting with GFS, shorten reporting lags, and improve coordination across government levels. - Adopt a medium-term numerical anchor consistent with development goals and rebuild buffers at an appropriate pace while preserving flexibility through well-designed escape clauses and contingency plans. - Operationalize fiscal rules within medium-term plans and integrate them in the annual budget cycle to ensure adherence and credibility. *Source: 1indea2023001* ### 2022. The authorities have re-affirmed their commitment to the deficit ceiling with a budgeted deficit of ### 1indea2023001 - 2022. The authorities have re-affirmed their commitment to the deficit ceiling with a budgeted deficit of ### Fiscal stance, debt, and IMF staff assessment - Budgeted deficit: 2.8 percent of GDP in 2023. - Debt: 40.1 percent of GDP in 2022. - IMF Staff view: - The deficit ceiling is considered an appropriate and credible anchor. - A medium-term strategy is needed to clarify medium-term budget objectives, risks and contingency policies to support the development agenda. ### Capacity development, surveillance priorities, and planned TA - Surveillance/program priorities: - Enhancing policy space through a credible and clearly communicated medium-term fiscal consolidation strategy. - Financial sector and regulatory policies and financial structural reforms, including promoting governance to safeguard the resilience of the economy. - Steadfast implementation of announced and additional structural reforms. - Recent and planned CD/TA activities (selected): - TA on fiscal-related issues at the state level: Medium-term fiscal framework and fiscal strategy, cash management, commitment control, strategic budgeting, performance measures, budget documentation. - Technical mission to review the RBI’s stress testing model framework. - Closing G20 data gaps, including organizing a customized Government Financial Statistics (GFS) workshop. - Real sector statistics: updating CPI, developing double deflation procedures to derive estimates of GDP in constant prices, and the use of VAT data for GDP compilation. - Ongoing FY2024 workplans: TA/training on fiscal issues at the state level; TA on compilation of financial accounts and balance sheets; TA/training on compiling a producer price index for services; macro, monetary, fiscal and debt-related cohort training at the national level. - Technical dialogue with MOF’s Budget office: i. Debt and Cash Management strategies; ii. Budget Formulation including Supplementary Budgets and gender budgeting; iii. Expenditure Management; iv. Fiscal Analysis & Fiscal Forecasting. - Enhancing technical cooperation with RBI Financial Stability Department on stress testing model framework. - Focusing on AML/CFT issues, including a regional AML/CFT workshop in the context of India’s upcoming FATF (fifth round) assessment. ### Sub-national fiscal reforms: Odisha and Tamil Nadu (examples and outcomes) - Odisha: - Implemented revenue mobilization and expenditure rationalization in the 2000s, including a freeze on public sector hiring and development of a fiscal framework. - Debt reduced to 15 percent of GSDP in FY2012/13 following a peak at 51 percent in FY2002/03. - Economy grew by an average of 9.1 percent, 1.5 percentage points above national average. - Authorities reported a 25-percentage point reduction in the poverty rate between FY2004/05 and FY2020/21. - Engagement with SARTTAC since 2019 covering MTFF, fiscal risk assessment, commitment control and cash management. - Odisha’s MTFF and fiscal risk assessment helped navigate shocks during the pandemic. - Tamil Nadu: - 2022 electricity sector reforms: electricity tariffs for commercial consumers increased by 25 percent (first increase since 2012); introduced a formula-based annual tariff adjustment mechanism while retaining some subsidies. - Reports suggest reforms reduce contingent liability risks; a bailout could cost the Tamil Nadu budget 5.2 percent of state-level GDP (Mukherjee and others, 2022). - With SARTTAC support since 2021, Tamil Nadu improved MTFF, strategic budgeting, fiscal risk management, budget communications, and cash and public investment management. - Released a Citizen’s Budget for FY2022/23 to improve budget transparency. ### Integrated Policy Framework (IPF) application and macro-financial scenario analysis - Context and calibration: - India characterized by robust growth, high inflation (above mid target of 4 percent), and ample external buffers. - Foreign exchange reserves covering more than 150 of ARA metric at end-2022. - Dominant currency invoicing: almost 90 percent of India’s total exports and imports were invoiced in US dollars in 2019. - FX mismatches: 46 percent of FX external currency borrowing, excluding FDI borrowings from foreign parent companies, was unhedged in March 2023. - Exchange rate pass-through: around 7 percent based on RBI’s quarterly projection model. - IMF QIPF model suggests FX market depth is mostly deep but occasionally shallow; episodes of shallower markets include 2008Q2 and 2020Q2. - IPF frictions guiding FXI use include: (A) destabilizing premia from arbitrage frictions in shallow FX markets; (B) countering financial stability risks due to FX mismatches; (C) preserving price stability when exchange rate changes risk de-anchoring inflation expectations. - Scenarios considered: - Scenario 1 — Global inflation pressure intensifies (global trade fragmentation and wider geopolitical conflict): - Advanced economy policy rates rise faster than baseline. - India hit by inflationary shocks; RBI resumes tightening despite a softening economy. - India faces some exchange rate depreciation but inflation expectations remain well-anchored; no large UIP premium shock. - Scenario 2 — Disorderly tightening of global financial conditions: - Aggressive interest rate hikes lead to global financial market turmoil and sharp global slowdown. - Large UIP risk premium shocks cause significant exchange rate depreciation for India. - Domestic credit conditions tighten and output declines from foreign spillovers and monetary/financial tightening. - Policy options analyzed: - IR only: adjustment in the policy rate. - IR+FXI: interest rate policy combined with foreign exchange intervention. - Key model findings (Scenario 1): - External shocks raise core inflation in foreign economies during 2023-2025 relative to baseline. - Interest rate hikes abroad lead to almost 4 percent Rupee depreciation in real effective terms. - India’s core inflation rises by almost 2 percentage points at its peak. - Output gap turns negative as domestic demand drops despite some net export gains. - Under IPF guidance, FXI is not warranted because the FX market remains deep and there are no adverse currency risk-off shocks. - Under IR only, the RBI needs to raise policy rate by about 0.3 percentage points at its peak compared to the baseline; inflation expectations remain well anchored and headline inflation gradually converges to the 4 percent target while the negative output gap improves. - Use of IR+FXI does not provide additional benefits in easing depreciation, closing the output gap, or mitigating inflationary pressures in this scenario. ### Key statistics and quantitative markers (verbatim from source) - Budgeted deficit in 2023: 2.8 percent of GDP. - Debt in 2022: 40.1 percent of GDP. - Odisha debt: 15 percent of GSDP in FY2012/13; peak 51 percent in FY2002/03. - Odisha average growth: 9.1 percent; 1.5 percentage points above national average. - Poverty reduction: 25-percentage point reduction between FY2004/05 and FY2020/21. - Tamil Nadu commercial electricity tariff increase: 25 percent. - Potential bailout cost for Tamil Nadu: 5.2 percent of state-level GDP. - Foreign exchange reserves covering more than 150 of ARA metric at end-2022. - Invoicing in US dollars in 2019: almost 90 percent of total exports and imports. - Unhedged FX external currency borrowing in March 2023: 46 percent (excluding FDI borrowings from foreign parent companies). - Exchange rate pass-through estimate: around 7 percent. - IR peak policy rate adjustment in Scenario 1: about 0.3 percentage points. - Rupee real effective depreciation in Scenario 1: almost 4 percent. - India core inflation peak increase in Scenario 1: almost 2 percentage points. - QIPF model identification of shallow FX market episodes: 2008Q2 and 2020Q2. *Source: content unit 1indea2023001.* ### 7. Under Scenario 2, global financial market turmoil, as a result of aggressive interest ### 7. Under Scenario 2, global financial market turmoil, as a result of aggressive interest rate hikes in the US and other key central banks, leads to a risk-off episode with capital outflows and higher domestic risk premiums. ### Scenario description and transmission - Global financial market turmoil triggered by aggressive interest rate hikes in the US and other key central banks causes a risk-off episode with capital outflows and higher domestic risk premiums. - Large shocks occurring when the FX market is notably shallower can cause significant exchange rate depreciation. ### Macroeconomic effects (model simulation results) - Real rupee exchange rate: sharp depreciation of the real rupee exchange rate (15 percent at its peak). - Trade and demand: - India’s exports decline as foreign demand declines despite the gain in competitiveness. - Net exports, on average, remain positive as imports also fall. - The downturn in domestic demand outweighs the improvement in net trade. - Output and inflation: - India’s output gap is negatively impacted and worsens over time. - India’s core inflation increases slightly driven by the depreciation. ### Role and effects of foreign exchange intervention (FXI) - Context: destabilizing capital outflows in shallow FX markets. - FXI can ease the inflation-output tradeoff for policymakers when large capital outflow shocks occur in a shallower FX market. - Simulated intervention: - An FX intervention of about 2.5 percent of GDP moderates inflationary pressures by reducing the UIP risk premia and limits the rupee depreciation (from 15 percent to 5 percent at peak). - Core inflation still rises but by less compared to an IR-only policy and converges to the 4 percent headline inflation target towards the end of the projection period. - Use of FXI reduces pressure on the policy rate hike, reducing the drag on domestic activity. - Output gap outcomes: - Under IR+FXI: output gap, despite being negative from adverse shocks, gradually improves over the medium term. - Under IR only: output gap deteriorates further over time. - Smaller policy rate hike when both tools are used implies a smaller increase in the long-term rate and may be less disruptive to domestic fixed income and funding markets. ### Policy guidance and constraints on FXI use - FXI should be part of the policy toolkit for external shocks but only used under certain circumstances. - Effectiveness conditions and limits: - Scope for FXI use relies on its effectiveness in stabilizing the exchange rate. - In some cases, meaningful impact on the exchange rate may require large amounts of reserves, making FXI costly and infeasible if reserves are limited. - FXI is notably less effective when the FX market is deeper; model estimations indicate India’s FX market is often deep and liquid. - Therefore, effectiveness of FXI in easing inflation-output trade-offs is likely limited in normal times when FX markets are liquid. ### Relevant policy actions and implementation progress (financial sector resilience) - Improve governance and financial operations of public sector banks (PSBs); develop strategic plan for consolidation, divestment, and privatization. - Number of PSBs as of March 2021: 12 (reduced via consolidation). - A majority stake in a PSB was sold to the state-owned Life Insurance Corporation of India and the bank has been classified as private sector bank since January 21, 2019, for regulatory purpose. - Recent budget speech: Finance Minister announced that in addition to IDBI Bank, two Public Sector Banks will be privatized; Government of India and RBI are discussing modalities. - Conduct granular assessments of banks’ capital needs and require additional provisions and swift recapitalization and restructuring. - Recapitalization plan and injections: - Indian rupee (INR) 881 billion infused in FY2017/18 (excluding INR 19 billion injected during the year before the announcement of the Plan). - Capital injection in FY2018/19 raised from INR 650 billion to INR 1.06 trillion. - Additional INR 700 billion in FY2019/20 and INR 200 billion in FY2020/21 has been infused. - In FY2021/22, INR 46 billion has been infused. - Since Q3 2018, the Banks Board Bureau conducts quarterly assessments of PSB capital requirements; RBI carries out assessments and shares them with the Government of India. - Redesign corporate debt restructuring mechanisms to be more flexible. - Prudential Framework for Resolution of Stressed Assets issued by RBI on June 7, 2019, replaces prior guidelines and allows lenders discretion to design resolution plans, early recognition/reporting, and disincentives for delays. - Accounting and provisioning frameworks and supervisory powers: - Indian Accounting Standards (Ind AS) implementation by Scheduled Commercial Banks was planned from April 1, 2018 but deferred; a Discussion Paper on Introduction of Expected Credit Loss Framework for Provisioning was released by RBI on January 16, 2023. - No amendments have been made to the legal framework to provide RBI full supervisory powers over PSBs. - Insurance supervision and risk-based regimes: - IRDAI formed committees and took steps toward a risk-based capital regime and risk-based supervision; a consultant appointment was approved in the Authority’s 112th meeting on 17/03/2021. - Securities regulation and market monitoring: - The Companies Act 2013 provides disclosure requirements; arrangements for information sharing between the Ministry of Corporate Affairs and SEBI exist. - SEBI has issued measures to streamline non-compliance procedures and developed an Early Warning System aggregator model. - An Expert Committee to integrate spot and derivatives markets for commodities trading submitted recommendations on February 12, 2018, many of which have been implemented by RBI/SEBI. *INDIA — INTERNATIONAL MONETARY FUND* ### 10. Financial markets infrastructure ### 10. Financial markets infrastructure ### Oversight — Improve stress testing scenarios and methodologies - Recommendation: Improve stress testing scenarios and methodologies. - CCIL reviews stress testing scenarios and methodologies on an ongoing basis. - A comprehensive review of the stress testing processes and methodologies in CCIL is done every year by external experts. ### Clearing Corporation of India (CCIL) — Revisions to stress testing and default fund sizing (since July 2018) - Since July 2018: stress losses are assessed more conservatively by assuming that the members will default in their incremental Mark-to-Market (MTM) margin and Volatility margin requirements. - Since February 2019: any downward revision in Default Fund at the time of month-end evaluation is subject to a floor of 85% of the prevailing default fund. - Since September 2019: - In Forex Forwards and Rupee Derivatives segments, CCIL is maintaining the Default Funds as per the Cover 2 criterion: the sum of the highest stress loss on account of a member and its affiliates and the second highest stress loss on account of a member and its affiliates in the past six months, plus stress losses on account of five weak entities. - CCIL's contribution towards default waterfall, linked to the member contributed default fund, has increased significantly. - A 25% weightage is given to the highest stress loss of a member while determining the member's default fund requirement; gross position and initial margin carry weightages of 50% and 25% respectively. - Stress testing methodology modified to incorporate clearing member structure in Securities, Forex Forwards and Rupee derivatives segments: client level losses (ignoring gains) under a given stress scenario are aggregated with their respective clearing member's gains or losses. - Since October 2020: the threshold for intra-month revision in default fund is lowered and made equal to the prevailing level of default fund (previously set equal to 95% of total prefunded resources). - Since February 2021: with implementation of auction-based default handling in derivatives segments, the Stress Period of Risk (SPOR) increased: - from two days to five days in Forex Forwards segment; - from three days to five days in Rupee Derivatives segment for trades linked to the Mumbai Interbank Offer Rate (MIBOR) benchmark. - Since October 2021: CCIL maintains prefunded default handling resources as 125% of Cover 1/ Cover 2 stress loss, as the case may be, plus stress losses on account of five weak entities. - For each clearing service, members are required to contribute 80% of the requirement or higher, whereas CCIL contributes to the extent of 20% of the requirement (subject to availability of balance in Settlement Reserve Fund (SRF)). - Prior to October 2021, if SRF balance could be insufficient, the SRF corpus was pro-rata allocated across all segments and the aggregate prefunded default handling resources for each clearing service would be lower than 125% of the respective Cover 1/Cover 2 stress losses. - Since January 2022: with the increase in Margin Period of Risk in Securities segment, SPOR increased from three days to five days. - With introduction of Clearing Service for interest rate swap (IRS) trades linked to Modified MIFOR (MMFOR) effective from April 2023: - Stress Testing process for Rupee Derivatives MIFOR sub-segment modified to compute stress losses on MIFOR and MMFOR trade portfolios at aggregate level, with no set-off available against gains on either portfolio. - The MIFOR Default Fund is available for management of default of members in either, or both, the trade portfolios. ### Crisis management framework — legislative and institutional measures - Recommendation highlights: - Resolution legislation should preserve RBI’s full supervisory authority over going concern banks, and promote equal treatment of domestic and foreign creditors. - Improve the frameworks for emergency liquidity assistance, deposit insurance, and crisis preparedness. - Status of legislation: - Consultations with Government of India regarding the proposed legislative framework for resolution of banks and other Regulated Entities (REs) of RBI—erstwhile Financial Resolution and Deposit Insurance (FRDI) Bill, now re-phrased as Financial Sector Development and Regulation (Resolution) Bill (FSDRR Bill), 2021—are a work in progress. - Issues to be addressed in reconsideration of the Bill include duplication of supervisory authority in the pre-resolution phase, strengthening of resolution tools and safeguards, recovery and resolution plans, treatment of domestic and foreign liability holders, and crisis preparedness. - Deposit Insurance and Credit Guarantee Corporation (DICGC) Act amendments: - The Deposit Insurance and Credit Guarantee Corporation Act, 1961 was amended on August 27, 2021; amendments came into force from September 1, 2021. - A key amendment mandates payment to depositors be completed within 90 days from the date of imposition of direction by the Reserve Bank. - The insured bank has to submit claim after imposition of such restriction within 45 days. - The Corporation has to get the claims verified within 30 days and pay the depositors within the next 15 days. - If the Reserve Bank brings a scheme of amalgamation/compromise or arrangement/reconstruction, the liability of the Corporation will get extended by a further period of 90 days. - Other amendments: - The DICGC may raise the limit of 15 paise per ₹100 of deposits on insurance premium with the prior approval of the Reserve Bank. - The DICGC, with the approval of its Board, may defer or vary the repayment period for the insured bank to discharge its liability to the DICGC and charge penal interest of 2 per cent over the repo rate per annum for the amount to be repaid to the Corporation in case of delay. - Crisis preparedness measures: - Under the Financial Stability and Development Council framework, the ‘Early Warning Group’ meeting frequency increased from once in three months to at least every two months. - Systemic concerns arising out of particular entity or entities identified by the sectoral regulator are deliberated, on a case-to-case basis, amongst the financial sector regulators at the EWG level. - Emergency liquidity assistance: - The RBI has a board-approved lender of last resort policy in place that incorporates constructive ambiguity and flexibility. ### Market integrity — politically exposed persons (PEPs) and predicate offences - Recommendation: Subject domestic politically-exposed persons to adequate due diligence and qualify domestic tax evasion as predicate to money laundering. - Current status: - The definition of politically exposed persons remains as those who have been entrusted with public functions in a foreign country, including Indians serving in high positions in a foreign country. - Tax evasion through foreign income and assets is a predicate offence to money laundering (Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015). - Domestic tax evasion qualifies as a tax crime in the Indian context, but it has not yet been made a predicate offence to money laundering. ### Market development — SLR, liquidity framework, and Priority Sector Lending (PSL) - Recommendation: Progressively reduce the SLR to help deepen markets and encourage lending. - Statutory Liquidity Ratio (SLR) developments: - The SLR has been reduced from 22.5 percent in June 2014 to 18 percent of net demand and time liabilities (NDTL) since April 2020. - Level 1 High Quality Liquid Assets (HQLAs) for computing the LCR include: - (a) Government securities in excess of the mandatory SLR requirement; and - (b) within the mandatory SLR requirement, Government securities to the extent allowed under (i) Marginal Standing Facility (MSF), [which is 2 percent of NDTL], and (ii) Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [which is 16 per cent of the banks’ NDTL since April 2022]. - Taking into account the carve out allowed under FALLCR and MSF, the SLR has been aligned with the Liquidity Coverage Ratio. - Recommendation: Undertake a cost-benefit and gap diagnostic of the PSL program and develop a plan to reduce its scope and ensure it targets underserved segments. - PSL and related reforms: - A review of the PSL guidelines was carried out and revised guidelines were issued to banks on September 4, 2020. - Significant changes under the revised guidelines include: - financing of start-ups; - increased limits for renewable energy, including solar power and compressed bio gas plants; - higher limits for health infrastructure; - increasing the targets for lending to ‘Small and Marginal Farmers’ and ‘Weaker Sections’ in a phased manner. - To address regional disparities in priority sector credit, an incentive framework assigns higher weight for incremental priority sector credit in identified districts with lower credit flow and lower weights for districts with comparatively higher credit flow. - Overall, revised guidelines aim to encourage and support environment friendly lending policies to help achieve Sustainable Development Goals (SDGs). - PSL target detail: - For scheduled commercial banks under Priority Sector Lending, there is a target of 7.5 percent of Adjusted Net Bank Credit (ANBC), or Credit Equivalent Amount of Off-Balance Sheet Exposure, to micro enterprises. *Source: 1indea2023001 - 10. Financial markets infrastructure* ### 5. Financing challenges can be broadly classified into supply and demand problems, ### 1indea2023001 - 5. Financing challenges can be broadly classified into supply and demand problems, ### Financing challenges: supply-side constraints - Lenders (particularly banks) find the underwriting process costly and less straightforward given the lack of collateral and financial information among MSME borrowers. - Lending to MSMEs is constrained by: - smaller ticket sizes, - higher default rates, - potentially challenging collections, - weaker bank penetration in some lower income states and rural areas. - Specific program and market figures: - ECLGS guarantees totaling 3.61 lakh crore (to 1.19 crore borrowers) have been issued. The program was launched in May 2020, and extended until March 2023. - Trade Receivables Discounting System (TReDS) allows trading, settlement, and discounting of bills and invoices from MSMEs, with eligible participants including banks, NBFCs, and corporates. - Credit-risk segmentation: - Low, medium, and high risk are defined by CIBIL MSME Rank (CMR) scores, developed by Transunion Cibil, which is designed to predict the probability of an MSME becoming NPA in the next 12 months. - Supervisory and programmatic notes: - Recent regulatory developments clarify some fintech–bank arrangements; supervisory follow up will be needed as interactions between fintechs, NBFCs, and banks evolve. - Ensuring adequate consumer protection, developing data transparency, and monitoring financial stability risks are priorities. ### Financing challenges: demand-side constraints - Prospective borrowers may: - lack proper documentation to secure loans, - believe they are ineligible, - face lengthy disbursement processes. - MSME borrower behavior and information gaps: - Surveys suggest MSME borrowers have been reluctant to apply for formal credit ratings. - Traditional credit risk models are a poor fit for firms that lack accurate financial information, have limited capital, and may not be interested in scaling up. - Program complexity: - Various government programs have overlapping mandates which may be difficult for borrowers to access or understand. ### Role of nonbank, fintech, and digital lending - The rapidly expanding nonbank financial, fintech, and digital lending landscape has significant potential, though the ecosystem is still developing. - Partnership models: - Fintechs and NBFCs can intermediate credit to MSMEs as both partners and competitors to banks. - Models include fintechs receiving funding from banks to lend onwards, or acting as lending agents conducting outreach, credit analysis, and collections. - “Co creation” models allow NBFCs or fintechs to leverage balance sheets of larger institutions plus platform and data advantages. - Regulatory developments: - The RBI released a digital lending framework in September 2022, followed by clarification on First Loss Default Guarantees in June 2023, which placed a 5 percent cap on default guarantees and formalized some requirements. - Infrastructure and initiatives that could facilitate credit: - Account Aggregator (for MSMEs), - Public Tech Platform for Frictionless Credit, - National Financial Information Registry. ### MSME definitions (as of July 2020) and legacy thresholds - MSME Classification - New (as of July 2020) - Micro - Investment in plant and machinery <= Rs. 1 million (US$ 12 thousand) - Turnover <= Rs. 5 million (US$ 61 thousand) - Small - Investment in plant and machinery >Rs. 1 million <= Rs. 10 million (US$ 122 thousand) - Turnover >Rs. 5 million <=Rs. 50 million (US$ 611 thousand) - Medium - Investment in plant and machinery >Rs. 10 million <= Rs. 50 million (US$ 611 thousand) - Turnover >Rs. 50 million <= Rs. 250 million (US$ 3.05 million) - MSME Classification - Old - Manufacturing sector - investment in plant and machinery - Micro <= Rs. 2.5 million (US$ 30.5 thousand) - Small >Rs. 2.5 million <= Rs. 50 million (US$ 611 thousand) - Medium >Rs. 50 million <= Rs. 100 million (US$ 1.22 million) - Service sector - investment in equipment - Micro <= Rs. 1 million (US$ 12 thousand) - Small >Rs. 1 million <=Rs. 20 million (US$ 244 thousand) - Medium >Rs. 20 million <= Rs. 50 million (US$ 611 thousand) - Notes: 1/US $ conversions are approximate, assuming an exchange rate of 0.0122 $/rupee. 2/Old classification does not include thresholds of turnover. ### MSME contribution and credit statistics - Registered MSMEs contribute around 30 percent to GDP. - The United States is the top export destination of MSMEs. - Within the MSME sector, micro enterprises account for the largest share of employment. - In urban areas, more workers are in trade and service MSMEs. - MSME credit trends: - MSME credit growth has been strong since the pandemic, though it has eased in recent months. - Bank credit to MSMEs makes up about 14% of overall lending. ### Employment, growth drivers, and structural issues (Annex X highlights) - Recent macro-labor facts: - Real GDP growth has averaged over 6 percent since 2000. - This growth lifted an estimated 415 million people out of multidimensional poverty since 2005. - Labor force and job needs: - India’s working age population (15 years and older) stood at just over 1 billion in 2022. - Labor force participation rate was 53 percent and the unemployment rate 5.7 percent according to PLFS data. - Assuming full employment at the current unemployment rate, the country was missing an estimated 3-87 million jobs in 2022. - Based on population projections, India will need to create 145-330 million jobs by 2050 to maintain its current labor force participation rate (and its current unemployment rate). - The low end of the missing jobs range includes only 3 million workers who are currently in government work guarantee schemes (MNREGA). The upper end includes 84 million jobs that would exist had the LFPR remained at its 2005 level of 61 percent. - Underemployment and structural transition: - Underemployment (part-time workers desiring full-time work, overskilled workers, unpaid family labor) may imply missing jobs are a lower bound. - Non-farm job creation is important as workers shift from farm to non-farm work. - Sectoral employment and productivity: - Agriculture’s share of value added declined from over 40 percent in 1980 to 15 percent in 2019. - Services share of value added grew from just over 30 percent to over 55 percent over the same period. - Over 42 percent of workers are classified as working in agriculture and allied sectors. - Services employment rose to about 34 percent since 1980; construction employed about 12 percent of workers in 2019. - Labor in 2019-20 in manufacturing and services was over 4.5 times more productive than in agriculture. - Growth decomposition and drivers: - Physical capital has driven growth across most sectors. - Value added growth shifted away from being labor-driven in the 1970s-80s toward physical capital and TFP-driven in recent decades. - Services have become more capital- and TFP-driven; job creation in services has not been sufficient to deliver needed formal, high productivity jobs. - Potential gains from labor reallocation (counterfactuals): - If the labor force increased by 2 percentage points (about 22 million people), or if 5 percent of the agriculture workforce shifted into either services (including half into construction) or manufacturing, it could contribute up to 1.2 percentage points to value added growth, relative to the recent historical average. - Scenarios assume capital, labor quality, and TFP remain constant and do not include possible endogenous impacts on TFP from labor reallocation. - Catch-up to technological frontier: - In 1995, productivity of a worker in agriculture in India was 2.3 percent of the technological frontier; by 2019 it was 2.9 percent. - Catch-up was weak for several manufacturing industries (wood and paper, chemicals, electrical and optical equipment, and other manufacturing); manufacturing of machinery regressed by 2 percentage points in distance to the labor productivity frontier. - Catch-up was faster in mining and petroleum refining, information and business services, health, and other services. - Labor productivity in business services is at 18 percent of the frontier. *Italicized source: India country report content (PDF chapter/section).* ### 11. Reallocation of workers towards more dynamic sectors could accelerate growth and ### 11. Reallocation of workers towards more dynamic sectors could accelerate growth and raise wages for Indian workers ### Employment shifts and productivity — key findings - Employment in agriculture declined by 17 million between 1995 and 2019, but agriculture still accounts for 43 percent of the workers in the country. - Employment change by sector (1995–2019): - Construction: +46 million - Trade: +33 million - Manufacturing: +15 million - Business services: +13 million, rising from 1.6 million in 1995 to 14 million in 2019 - Many sectors that added employment (construction, trade) are relatively low-productivity and showed limited catch-up to the technological frontier over the last 25 years. - Industries with fast catch-up to the frontier (e.g., mining, petroleum refining, information services) added few jobs, consistent with their relatively low labor-intensity. - There is scope for growth by both accelerating catch-up to the technological frontier across industries and reallocating workers from low value-added jobs (particularly agriculture) to higher value-added jobs in manufacturing and services. ### Firm-level performance and frontier firms - Median productivity of Indian firms (sales per employee) averages 17 percent of the sales per employee of frontier firms across industries. - Some sectors have firms with sales per employee close to or above the frontier, including manufacturing of jewelry and soap, printing of newspapers, and other professional services. - Number of Indian firms operating at the technological frontier: 126 firms (sales per employee above the 95th percentile for non-Indian firms). - Of these 126 firms: - 12 operate in computer programming or other information technology services. - 7 engage in jewelry manufacturing. - Size and ownership characteristics: - Three quarters of the Indian firms at the frontier have assets greater than $100 million. - 10 percent of Indian firms at the frontier are foreign-owned, versus 7 percent for non-frontier Indian firms. - Policy implication: removing obstacles to firm growth and fostering foreign direct investment is important to scale up strong performers. ### Skill gaps and labor force characteristics - Educational attainment and skill shortages: - Only 61 percent of the population aged 25 and older have at least completed primary education, compared to 71 percent among lower-middle income peers and 89 percent among upper-middle income countries. - Three quarters of India’s skilled agricultural workers are considered to have fewer years of formal education than desirable (have not completed primary education). - Over 60 percent of craft and related workers and plant and machine operators and assemblers have had too few years of formal schooling. - 52 percent of services and sales workers have had too few years of formal schooling. - Some pockets of overeducation exist (clerks and technicians), particularly in Chandigarh, Puduchery, Andaman & N. Island, Haryana, and Delhi. - Skills and training infrastructure: - Industrial Training Institutes (technologically-equipped) with combined annual enrollment of 1.24 million students. - Apprenticeship for 740 thousand trainees. - Initiatives for industry-aligned short-term training and Skill India Digital platform for skilling and job matching. ### Policy recommendations to foster growth and employment - Strengthen education and skilling: - Address low years of formal education and low education quality; implement dynamic, industry-centric skilling and the 2020 National Education Policy. - Advance labor market reforms: - Implement rules and notifications for four new federal labor codes more rapidly. - Work with states to accelerate reform momentum to enhance labor market flexibility while maintaining worker protection. - Evidence indicates strict labor market regulations contributed to labor misallocation; loosening restrictive employment protection legislation would increase total employment over time (may cause brief employment decline during initial reallocation). - Foster trade integration: - Negotiate bilateral trade agreements, remove tariff and non-tariff barriers to raise competition and productivity. - Remove red tape and obstacles to private sector growth: - Digitalization and business climate improvements (e.g., Udyam Portal for MSME registration). - Production-Linked Incentive schemes (PLIs) provide subsidies to firms meeting investment and employment targets in specific sectors. - Multiyear cost of existing PLIs assuming full implementation: 0.72 percent of FY 2022/23 GDP. - Authorities estimate PLIs may help create up to 6 million jobs. - PLIs should be subject to rigorous cost-benefit analysis, be time-bound, and preserve competition; they do not replace broader market reforms. - Continue public investment push: - Union government efforts expected to raise public investment by the center to 3.3 percent of GDP in 2023/24, twice as much as in 2018/19. - Provision of soft loans to states to raise their investments. - Stronger physical public infrastructure, together with India’s digital public infrastructure, will increase private sector productivity. - Strengthen social safety nets: - More flexible and targeted safety nets can support structural transformation and migration from rural to urban areas. - Example: rollout of “One-Nation, One-Ration Card” during COVID-19 allowed migrant workers to access food subsidies wherever they were. - Facilitate access to credit and corporate sector health: - Continued vigilant supervision to ensure healthy credit growth supporting private investment. - Facilitate exit of non-viable firms and promote asset resolution. ### Female labor force participation — annex highlights - Female LFPR and unpaid activities: - As of CY2022, female LFPR in India was 28.6 percent, compared to 76.7 percent for males. - 63 percent of females are participating in unpaid activities (domestic duties or helping family business). - 71 percent of females are outside the labor force (2022); the majority primarily participate in domestic activities. - Around 55 percent of females reported childcare or homemaking as the main reason for not entering the labor market in both rural and urban areas. - Among females in the labor force, unpaid family workers account for 31 percent, own-account workers account for 28 percent. - Cross-country and subnational patterns: - Female LFPR for females with advanced education (tertiary or higher) in India: 33 percent, versus an average of 70 percent globally. - Male LFPR with advanced education in India: 83 percent, versus 81 percent in the global sample. - Large heterogeneity across states and union territories (UTs): female LFPR ranges from 10 to 65 percent in CY2022; gender gap (ratio of female to male LFPR) ranges from 80 to 14 percent across states and UTs. *Source: IMF staff estimates, PLFS, ORBIS, EU KLEMS, country authorities, and the content of the provided chapter.* ### 3. Many factors, both from the demand and supply side, seem to affect female LFPR or ### 3. Many factors, both from the demand and supply side, seem to affect female LFPR or ### Supply- and demand-side determinants of female LFPR and paid job opportunities - Supply-side constraints cited: - Time constraints due to domestic and caregiving work (IWWAGE, 2021). - Lack of relevant skills (Mehrotra & Parida, 2017). - Social norms (Bernhardt et al., 2018). - Lower mobility due to limited bus service and safety concerns (Siddique (2022) and Lei et al. (2019)). - Demand-side constraints cited: - Mechanization of agriculture coupled with limited availability of non-agricultural and regular part-time employment opportunities, especially in rural areas (Afridi et al. (2020), Fletcher et al. (2017), and Chatterjee et al. (2015)). - Gender-biased occupational segregation and employment practices adversely affecting female LFPR (Kapsos et al., 2014). ### Government programs and interventions to boost female LFPR - Infrastructure and services: - Pradhan Mantri Sahaj Bijli Har Ghar Yojana and Jal Jeevan Missions: helped bring reliable, continuous access to electricity and water to homes. - Funding for working women hostels; in certain regions female-only public transportation or free public transportation is available. - Financial inclusion and entrepreneurship: - National Rural Livelihoods Mission: connected almost 90 million women with self-help groups that provide collateral free loans and connect them with skills training (including for plumbing, LED bulb making, and repairing drones, among other activities). - PM MUDRA scheme: extends collateral-free loans with a special focus on women’s entrepreneurship; has helped boost the number of women-owned MSMEs, which now stand at more than 2.8 million. - Labor law and labor market provisions: - Center-approved labor laws include provisions for wage parity, enhanced paid maternity leave, required mandatory childcare facilities at employers over a certain size, and permitted female employment during night shifts. - Education and skills: - National Education Policy and Skill India Mission: providing education, skills and vocational training to enhance women's employability. ### Policy recommendations and proposed actions - Reduce time constraints from unpaid domestic work: - Expand access to enabling services (such as child and elderly care services and facilities). - Invest in time-saving infrastructure and improve access to sanitation to ease time constraints on females. - Strengthen female skilling and employability: - Provide education and vocational training that matches labor market needs, leveraging digitalization and technological progress. - Reduce barriers and discrimination in the labor market: - Raise awareness of the importance of female participation. - Prohibit discriminatory employment practices. - Further address safety concerns for females, develop road infrastructure, and enhance public transportation. - Promote non-agricultural, labor-intensive employment, especially in rural areas: - Focus on creating service demand and labor-intensive industries. - Increase job flexibility and firm size opportunities: - Facilitate creation of jobs with flexibility in working hours and location. - Reduce barriers to firms expanding in size, as larger firms can offer greater flexibility and higher benefits. - Strategic priority: - Narrowing gender gaps in LFPR should be a priority because it would bring positive spillovers such as boosting economic growth and male income (Ostry et al., 2018). - Build on the government’s “Women-led development” initiative under the G-20 presidency. ### Empirical patterns, correlations, and key statistics - Labor force status (aged 15 and above, current weekly status, CY2022): - In the population chart: labor force, 29%; Not in the labor force, 71%. - Activity breakdown (shares shown in chart): Own-account worker & Employer, 8%; Unpaid family worker, 9%; Regular wage worker, 5%; Casual worker, 5%; unemployed, 2%; domestic duties only, 36%; domestic duties & free collection of goods, sewing, tailoring, weaving, etc. for household use, 18%; education, 11%; others, 6%. - Note: Periodic Labor Force Survey for 3Q of 2020 to 2Q of 2022 and females aged 15 and above. - Time use (average time spent in a normal day, 2019, minutes, aged 20-59) — population shares indicated in bracket: - Shares inside the bracket: male, employed (44%); male, not employed (5%); female, employed (13%); female, not employed (38%). - Regression and correlation results (across States and UTs, average of CY2019-CY2021, aged 15 and above; regressions controlled for share of females living in rural areas): - Female LFPR and Sanitation: - Regression: y = 0.49x -8.7 - R² = 0.28 - The p-value for the coefficient of interest is 0.00. - Female LFPR and Education (Share of females who completed secondary or higher): - Regression: y = 0.44x + 13.05 - R² = 0.19 - The p-value for the coefficient of interest is 0.07. - Female LFPR and Empowerment (Share of married women who cannot make decisions alone nor jointly with their husband, age 15-49, %): - Regression: y = -0.69x + 35.7 - R² = 0.08 - The p-value for the coefficient of interest is 0.10. - Note on empowerment measure: Decisions about health care, major household purchases, and visits to relatives. - Data and sources cited: - PLFS, NFHS, Time Use Survey 2019, and IMF staff estimates. - Several studies note measurement errors in female LFPR in India due to difficulty differentiating domestic duties from helping family enterprises and the fragmented and short-term nature of female employment (Deshpande & Singh (2021) and Kapsos et al. (2014)). *Source: IMF staff report extract (India). The figures, regression results, programs, and statistics above are drawn exactly from the provided content.* ### Section 2(a): restrictions related to the non-transferability of balances under the India-Russia debt ### Section 2(a): restrictions related to the non-transferability of balances under the India-Russia debt ### Exchange restrictions and transfer taxes - Executive Board has not approved: restrictions related to the non-transferability of balances under the India-Russia debt agreement; restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries; and a restriction on the transfer of amortization payments on loans by nonresident relatives. - Transfer taxes introduced in 2020 under the Liberalized Remittance Scheme (LRS); tax rate changes effective October 2023 aimed to discourage underreporting by high-net-worth individuals. - Exchange restrictions arise from specific tax provisions: - 20 percent tax on personal remittances above the annual Rs 700,000 threshold; - 0.5 percent tax on remittances above the annual Rs 700,000 threshold for education payments where financed by loan; - 5 percent tax on payments above the annual Rs 700,000 threshold for education and medical services; - 5 percent tax on payments for travel services (overseas packages) below the annual threshold of Rs 700,000 and 20 percent tax thereafter, to the extent that it applies to cross-border payments (i.e to nonresident seller). - Although the income tax law provides for reimbursement of these taxes, they constitute an additional burden/cost on making current international payments and transfers and therefore give rise to exchange restrictions. ### Surveillance engagements, FSAP and capacity development - Article IV Consultation: - Previous Article IV consultation discussions: September 2022. - Staff Report (IMF Country Report No. 22/386) discussed by the Executive Board on November 28, 2022. - FSAP Participation: - Concluding meetings for the latest FSAP Update: 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 and published as Country Reports No. 18/4. - Upcoming FSAP discussions will begin in November 2023, with a concluding envisaged in late summer 2024. - Capacity Development (Technical Assistance and Training): - Recent and planned IMF capacity development and training activities with India are discussed in Appendix VI of the staff report. - Resident Representative: - Resident representative’s office opened in November 1991. - Mr. Luis Breuer has been the Senior Resident Representative since July 2019. ### Statistical issues — assessment of data adequacy for surveillance (As of October 1, 2023) - General: Data provision is broadly adequate for surveillance but upgrading and expanding statistics, particularly in the real sector (national accounts, employment, and prices), would help monitoring and policy design. - National accounts and employment statistics: - CSO released new series of national accounts in January 2015 with base year 2011/12 and implementation of the 2008 System of National Accounts. - Current base year 2011/12 is outdated; GDP should be rebased as soon as feasible. - For current price estimates, data sources provide adequate coverage and methodology is broadly consistent with international standards. - Indirect-tax-based extrapolation of trade turnover value from the base year does not accurately gauge growth of economy-wide value added from trade. - Supply-side data considered better quality than expenditure-side data. - Weaknesses: deflation method used to derive value added; use of Wholesale Price Index (WPI) as deflator for many activities instead of the appropriate Producer Price Index (PPI), which is under development. - Issues: large revisions to historical series, relatively short time span of revised series, discrepancies between GDP by activity and GDP by expenditure, lack of official seasonally-adjusted quarterly GDP series. - Employment data deficiencies: Periodic Labour Force Survey questionnaire can be strengthened; quarterly employment data only available for urban areas; rural employment data available only annually and with substantial lag. - Price statistics: - All-India Consumer Price Index (CPI) with updated weights released in early 2011 with base year 2009/10; separate urban and rural CPI series published. - CPI weights updated in early 2015 using 2011/12 expenditure data; CPI series revised from January 2015. - CPIs published with a lag of about two weeks. - Four CPIs exist for narrow consumer categories (industrial workers, urban and non-manual employees, agricultural laborers, and rural laborers); except for the industrial workers’ CPI, other indices use weights over ten years old. - Authorities conducting a new household survey to update CPI basket over the medium term. - WPI base year is 2011/12; authorities developing PPI to replace WPI. - RBI series on residential property price indexes exists, but geographic coverage limited; commercial real estate price data not available. - Government finance statistics (GFS): - Ministry of Finance (MoF) compiles and disseminates GFS. - General government operations data include state governments but exclude extra-budgetary funds, local governments, and social security funds. - Scope to improve timeliness and analytical usefulness; data not presented on a GFSM 2014 basis. - Timely consolidated data, particularly at sub-national level, would help identify fiscal risks. - Publication/submission history: - Authorities published central government and general government operations data on the National Summary Data Page under SDDS. - 2017: GFS data disseminated for budget central government (BCG) and state government. - 2018: only data for BCG disseminated. - Authorities have not made submissions since 2019. - Other sub sectors (EBUs, local governments, social security funds) have never been explicitly compiled. - Authorities working to meet G20 DGI Recommendation II.15 to produce GFS on a GFSM 2014 basis; compiled quarterly government operations data for budget central government for the last three years though not yet published domestically; working to expand coverage to state government data and to disaggregate data to meet IMF annual GFS requests. - 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, interest rates, exchange rates, foreign reserves, foreign exchange interventions, government securities auctions results). - RBI reports some Financial Access Survey (FAS) series including mobile and internet banking, mobile money, gender disaggregated data, and UN indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults). - RBI reports monetary data to STA in non-standard format and provides "test" data using standardized reporting forms; test data lack sufficient details (instrument, currency, counterparty sector breakdowns) to construct a complete analytically useful picture consistent with the Monetary and Financial Statistics Manual. - Data reported cover depository corporations only; other financial corporations (insurance corporations, pension funds, investment funds) not covered. - Financial sector data: - 13 core and 9 encouraged FSIs for deposit takers reported quarterly, plus three FSIs for real estate markets. - 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, sometimes resulting in significant revisions. - Imports of goods in the balance of payments registered in c.i.f. prices while BPM6 requires f.o.b. pricing. - External debt statistics available quarterly with a one quarter lag. - Estimates of short-term external debt presented on original maturity and residual maturity basis (residual maturity available only annually). - International investment position (IIP) statistics cover BPM6-prescribed sectors and are disseminated within three months for quarterly data. - India disseminates monthly the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS. - Weekly updates on total foreign reserve assets, foreign currency assets, gold, and SDRs available as part of a weekly statistical supplement on the RBI web site. - Note: The IIP as published by the RBI values equity liabilities at acquisition cost, while the Fund uses market prices, resulting in substantial differences. ### Data standards, reporting frequency and recent indicator dates - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since December 1996; uses SDDS flexibility option on timeliness of employment, unemployment, and general government operations and periodicity of employment and unemployment. - Latest SDDS Annual Observance Report available on the DSBB. - A Report on Observance of Standards and Codes—Data Module; Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework published on March 29, 2004. - Selected “Date of latest observation / Date received / Frequency of Data / Frequency of Reporting / Frequency of Publication” entries (as of October 16, 2023 unless otherwise indicated): - Exchange Rates: 10/16/23 10/16/23 D D D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 10/06/23 10/13/23 W W W - Reserve/Base Money: 10/06/23 10/11/23 W W W - Broad Money: 09/22/23 10/13/23 BW BW BW - Central Bank Balance Sheet: 10/06/23 10/13/23 W W W - Consolidated Balance Sheet of the Banking System: 09/22/23 10/13/23 BW BW BW - Interest Rates: 10/16/23 10/16/23 D D D - Consumer Price Index: September 2023 10/12/23 M M M - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2021/22 January 2023 A A A - Revenue, Expenditure, Balance and Composition of Financing – Central Government: August 2023 09/29/23 M M M - Stocks of Central Government and Central Government-Guaranteed Debt: Apr-Jun 2023 09/27/23 Q Q Q - External Current Account Balance: Apr-Jun 2023 09/28/23 Q Q Q - Exports and Imports of Goods and Services: September 2023 10/13/23 M M M - GDP/GNP: Apr-Jun 2023 08/31/23 Q Q Q - Gross External Debt: Apr-Jun 2023 09/27/23 Q Q Q - International Investment Position: Apr-Jun 2023 09/28/23 Q Q Q *IMF Country Report content from the India staff report (as provided in the source).* ### 6. India’s female LFPR is widely perceived to be too low, using the ILO estimate of 19 per ### 6. India’s female LFPR is widely perceived to be too low, using the ILO estimate of 19 per ### Female labour force participation and measurement issues - ILO estimate: "19 per cent" for 2020 (ILO’s modelled estimate, not India’s PLFS). - PLFS (MoSPI) FLFPR: "23.3 %" in 2017-18; "32.8%" in 2021-22; "37%" in 2022-23. - ILO’s latest (2013) standards: exclude all unpaid work from the labour force. - MoSPI standards: aligned with older ILO standards of 1982; consider unpaid work as part of the labour force in cases of subsistence farming and working as an unpaid helper in a household enterprise (agricultural or non-agricultural). - Categories excluded from the labour force even by MoSPI standards: “attended domestic duties only” and “attended domestic duties and was also engaged in free collection of goods, tailoring, weaving, etc., for household use”. - Government actions acknowledged by staff: numerous steps to improve females’ LFPR, ensure economic security and quality of employment; some labour code provisions on wages and social security already in force; "29 States/Union Territories out of 31 have pre-published draft rules on new labour codes." ### Trade barriers, tariffs and non-tariff measures (NTMs) - Staff view: India’s tariff and non-tariff import barriers are high (staff assessment contested). - World Bank WITS evidence cited: India’s NTMs are significantly lower than leading economies on Coverage and Frequency Ratios. - Non-Tariff Measures (%) — Coverage ratio and Frequency ratio: - Leading Economies*: - Maximum "94.3" and "95.5" - Average "82.9" and "74.8" - Minimum "76.2" and "61.2" - India: "45.5" and "43.7" - *: US, European Union, Japan, Canada and Australia. - Argument: leading economies use opaque NTMs more intensively; India relies on tariffs which are "transparent and objective". - Policy implication: characterization of India’s trade barriers as high is selective and inconsistent with empirical evidence. ### Public procurement reform: Government e-Marketplace (GeM) - GeM introduced: purchases through GeM made mandatory in 2017; State Governments encouraged to use GeM. - Scale and impact: - GeM caters to "more than 67,000 government buyer organisations". - Average savings of around "10%" on the median price. - Savings of about "₹40,000 crore" by the end of March 2023. - Assessment: one of the largest global change-management exercises in realigning entrenched procurement processes; provides MSMEs and small businessmen access to government orders. ### Fiscal issues and public debt - Central government gross fiscal deficit (GFD) budgeted: "5.9% of GDP" in 2023-24, down from "6.4%" in 2022-23. - Authorities’ commitment: reduce GFD to "4.5% of GDP" by 2025-26. - Fiscal consolidation achieved: "3.3 percentage points" in three years since 2021-22. - Public debt history (general government level): "81%" in 2005-06; "84%" in 2021-22; "81%" in 2022-23. - Contingent liabilities estimate cited by staff: "6.7% of GDP" and staff scenario implying gross financing needs "over 20% of GDP" (author calls implied probability of realisation "33%"). - Central Government’s GFD at "37.3% of the annual target" in the first half of 2023-24. - Receipts growth: "17.7%" against the annual target of "10.6%". - GST collection: jumped by "13%" in October to "₹1.72 lakh crore" (highest-ever collection next to April 2023). - Evolving tax metrics: tax-to-GDP, direct tax-to-GDP and indirect tax-to-GDP ratios have improved compared to trends from 2008 to 2015-16 (Subramanian, 2023). - Revenue outlook: improvements attributed to tax administration reforms and use of Artificial Intelligence and Machine Learning to curb tax evasion; revenue situation expected to be "much better than staff anticipation". - Taxes on outward remittances: taxed at source but "total tax collected at source is available for full credit or refund" when filing income tax return; do not limit availability or use of foreign exchange. ### Monetary policy and exchange rate - Policy repo rate: steady at "6.5%" after cumulative hike of "250 bps" during May 2022-February 2023. - Policy stance: withdraw accommodation to align inflation progressively to target while supporting growth. - Incremental cash reserve requirement: temporarily invoked in response to withdrawal of "₹2000/- banknotes"; since phased out. - Rupee movements: limited depreciation vis-à-vis USD in 2023 due to CAD moderation, revival of capital flows, comfortable FX reserves buffer and macroeconomic stability. - Staff characterization contested: staff labelled the Rupee-USD exchange rate regime as a “stabilised arrangement”; authorities argue FXI modest in 2023 and staff selection of analysis period is subjective. - Authorities’ stance: exchange rate flexibility remains first line of defence; interventions limited to addressing disorderly market conditions. ### External sector and CBDC - Current Account Deficit (CAD): India’s CAD was "2%" in 2022-23 (author’s figure) vs. staff projection "3.5%". - Staff projection for CAD: "1.8%" for 2023-24. - Q1 2023-24 CAD: declined to "1.1%" from "2.1%" in Q1: 2022-23. - Foreign exchange reserves: "US$ 590.8 billion" as of November 03, 2023. - Capital flows: turnaround in portfolio flows; FDI flows moderated in line with global trend; external commercial borrowings switched into positive territory, majority for capital expenditures. - CBDC pilots: India launched CBDC pilots in wholesale and retail segments in 2022; pilots expanding to more banks, cities, segments and use cases including linking e-rupee to UPI. - CBDC potential: instant settlement can make cross-border payments cheaper, faster, and more secure. ### Financial sector resilience and policy measures - Stability indicators: sustained growth in bank credit, low levels of non-performing assets, adequate capital and liquidity buffers. - NBFCs: financial indicators align with banking system; weaker NBFC tail vulnerable to liquidity risks are "not systemically important". - Twin balance sheet advantage: banking and corporate sector balance sheets strengthened. - Insolvency and Bankruptcy Code (IBC): focus on resolution over liquidation; significant reduction in gross NPAs over past two years; government issued a discussion paper on further reforms in January 2023. - ECLGS impact: saved at least "14.6 lakh MSMEs" which benefited from "₹2.2 lakh crore" in additional credit (SBI Research analysis, January 2023); saved around "12%" of outstanding MSME credit from slipping into NPAs; saved livelihood of at least "6.6 crore" people. - Sovereign risk premia scenario: staff scenario of sudden increase weighing on balance sheets and bank lending judged "far-fetched" by authorities. - Held to Maturity (HTM) policy: planned removal of limit on banks' HTM portfolio from April 2024 expected to add operational flexibility. - Unsecured retail loans: - Formed "7.9%" of total banking system credit. - GNPA ratio for unsecured retail loans declined from "3.2%" to "2.0%" during March 2021 to March 2023. - SMA1+SMA2 ratio fell from "4.2%" in March 2021 to "2.3%" in March 2023. - Authorities' view: unsecured retail loan growth driven by digitalization enabling information-based lending; digitalization mitigates adverse selection and moral hazard; risks do not pose imminent threat to systemic stability. - Risk assessment disagreement: authorities disagree with staff labelling financial sector vulnerabilities as “Medium”; assert banking system is "in its best shape in more than a decade" and well capitalized. ### Potential growth and methodological critique - Staff revised India’s potential growth estimate from "6%" to "6.3%" in the baseline scenario. - Authorities’ critique of methodology: - Staff estimate uses historical relationship between labour productivity growth and TFP growth during 1985-2019 — argued to be conceptually flawed (TFP is a residual). - Kotera and Xu (2023) evidence: India’s growth primarily from capital growth with minimal labour growth; TFP grew at "2.7%" from 2014 to 2019 vs "1.3%" from 2002 to 2013. - Using long period starting in 1985 masks a regime change in the early 2000s. - Staff’s treatment of depreciation: only variable where latest (highest) value used, which lowers potential growth estimate. - Resulting divergence: Subramanian (2023) baseline growth estimate "7.1%" vs staff "6.3%" using similar Solow model and Penn World Tables data; authorities argue staff have not provided convincing explanation for the difference. - Recommendation: incorporate boundary conditions and structural reforms of Emerging Market Economies into standard paradigms primarily focused on advanced economies. *Source: IMF staff and Indian authorities’ discussion as presented in the supplied content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1indea2023001.pdf_