## 1indea2025001-print-pdf

## Source details

**Canonical URL:** [1indea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf.json)

---

### Recent macroeconomic developments: growth, demand, and prices
- Real GDP growth:
  - 8.2 percent in 2023/24.
  - Moderated to 6 percent in the first half of 2024/25.
  - Staff projection: 6.5 percent for 2024/25 and 6.5 percent for 2025/26; medium-term potential growth projected at 6.5 percent.
- Demand composition:
  - Private consumption: 4 percent in 2023/24; 6.7 percent in H1 2024/25.
  - Investment: slowed in H1 2024/25; capital expenditure execution moderated due to national elections; private corporate investment increased but less dynamic than expected (including machinery and equipment).
  - Public capital expenditure acceleration in November/December expected to support H2 recovery.
- Inflation:
  - Headline inflation broadly within RBI’s tolerance band (2-6 percent); fluctuations driven by vegetable prices.
  - Ex-vegetable inflation: hovering between 3 and 4 percent.
  - Core inflation: increased to 3.6 percent in December from 3.1 percent in April–June 2024.
  - Staff projection: 4.8 percent in 2024/25 and 4.3 percent in 2025/26.

### Labor market and employment quality
- Labor force participation rate (LFPR): 56.4 percent in 2023/24 (up from 54.6 percent in 2022/23 and 48.4 percent in 2017/18).
- Employment changes in 2023/24:
  - Working age population (WAP) increased by 14 million.
  - Employment rose by 27 million, including a record-high 9 million regular-wage jobs.
- Job quality and informality:
  - Much of LFPR increase driven by own-account and unpaid family workers; high informality persists.
  - Agricultural employment increased since COVID-19, diverging from typical development patterns.
- Potential employment gains from labor reforms:
  - Advancing labor market reforms, including relaxing hiring and firing regulations, could generate an additional 44 million jobs by 2029/30.

### Financial markets, external sector, and reserves
- Credit and nonbank finance:
  - Bank credit growth: 10.6 percent (November 2024).
  - Nonbank credit growth: 16 percent (September 2024).
  - Unsecured personal lending by banks: 12.6 percent growth in November 2024 (from 24.5 percent in 2022-2023).
  - NBFC unsecured lending: over 30 percent as of September 2024.
- Capital flows and markets:
  - Equity markets: record highs in September 2024, then correction with foreign outflows of $21 billion from end-September through January.
  - Net FDI declined to almost zero as repatriation and outward investments offset gross inflows.
  - Inclusion into global bond indices and relaxation of some CFMs encouraged portfolio debt inflows.
- Exchange rate and FX intervention:
  - Rupee depreciated by about 4 percent since end-September 2024.
  - Estimated large net RBI FX intervention: about US$76.5 billion in October–November 2024 across all FX market segments.
  - Official international reserves: peaked at about $705 billion at end-September, dropped to US$640 billion by end-December, remaining above end-2023 levels.
  - Reserves cover: about 8 months of prospective imports and about 105 percent of the ARA metric.
- External position and current account:
  - Preliminary assessment: 2024/25 external position moderately stronger than implied by fundamentals and desirable policies.
  - Current account deficit: projected to widen to 0.9 percent of GDP in 2024/25 (from 0.7 percent in 2023/24), then converge to a norm of 2.2 percent of GDP in the medium term.
  - Services exports expected to outpace merchandise trade.
- Sovereign bond yields and housing:
  - Government bond yields: declined by 30–40 bps on net since January 2024.
  - Housing activity and prices: rapid growth in some cities with considerable heterogeneity.

### Fiscal position, sovereign stress, and consolidation strategy
- Sovereign stress assessment:
  - Risks of sovereign stress assessed to be moderate.
  - Under current policies, debt expected to decline gradually to 77 percent of GDP in 2030/31.
  - Staff projects central government debt can reach 50 percent of GDP by 2030/31 under current policies given favorable interest-growth differential; authorities target 50±1 percent of GDP by 2030/31.
- Central government fiscal aggregates (percent of GDP):
  - FY 2023/24 Actual / FY2024/25 Budget / FY2024/25 RE / FY2025/26 Budget — Total Revenues: 9.5 / 9.8 / 9.7 / 9.7.
  - Net tax revenues: 7.9 / 8.0 / 7.9 / 7.9.
  - Total Expenditure: 15.1 / 14.9 / 14.6 / 14.1.
  - Capital expenditure: 3.2 / 3.4 / 3.1 / 3.1.
  - CG Fiscal Deficit: 5.6 / 5.1 / 4.8 / 4.4.
- Need for consolidation:
  - Continued fiscal consolidation recommended to rebuild buffers and reduce debt servicing burden; interest payments absorb around 30 percent of general government tax revenue.
  - Staff’s recommended consolidation strategy (revenue-based, growth-enhancing):
    - Raise revenue via GST simplification, reverse fuel excise cuts, broaden income tax base, allow domestic energy prices to move with global prices.
    - Rationalize current expenditure: better targeting of subsidies, replace with cash transfers where feasible.
    - Boost growth-friendly spending: infrastructure investment, R&D, health, and improve public investment management.
- Reform scenario impacts:
  - Recommended reforms narrow deficit by an additional 0.9 percent of GDP below baseline.
  - Interest payments decline by 0.2-0.3 percent of GDP over medium term relative to baseline.
  - Central government debt reduced to approximately 48½ percent of GDP by 2030/31; general government debt falls by an additional 3½ percentage points by 2030/31.
  - Limited short-term drag on growth; medium- to long-term growth above baseline from lower borrowing costs and greater productive capacity.

### Monetary policy, liquidity, and exchange rate guidance
- Monetary framework:
  - Flexible inflation targeting (FIT) effective; headline inflation remains appropriate target given food weight.
  - Real neutral rate staff assumption: 1.6 percent.
  - With output gap broadly closed and inflation converging to target, room likely exists for policy rate cuts toward broadly neutral stance; timing and pace should be data dependent.
  - RBI stance shifted from “withdrawal of accommodation” to “neutral” in October 2024.
- Liquidity actions:
  - Liquidity tightened to a deficit in late 2024; effective overnight rates rose.
  - December 2024: RBI reduced CRR by 50 bps.
  - January 2025: RBI increased frequency of variable rate repo auctions, announced outright government bond purchases through OMO, and conducted a $5 billion FX swap.
- Exchange rate policy:
  - Greater exchange rate flexibility recommended to absorb external shocks; FX intervention limited to disorderly market conditions to support market functioning.

### Financial sector soundness, NBFIs, and macroprudential policy
- Banking sector indicators (selected exact figures, 2019/20–2023/24):
  - Scheduled commercial banks — Risk-weighted CAR: 14.8, 16.3, 16.8, 17.2, 16.8.
  - Net nonperforming assets (% of outstanding net advances): 2.8, 2.4, 1.7, 1.0, 0.6.
  - Gross nonperforming assets (% of outstanding advances): 8.2, 7.3, 5.8, 3.9, 2.8.
  - Return on assets: 0.1, 0.7, 0.9, 1.2, 1.3.
  - Total assets (% of GDP): 88.6, 98.6, 91.9, 90.2, 95.1.
  - Credit-to-deposit ratio: 78.1, 73.1, 74.3, 77.4, 80.3.
- NBFCs (selected): Total assets (% of GDP): 16.6, 17.7, 15.8, 16.2, 17.2; Gross NPAs: 6.8, 6.4, 6.3, 4.3, 4.0; CAR: 23.7, 25.0, 26.8, 27.5, 26.6.
- Systemic risks and policy recommendations:
  - Systemic risks broadly contained; banks’ GNPA at 2.6 percent (September 2024 multiyear low).
  - Concentrated exposures of select NBFCs to power sector present transition risks.
  - Recommended reforms: enforce Pillar 2 capital add-ons, finalize IFRS9 adoption, build releasable CCyBs, extend borrower-based macroprudential measures (DSTI limits) to all household loans, improve data sharing, and strengthen resolution and liquidity frameworks adapted for NBFIs and market finance.
  - Suggested reduction in SLR given LCR introduction; improve level playing field by removing exemptions for state-owned NBFCs.

### Trade policy, investment, and structural reform priorities
- Recent trade measures:
  - Export restrictions (rice, sugar, onions, wheat) relaxed; non-basmati white rice and onion export restrictions lifted in September 2024.
  - Import management system for IT hardware extended until end-2025.
  - Import tariffs of 12 to 30 percent on certain steel products from China and Vietnam extended.
  - Customs duties on soybean oil, palm oil, sunflower oil raised from 0 to 20 percent in September 2024.
  - 2025/26 Union Budget announced simplification and reduction of import tariffs across a wide range of products.
- Investment and industrial policy:
  - PLIs for 14 industries with total fiscal outlay of 0.1 percent of GDP between 2022/23 and 2024/25; attracted investment and boosted production in select industries but insufficient alone for job creation and entail substantial fiscal costs per job.
  - Recommendations: reduce trade restrictions, accelerate FTAs and export market expansion, cautiously pursue narrowly targeted industrial policies, renegotiate BITs in line with revamped models, and further liberalize investment regime to attract FDI.
- Private investment and project dynamics:
  - Private investment above 20 percent of GDP; private capital stock per capita about one third of EM median.
  - Machinery and equipment investment by private corporates: 4.3 percent of GDP in 2022/23 (average 5.9 percent between 2011/12–2015/16).
  - FDI trends: India’s share in global FDI fell to about 2 percent in 2023 from about 6½ percent in 2020; net FDI turned negative in 2024Q3.
  - Economic policy uncertainty reduces project announcements and increases stalled/abandoned projects (one-standard deviation increase in uncertainty associated with an 11 percent decline in new projects).

### Climate policy, energy transition, and financing needs
- Climate targets and progress:
  - India on track to meet 2030 NDC targets under currently announced policies: reduce emissions intensity by 45 percent by 2030 vs 2005; increase non-fossil installed electricity capacity share to 50 percent by 2030.
  - India surpassed 200 GW in installed renewable capacity in 2024 and aims for 500 GW by 2030.
  - Rollout of Carbon Credit Trading Scheme (CCTS) expected in 2025/26 (compliance mechanism with unit-level emissions intensity targets for obligated entities).
- Net zero by 2070 and policy mix:
  - Deep abatement to reach net zero requires raising effective carbon price broadly; policy mix may include renewables subsidies, higher coal tax, carbon tax — combining carbon tax with other measures less distortionary than subsidies alone.
  - CCTS design recommendations: tight emission intensity targets, robust monitoring/auditing, capacity building, broaden sectoral coverage over time, targeted public support for grid capacity, land acquisition, supply-chain resilience.
- Adaptation and financing:
  - High exposure to climate hazards; adaptation priorities include resilience in agriculture and water management.
  - External concessional financing and technology transfer critical.
  - India's Initial Adaptation Communication (2023): cumulative adaptation cost in BAU scenario 56.7 trillion rupees (19 percent of 2023/24 GDP) through 2030.
  - India's Long-Term Low-Carbon Development Strategy (2022): cumulative cost 85.6 trillion rupees in 2011-12 prices (49 percent of 2023/24 GDP) through 2030.
- Financial-sector transition risks and social measures:
  - Strengthen supervision of transition risks in coal-dependent power sector.
  - Strengthen social safety nets and targeted reskilling to manage worker displacement.

### Data, statistics, and capacity development priorities
- Data and methodological upgrades planned:
  - National accounts base-year update to 2022/23 and methodological improvements: minimize single deflation, expand volume extrapolation use, rely on PPIs where possible, incorporate Annual Survey of Unincorporated Sector.
  - CPI weights and items to be updated based on 2022-23 household consumption expenditure survey; CPI rebase to 2024 in progress.
  - Timely labor data: quarterly rural employment and monthly urban employment data to begin in early 2025.
  - Population census priority — last completed in 2011/12; updated series expected early 2026.
  - Publication timelines: updated national accounts series tentatively planned for February 2026; revised CPI series expected January 2026.
- Data adequacy:
  - Staff: data broadly adequate for surveillance but sectoral shortcomings (national accounts, CPI base year, consolidated fiscal accounts, NBFC data) remain.
  - Ongoing CD: PPIs development, PIMA, GST-related modelling, fiscal/PNC workshops, AML/CFT support, and statistics capacity building.

### Risk assessment, scenarios, and implications of fragmentation
- Key risks (RAM highlights):
  - External: intensification of regional conflicts (Likelihood: High), commodity price volatility (High), deepening geoeconomic fragmentation (High), cyberthreats (High), global growth slowdown (Medium), monetary policy calibration risks (Medium).
  - Domestic: weaker investment (Medium), weaker private consumption (Medium), social discontent (Medium), weaker credit growth (Medium), fiscal shocks/contingent liabilities (Medium), climate extremes (Medium).
- Geoeconomic fragmentation scenarios (India GDP loss estimates):
  - World divides into two blocs, no trade in high-tech and energy between them: GDP loss 1.5 percent.
  - Add nontariff restrictions between blocs: GDP loss 3.3 percent.
  - FDI between blocs drops 50 percent with policy uncertainty: GDP loss 0.7 percent.
- Policy implications: accelerate structural reforms, diversify trade links, pursue FTAs, maintain exchange rate flexibility, preserve buffers, and seek concessional climate finance.

### Authorities’ views and areas of alignment/disagreement with staff
- Broad alignment with staff on outlook and risks; authorities expect H2 pickup from capex catch-up and view potential growth of 6.5 percent as at lower end of their assessment.
- Authorities emphasize exchange rate near equilibrium and strong services export potential.
- Authorities favor more gradual fiscal consolidation given global uncertainties and stress debt characteristics (long-dated, fixed-rate, domestic, resident-held).
- Authorities contest some staff data assessments and the weighting in data adequacy ratings; they emphasize recent progress on fiscal consolidation, capital expenditure focus, and social programs.
- Authorities support revenue mobilization via voluntary compliance, tax law simplification, and tax administration digitalization.

_Italic: Source: 1indea2025001-print-pdf (IMF staff report excerpts)._

### 1. Recent Macroeconomic Developments _______________________________________________________ 27

### 1. Recent Macroeconomic Developments

### Context
- Post-pandemic real GDP growth has averaged over 8 percent, supported by prudent macroeconomic policies.
- Financial sector health has improved significantly following stress episodes in the 2010s; inflation has come down from 2022 highs.
- Progress towards SDGs: the multidimensional poverty index is expected to halve from 2016 levels well before the 2030 target.
- Landmark structural reforms over the last decade include implementing inflation targeting, introducing the goods and services tax (GST), and revamping the regulatory framework for non-bank financial companies (NBFCs).
- Digital public infrastructure (identity, payments, and data exchange) underpins the digital economy, unlocking innovation and supporting financial inclusion.

### Recent developments: growth, demand, and prices
- Real GDP growth:
  - 8.2 percent in 2023/24.
  - Moderated to 6 percent in the first half of 2024/25.
- Investment:
  - Investment slowed in H1 2024/25, partly linked to moderation in public capital spending execution due to national elections.
  - Private corporate investment has increased but remains less dynamic than expected, including machinery and equipment investment.
- Consumption:
  - Private consumption was 4 percent in 2023/24 and recovered to 6.7 percent in H1 2024/25, supported by strengthening rural demand from a more favorable monsoon and recent kharif harvest yields.
  - Good prospects for the upcoming rabi harvest (high reservoir levels, good progress in sowing) and acceleration of public capital expenditure in November/December point to a recovery in activity in H2 of the fiscal year.
- Inflation:
  - Headline inflation has broadly declined within the RBI’s tolerance band (2-6 percent) but has fluctuated significantly due to vegetable prices.
  - Excluding vegetable prices, inflation has eased from last year, hovering between 3 and 4 percent.
  - Core inflation increased to 3.6 percent in December from a low of 3.1 percent in April–June 2024 as commodity and wholesale price inflation normalized.

### Labor market
- Labor force participation rate (LFPR):
  - 56.4 percent in 2023/24, up from 54.6 percent in 2022/23 and 48.4 percent in 2017/18.
- Employment changes (2023/24):
  - Working age population (WAP) increased by 14 million.
  - Employment rose by 27 million, including a record-high 9 million regular-wage jobs.
- Quality of jobs: much of labor force participation increase driven by own-account and unpaid family workers; high informality highlights need for formal sector job creation.
- Sectoral note: increase in agricultural employment since COVID-19 diverges from typical development paths and India’s own historical experience.

### Financial markets and external sector
- Credit growth:
  - Bank credit growth decelerated to 10.6 percent (November 2024).
  - Nonbank credit growth at 16 percent (September 2024).
- Equity and capital flows:
  - Equity markets reached record highs in September 2024, then experienced a correction with sizeable foreign outflows of $21 billion from end-September through January.
  - Net FDI declined to almost zero, with repatriation and outward investments offsetting steady gross inflows.
  - Inclusion into global bond indices and relaxation of some capital flow management measures have encouraged portfolio debt inflows.
- Foreign exchange and reserves:
  - The rupee depreciated by about 4 percent since end-September 2024 amid broad dollar strength.
  - Large net RBI FX intervention estimated at about US$76.5 billion in October–November 2024 across all FX market segments.
  - Official international reserves: peaked at about $705 billion at end-September, dropped to US$640 billion by end-December, remaining above end-2023 levels.
  - Reserves cover: about 8 months of prospective imports and about 105 percent of the ARA metric.
- Government bond yields declined by 30–40 bps on net since January 2024.
- Housing activity and prices have grown rapidly in some cities with considerable heterogeneity; corporates remain broadly resilient with rising aggregate interest coverage ratios.

### Trade policy developments
- Export restrictions introduced in 2022–2023 (rice, sugar, onions, wheat) have been relaxed; non-basmati white rice and onion export restrictions lifted in September 2024.
- Import management system for IT hardware (introduced late 2023) extended until end-2025.
- Import tariffs of 12 to 30 percent on certain steel products from China and Vietnam were extended.
- Customs duties on soybean oil, palm oil, and sunflower oil raised from 0 to 20 percent in September 2024.
- 2025/26 Union Budget (early February) announced substantial simplification and reduction of import tariffs across a wide range of products, rationalizing the tariff structure and eliminating peak rates.

### Outlook and risks
- Growth projections:
  - 2024/25 projected at 6.5 percent (output gap estimated broadly closed).
  - 2025/26 projected at 6.5 percent.
  - Medium-term potential growth projected to align at 6.5 percent.
- Inflation projections:
  - 4.8 percent in 2024/25.
  - 4.3 percent in 2025/26.
- External position:
  - On a preliminary basis, 2024/25 external position assessed as moderately stronger than implied by medium-term fundamentals and desirable policies.
  - Current account deficit projected to widen to 0.9 percent of GDP in 2024/25 (from 0.7 percent of GDP in 2023/24) and gradually converge to a norm of 2.2 percent of GDP in the medium term.
  - Services exports expected to outpace merchandise trade; subdued demand in trading partners will contain export growth while rising domestic consumption and investment support imports.
- Reserve dynamics and capital flows noted above.
- Risks (tilted to the downside):
  - External risks: deeper geoeconomic fragmentation, tighter-for-longer US financial conditions and stronger U.S. dollar, oil price volatility, cyberattacks.
  - Domestic risks: weaker-than-expected recovery in real incomes and private investment, under-execution of public capital expenditure, adverse weather shocks affecting agriculture and food prices, further weakening credit growth, sudden financial market volatility affecting household wealth and sentiment.
  - Upside: faster structural reform implementation could boost employment, private investment, and potential growth.

### Authorities’ views
- Broad alignment with staff on outlook and risks:
  - Authorities expect activity to pick up in H2 of the fiscal year due to catch-up in public capital expenditure and expect inflation to converge to target.
  - Consider risks to growth broadly balanced and view staff’s potential growth estimate of 6.5 percent as at the lower end of their assessment.
  - Broad agreement with staff’s balance of payments projections (growing FDI and portfolio investments offsetting CAD and enabling continued FX reserve accumulation).
  - Authorities view the real exchange rate as near equilibrium and emphasize strong potential for expanding services exports, particularly IT and business services.
  - Main perceived risks: rising geoeconomic fragmentation and weather shocks.

### Policy discussions — fiscal policy
- Fiscal stance:
  - Continued fiscal normalization appropriate given a broadly closed output gap and elevated debt; moderately contractionary fiscal deficit for 2024/25 is fitting.
  - Acceleration of capital expenditure execution in the second half of the year is welcome.
  - Windfall gains (e.g., high RBI dividends) should not be used to finance permanently higher recurrent expenditure.
  - States should avoid expanding recurrent expenditure at the expense of capital expenditure.
- 2025/26 budget measures:
  - Personal income tax-free threshold substantially raised, bringing it well above peers and leading to 0.3 percent of GDP in foregone revenue.
  - Budgeted improvements in tax administration and an ambitious narrowing in recurrent expenditure are expected to more than offset the personal income tax cut, allowing further consolidation by about 0.4 percent of GDP.
- Fiscal risks and contingent liabilities:
  - Risks include difficulties in moderating recurrent spending, higher commodity prices, and realization of contingent liabilities (government guarantees, loss-making SOEs—particularly in power—and unfunded civil service pensions liabilities).
  - Rising commodity prices would increase subsidies.
  - Policy recommendations to reduce fiscal exposure:
    - Better targeting of subsidies to protect the vulnerable while reducing exposure to commodity prices.
    - Regular revision of power tariffs, full pricing of services provided by utilities, and continued incentives to improve DISCOM efficiency to improve power distribution companies’ financial health.
    - Public support should be limited to vulnerable households and transparently provided on budget rather than weighing on DISCOM balance sheets.
    - Actuarial assessments to ensure contributions to new civil service pension schemes (UPS) are sufficient to cover additional benefits.
    - Any additional government pension contribution should be funded by additional revenue sources or by reductions in other expenditure given the need for consolidation.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf*

### 15.      Risks of sovereign stress are assessed to be moderate. Under current policies, the deficit

### 1indea2025001-print-pdf - 15.      Risks of sovereign stress are assessed to be moderate. Under current policies, the deficit

### Sovereign stress assessment and fiscal outlook
- Risks of sovereign stress are assessed to be moderate.
- Under current policies, the deficit is expected to narrow further, supporting a gradual reduction in debt to 77 percent of GDP in 2030/31.
- Under shock scenarios, debt paths are skewed towards higher debt levels, highlighting the importance of swiftly rebuilding buffers (Annex VIII).
- India has some fiscal space which can be used to support domestic demand and shelter vulnerable households in case of shocks.
- Funding climate-change-related investment entirely through the government budget could lead to high long-term risk of sovereign stress, pointing to the need for additional concessional financing and greater private sector participation.
- Banks hold a relatively high share of government securities (though it has declined since 2019), which could amplify macro-financial shocks under severe adverse scenarios.
- Risks from elevated debt are mitigated as debt is largely domestic with a long duration, and the interest-growth differential is expected to remain favorable.
- Demand from financial institutions (FIs) for government securities remains robust.
- More than half of states, comprising over 60 percent of the combined gross state domestic product, have primary deficits wider than their respective debt stabilizing primary balance — pointing to vulnerabilities at the sub-national level.
- States require differentiated deficit paths guided by state-level debt sustainability assessments because of heterogeneity.

### Summary central government fiscal developments (In percent of GDP)
- FY 2023/24 Actual / FY2024/25 Budget / FY2024/25 RE / FY2025/26 Budget
  - Total Revenues: 9.5 / 9.8 / 9.7 / 9.7
  - Net tax revenues: 7.9 / 8.0 / 7.9 / 7.9
  - Non-tax revenues: 1.6 / 1.8 / 1.8 / 1.8
  - Total Expenditure: 15.1 / 14.9 / 14.6 / 14.1
  - Revenue expenditure: 11.9 / 11.5 / 11.4 / 11.0
  - Food Subsidy: 0.7 / 0.6 / 0.6 / 0.6
  - Fertilizer Subsidy: 0.6 / 0.5 / 0.5 / 0.5
  - Capital expenditure: 3.2 / 3.4 / 3.1 / 3.1
  - Central Government (CG) Fiscal Deficit: 5.6 / 5.1 / 4.8 / 4.4
  - CG Fiscal Deficit (authorities' definition)1/: 5.6 / 5.0 / 4.8 / 4.4
- 1/ Authorities' definition includes asset sales in receipts, and excludes certain non-tax revenue items, hence the difference with staff's definition.

### Need for continued fiscal consolidation
- Continued fiscal consolidation is needed over the medium term to rebuild buffers and reduce the debt servicing burden.
- Authorities are targeting a continued decline in the central government debt ratio to reach 50±1 percent of GDP by 2030/31.
- Staff projects that a decline to 50 percent of GDP can be achieved under current policies given a favorable interest-growth differential.
- Authorities’ 2025/26 budget presented a ‘high degree of consolidation’ scenario where central government debt reaches approximately 48½ percent of GDP.
- Rationale for faster adjustment:
  - Rebuild fiscal buffers.
  - Reduce the debt servicing burden; interest payments absorb around 30 percent of general government tax revenue.

### Recommended consolidation strategy (revenue-based, growth-enhancing)
- Enhancing revenues:
  - Raise additional revenue through GST simplification, partially undoing the past decline in the effective GST rate.
  - Reverse fuel excise cuts.
  - Broaden the income tax base.
  - Allow domestic energy prices to move in line with global energy prices.
- Rationalizing current expenditure:
  - Better targeting of subsidies and replacing them with cash transfers, where possible, to create fiscal savings while supporting the vulnerable.
  - Rationalize the volume of expenditure schemes introduced in past budgets to generate cost savings.
- Raising growth-friendly spending:
  - Use revenue gains and current expenditure containment to boost (i) infrastructure investment and R&D spending to raise private investment and productivity and (ii) investment in human capital through additional health expenditure.
  - Improve public investment management to enhance returns from infrastructure investment (Annex IX).

### Reform scenario impacts
- With the recommended reforms:
  - The deficit declines by an additional 0.9 percent of GDP below baseline.
  - Interest payments decline by 0.2-0.3 as share of GDP over the medium term relative to the baseline.
  - Central government debt is reduced to approximately 48½ percent of GDP by 2030/31.
  - General government debt is also reduced by an additional 3½ percentage points by 2030/31.
  - There is a limited drag on growth in the short term; over the medium to long term growth picks up above baseline driven by lower borrowing costs and greater productive capacity (Annex X).
- Alternative consolidation scenarios could involve greater domestic revenue mobilization and expenditure prioritization.

### Medium-term anchor and fiscal framework guidance
- Placing debt on a firmly downward trajectory is a suitable medium-term anchor, but the medium-term adjustment path should be defined more clearly.
- Suggested refinements to the authorities’ target:
  - Expand the perimeter to include state government debt.
  - Complement the debt anchor with a fiscal deficit path for the Union and the states to provide operational guidance for annual budgets.
- Staff’s reform scenario: debt falls to below 74 percent of GDP and the general government deficit gradually narrows to below 6 percent of GDP by 2030/31.
- Recommendation: Include medium-term projections of key macroeconomic variables, the fiscal deficit, and its composition in the Budget under a revamped Fiscal Responsibility and Budget Management Act, while retaining escape clauses for large shocks.

### Authorities’ views on fiscal policy
- Authorities agree on the need for medium-term fiscal consolidation but favor a more gradual pace given global uncertainties.
- Their aim: central government debt on a declining path to reach 50±1 percent of GDP by 2030/31, while maintaining flexibility to respond to cyclical conditions.
- Authorities’ mitigation view: public debt risks are reduced because debt is largely long-dated, contracted at fixed rates, denominated in domestic currency, and held by residents; they expect the favorable growth-interest differential to continue.
- Authorities note heterogeneity among states: some have fiscal space for development spending but lack capacity to utilize it; others need to prioritize consolidation.
- Authorities stressed that removing annual fiscal targets post-pandemic provided room to respond to shocks; central government gross fiscal deficit has declined and the quality of adjustment has improved with a focus on capital expenditure.
- Authorities consider a combined fiscal deficit of less than 6 percent of GDP as advocated by staff to imply eliminating the revenue deficit, which they view as not feasible in the near term.
- Authorities highlighted capital expenditure previously undertaken by SOEs being brought onto the central government budget, making a central government deficit around 3 percent of GDP difficult.
- Authorities reiterated focus on greater revenue mobilization via voluntary compliance, tax law simplification (e.g., review of the Income Tax Act), and tax administration digitalization.

### Monetary policy
- India’s flexible inflation targeting (FIT) framework has proven effective in managing inflation and anchoring expectations; headline inflation remains an appropriate target due to the high weight of food in the CPI basket.
- With a broadly closed output gap and inflation expected to move towards target, there will likely be room for policy rate cuts towards a broadly neutral stance.
- Given upside risks from food price inflation, monetary policy has been prudent, with the real interest rate remaining above the estimated neutral rate.
- In October 2024, the RBI changed the monetary policy stance from “withdrawal of accommodation” to “neutral” to provide flexibility to monitor disinflation and growth.
- As inflation converges to the 4-percent target and the output gap is estimated broadly closed, a well-communicated, gradual normalization of the policy rate towards a broadly neutral stance appears appropriate, with data-dependent timing and pace.
- If inflation declines faster than anticipated with weaker-than-expected growth, faster monetary easing would be warranted.
- Liquidity management:
  - Banking system liquidity declined to a deficit in late 2024; effective overnight interest rates rose towards the upper bound of the interest rate corridor.
  - In December 2024, the RBI reduced the cash reserve rate (CRR) by 50 bps.
  - In January 2025, the RBI increased frequency of variable rate repo auctions, announced outright government bond purchases through open market operations, and conducted a $5 billion FX swap.
- Exchange rate policy:
  - Greater exchange rate flexibility is warranted to help absorb external shocks, with intervention limited to addressing disorderly market conditions.
  - Given relatively low FX mismatch, well-anchored inflation expectations, and a generally deep FX market, FIT should be supported by greater exchange rate flexibility.
  - FX intervention (FXI) can play a supporting role during periods of global financial stress to improve market functioning and mitigate adverse impacts on output and inflation; greater flexibility reduces need for costly precautionary FX reserves and promotes FX market development.
- Staff assumption: real neutral rate of 1.6 percent.

### Central bank digital currency (CBDC) progress
- As of late 2024:
  - Retail pilot: five million users, 0.5 million merchants, and 16 banks participating, with approximately 0.2 million transactions per day.
  - Authorities developing programmability and offline usage; several test cases in progress.
  - Cross-border payment applications explored bilaterally and multilaterally but remain nascent.
  - Wholesale CBDC has had limited usage; some applications in financial markets are being considered.

### Financial sector policy and risks
- Systemic financial sector risks are broadly contained.
- Broad financial stability metrics appear healthy.
- Banks’ gross nonperforming loan ratio fell to a multiyear low of 2.6 percent in September 2024.
- Capital buffers remain adequate overall; capital adequacy ratios in privately owned banks generally stronger than in public sector banks (PSBs).
- Liquidity coverage ratios remain comfortably above regulatory minimums.
- Stress tests (FSSA) for banks and NBFCs demonstrate resilience to macroeconomic stress, but:
  - Some banks, especially PSBs, may need to build more capital to continue providing moderate credit in adverse scenarios.
  - Weak tails remain among select NBFCs and urban cooperative banks, though they account for only a small share of the financial system.
  - Concentrated exposures of NBFCs to the power sector — with history of operational challenges and potential climate-related transition risks — remain a potentially systemic vulnerability.

*Source: IMF staff report excerpt.*

### 29.      Overall, unsecured personal credit

### 29.      Overall, unsecured personal credit

### Unsecured personal credit: trends and risks
- Unsecured personal lending by banks slowed to 12.6 percent growth in November 2024, down from 24.5 percent in 2022-2023.
- NBFCs’ unsecured lending has remained robust at over 30 percent as of September 2024.
- Household debt stands at 43 percent of GDP.
- Delinquencies have risen somewhat, particularly among small loans.
- Policy implication: Ensuring that financial institutions maintain strong lending standards and risk management is essential for sustainable credit growth.
- Policy recommendation: Broaden the use of targeted macroprudential measures—such as applying debt-service-to-income (DSTI) limits—to all household loans to enhance policy effectiveness.
- Existing practice note: Microfinance loans are currently subject to a DSTI limit of 50 percent.

### Non-bank financial institutions (NBFIs), market financing, and systemwide monitoring
- NBFIs (including NBFCs, mutual funds, and insurance companies) expanded their footprint to account for 43 percent of total assets, up from 34 percent in 2017.
- Bank funding accounted for over 40 percent of NBFC borrowing in 2023/24, with additional financing through mutual funds.
- Policy implication: The growing interconnectedness across financial institutions makes systemwide risk monitoring essential.
- Policy recommendations:
  - Improve data collection and sharing across institutions.
  - Develop and deploy risk assessment toolkits to promptly identify emerging vulnerabilities among a diverse set of institutions.

### Financial sector oversight and resilience measures
- Recommended reforms to strengthen oversight:
  - Enforce Pillar 2 capital add-ons.
  - Finalize IFRS9 adoption—including the expected credit loss framework—to enhance loan classification and loss provisioning.
  - Start building releasable countercyclical capital buffers (CCyBs) before the next credit cycle, given favorable macro-financial conditions.
- NBFC regulation:
  - The new scale-based regulation for NBFCs is welcome, but exemptions for state-owned NBFCs—especially regarding concentration risks—should be eliminated to level the playing field.
  - Ensure full compliance among selected NBFCs with existing liquidity coverage ratio (LCR) requirements.
  - Establish more tailored guidance on liquidity requirement indicators to suit the diverse range of NBFCs.

### Role of government in the financial system and market development
- Recommendations on government involvement:
  - Financial stability should be clearly prioritized in relevant legislation even when regulators pursue multiple policy objectives.
  - The Statutory Liquidity Ratio (SLR) should be further reduced given the introduction of the Liquidity Coverage Ratio (LCR).
  - Make the priority sector lending (PSL) program more flexible, including through expanded co-lending arrangements, while conducting a comprehensive cost-benefit analysis.
  - Build infrastructure to ease access to private sector credit, including:
    - State-of-the-art credit enhancement tools.
    - Digital lending built on a comprehensive credit registry.
    - Securitization, including safe covered bonds.
  - Safeguard regulators’ independence and power in line with international standards, especially regarding corporate governance of state-owned financial institutions.
  - Legislation should transfer appellate authority for the RBI from the Ministry of Finance to an independent agency to avoid conflicts of interest.

### Crisis management, liquidity frameworks, and market liquidity tools
- Legal and framework recommendations:
  - Enact legislation to establish a modern resolution regime with comprehensive tools and legal powers in line with international standards.
  - Adapt the systemic and emergency liquidity assistance framework to the growth of NBFIs and market finance.
  - Broaden policy options for systemic liquidity support and emergency liquidity assistance, including readiness to expand eligible collateral beyond government bonds, with appropriate haircuts.
  - The establishment of the Corporate Market Development Fund is welcome, but authorities could further broaden policy options for systemic liquidity support.

### AML/CFT assessment and follow-up
- FATF 2024 assessment findings:
  - Strengths: money laundering and terrorism financing risk understanding and mitigation, and beneficial ownership transparency.
  - Shortcomings: AML/CFT supervision and application of AML/CFT preventive measures by obliged entities assessed as only moderately effective.
- Recommendations:
  - Establish clear obligations for reporting entities for domestic politically exposed persons.
  - Improve targeted financial sanctions for terrorism financing.
  - Enhance AML/CFT supervision of high-risk non-bank and non-financial businesses and professions.
- Status: India will report progress to the FATF on a regular (rather than enhanced) basis, reflecting the strength of its AML/CFT regime.

### Authorities’ views (summarized)
- The authorities view the financial sector as strong and consider macroprudential measures effective at slowing unsecured lending growth.
- They assess delinquencies as contained to a small part of the financial system and broader asset quality and capital measures as healthy.
- Authorities acknowledge the need for an enabling framework to implement DSTI limits on household loans, noting calibration challenges.
- They assert regulators remain operationally independent and consider it not the appropriate time to build additional capital buffers or implement a (positive) CCyB given India’s position in the current credit cycle.
- The authorities view current PSL provisions as important for inclusive growth, financial inclusion, economic development, and risk diversification.
- India is among the five G20 countries in the FATF “regular follow-up” category.

### Structural reform priorities and expected payoffs
- Near-term priorities to raise potential growth and create quality jobs:
  - Implement the labor codes.
  - Deepen economic integration (reduce trade restrictions, reforms to attract FDI).
  - Continue public investment push and increase R&D spending.
  - Streamline business regulations.
  - Provide stable policy frameworks for firms and households amid heightened uncertainties.
- Other priorities:
  - Agricultural, land, governance, and judicial reforms.
  - Strengthen education, skilling, public health, and social safety nets.
  - Reduce public sector footprint in credit markets.
  - Implement climate policies.
- Reform impact example: Implementing reforms that narrow India’s distance to the EM frontier in the judiciary and credit markets by 25 percent could raise private investment by 5 percent.

### Labor market, human capital, and job creation
- Labor market recommendations:
  - Steadfast implementation of the new labor codes (center–state cooperation required) to enhance flexibility and reduce constraints keeping firms inefficiently small.
  - More flexible and targeted social safety nets, leveraging technology and portability (e.g., “One Nation, One Ration Card”).
  - Policies to promote female employment, workplace safety, female entrepreneurship, and childcare access.
- Job creation estimate: Advancing labor market reforms, including relaxing hiring and firing regulations, could generate an additional 44 million jobs by 2029/30.
- Human capital:
  - Improve education quality through enhanced teacher training, technology to monitor attendance and performance, early childhood development, and regular classroom observations.
  - Strengthen skill development via industry-linked skilling programs and placement facilitation; revamp industrial training institutes and implement employment-linked internship programs.
  - Promote health and nutrition interventions to reduce stunting and wasting and enhance Integrated Child Development Services delivery.

### Trade, investment, and industrial policy guidance
- Trade and FDI recommendations:
  - Reduce external trade restrictions and accelerate expansion into new export markets and FTAs to strengthen integration into GVCs, attract FDI, and boost productivity.
  - Tariff simplifications and reductions in the draft 2025/26 Union Budget will reduce India’s average tariff rate.
  - Consider participation in large trade blocs (e.g., RCEP) and address remaining restrictions in SAFTA.
  - Renegotiate BITs in line with revamped models and reinforce double taxation avoidance agreements.
  - Relax inflow CFMs (examples cited: lifting of FDI limits for the space industry; elimination for the insurance sector proposed in the draft budget).
- Industrial policy notes:
  - Production Linked Incentives (PLIs) rewarded incremental production in 14 selected industries with a total fiscal outlay of 0.1 percent of GDP between 2022/23 and 2024/25.
  - PLIs attracted investments and boosted production in a few industries (e.g., electronics manufacturing) but are insufficient alone to create the jobs needed and entail substantial fiscal costs per job created.
  - Industrial policies are no substitute for horizontal reforms.

### Climate policy and energy transition
- Climate and energy milestones and targets:
  - India is on track to meet its 2030 NDC targets with currently announced policies.
  - 2030 NDCs (updated in 2022) include reducing emissions intensity by 45 percent by 2030 compared with 2005 and increasing the share of installed electricity capacity from non-fossil-fuel sources to 50 percent by 2030.
  - India surpassed 200 GW in installed renewable energy capacity in 2024 and aims to reach 500 GW by 2030.
  - Rollout of the Carbon Credit Trading Scheme (CCTS) is expected in 2025/26.
- Policy recommendations for CCTS and renewables:
  - Set appropriately tight emission intensity targets to raise the effective carbon price.
  - Ensure emission monitoring and auditing for transparency and efficiency, complemented by capacity building for obligated entities.
  - Broaden sectoral coverage of the CCTS over time.
  - Continue targeted public support to address challenges for renewable expansion related to grid capacity, land acquisition, and supply chain vulnerability.

*International Monetary Fund: Selected excerpts from chapter on financial sector and structural reforms.*

### 43.      Additional policies are needed to achieve India’s target of net zero emissions by 2070

### Additional policies are needed to achieve India’s target of net zero emissions by 2070

### Climate mitigation: achieving net zero by 2070
- Over the longer run, measures to raise the effective carbon price on a broad scale would facilitate the deep abatement required to reach net zero emissions by 2070.
- A mix of policies can alleviate the economic costs of mitigation:
  - subsidies for renewables,
  - a higher coal tax,
  - a carbon tax.
- Combining a carbon tax with other measures is stated to be less distortionary than tax-financed renewable subsidies alone.
- The expected rollout of the Carbon Credit Trading Scheme (CCTS) in 2025/26 is welcome; the CCTS includes:
  - a compliance mechanism with unit-level emissions intensity targets and carbon credit trading,
  - a voluntary mechanism for carbon offset,
  - the compliance mechanism will subsume the existing performance standard scheme on energy consumption (Perform, Achieve, and Trade; PAT) for obligated entities in sectors including aluminum, cement, chlor-alkali, fertilizer, iron and steel, pulp and paper, textile, petrol-chemical, and petrol-refinery,
  - buildings, DISCOMs, railways, sugar, and thermal power plants will remain under PAT.

- The suggested policy scenario would also imply:
  - a substantial reduction in pollution-related deaths,
  - a substantial reduction in coal imports.

### Climate adaptation, transition risks, and financing
- Greater access to concessional financing and technology are critical for India to address climate adaptation needs and accelerate the energy transition.
- India’s exposure and adaptation priorities:
  - India is highly exposed to climate-change-related hazards due to its dense population, large agricultural sector, and geography.
  - Adaptation policies should focus on extreme weather events and resilience-building in agriculture and water resource management.
- Financial-sector and labor considerations:
  - Enhanced financial sector supervision of transition risks stemming from the coal-dependent power sector is needed to guide a just and orderly transition.
  - To minimize potential displacement of workers in conventional energy sectors, social safety nets can be strengthened, with targeted reskilling schemes to support labor market flexibility.
- External support requirements:
  - External concessional financing and technological transfer remain critical to meet substantial investment needs of energy transition and climate adaptation.
- Estimated adaptation cost figures cited:
  - India's Initial Adaptation Communication to UNFCCC (2023) estimates the cumulative adaptation cost in a business-as-usual scenario at 56.7 trillion rupees (19 percent of 2023/24 GDP) through 2030.
  - India's Long-Term Low-Carbon Development Strategy | UNFCCC (2022) cites a cumulative cost of 85.6 trillion rupees in 2011-12 prices (49 percent of 2023/24 GDP) through 2030.

### Data, statistics, and measurement improvements
- Improving the quality, availability, and timeliness of macroeconomic and financial statistics would support policy formulation.
- Ongoing and planned methodological upgrades in GDP compilation as part of the national accounts benchmark revision:
  - update of the base year,
  - improvement of volume estimates by minimizing the use of single deflation,
  - expanding the use of volume extrapolation,
  - relying on producer price indices to the extent possible,
  - incorporating regularly key data sources such as the annual survey of the unincorporated sector.
- CPI and survey updates:
  - The CPI weights and items basket will be updated to better reflect current consumption patterns, based on the 2022-23 household consumption expenditure survey.
  - Regular benchmark revisions of national accounts, prices, and other key statistics should be conducted according to international best practices.
- Labor market and population data timing:
  - Provision of quarterly data on rural employment and monthly data on urban employment will begin in early 2025 to provide timely labor market information.
  - Priority should be given to conducting the population census, last completed in 2011/12, to ensure surveys remain representative.
- Other data gaps:
  - Timely provision of consolidated general government fiscal accounts and expanding the available data on NBFCs are areas for improvement.
- Authorities noted efforts to update national accounts and CPI methodologies, with new series expected to be launched in early 2026.

### Authorities’ views on climate and reforms
- Authorities emphasized:
  - India has made significant progress in emission intensity reduction and renewable energy adoption.
  - Climate mitigation responsibilities should be in accordance with the UNFCCC and its Paris Agreement, assigned equitably based on the principle of equity and common but differentiated responsibilities and respective capabilities (CBDR-RC), considering per-capita emissions, income level, and historical emissions.
  - CCTS coverage should align with the nationally determined transition pathway and consider proportionality if small and medium enterprises are brought under coverage.
  - International support in concessional finance and technology transfer is critical for India to advance mitigation policies while addressing developmental priorities.
  - Concern that climate finance commitments and contributions by advanced economies fall short of the needs of a just transition for developing countries.

### Staff appraisal: macroeconomic context and policy recommendations
- Macroeconomic assessment:
  - India’s economy remains resilient with inflation moving closer to the target, supported by prudent macroeconomic policies.
  - Growth softened in the second quarter of the fiscal year but is expected to rebound in the second half, contingent on recovery in private consumption and catch-up in public capital expenditure.
  - Following monetary policy tightening during May 2022–February 2023, headline inflation has declined on average though remains volatile due to food price fluctuations.
  - India’s external position is moderately stronger than that implied by medium-term fundamentals and desirable policies.
- Fiscal policy recommendations:
  - An ambitious and well-designed medium-term fiscal consolidation path is needed to rebuild buffers and support growth-enhancing expenditure.
  - A revenue-based medium-term consolidation strategy is recommended, comprising:
    - GST reform,
    - reversal of earlier excise tax cuts,
    - further broadening of the income tax base.
  - Expenditure prioritization, such as better targeting of subsidies, can create space for infrastructure and health spending.
  - Adoption of debt as a medium-term fiscal anchor is welcome; it should include state government debt and provide a fiscal deficit path for Union and states.
  - A revamped Fiscal Responsibility and Budget Management Act should include medium-term projections and escape clauses for large shocks.
- Monetary and exchange rate policy:
  - With inflation likely to converge to target and a broadly closed output gap, there should be opportunities for gradual monetary policy rate cuts, timing and pace data dependent.
  - Exchange rate flexibility should be supported as an important shock absorber under the Integrated Policy Framework.
- Financial sector resilience and structural reforms:
  - Manageable systemic financial sector risks provide a setting for further strengthening resilience; concentrated lending exposures among some large NBFCs are a pocket of vulnerability.
  - Expand borrower-based macroprudential measures, such as debt-service-to-income limits, to all household loans.
  - Improve oversight framework, strengthen autonomy of key financial regulators, reduce regulatory gaps between state-owned and private financial institutions, and improve crisis response toolkit.
  - Structural reforms to boost competitiveness and investment include labor market reforms, enhancing human capital, deeper trade integration, easing business conditions, improving judicial capacity for insolvency, strengthening credit markets, streamlining business regulations, improving governance, and continuing anti-corruption efforts.
- Climate policy reiteration:
  - A balanced climate policy framework alongside greater access to concessional financing and technology is needed to achieve net zero emissions by 2070.
  - Carefully designed mitigation and adaptation policies, alongside external concessional financing and technological transfer, are critical to address climate vulnerabilities and support the energy transition.
- Data recommendations:
  - Continued efforts to improve data quality, particularly in the national accounts, are welcome to enhance data transparency and support policy making.

*Source: 1indea2025001-print-pdf - 43.      Additional policies are needed to achieve India’s target of net zero emissions by 2070*

### 60.      It is recommended that the next Article IV consultation be held on the standard 12-

### India: Recent Macroeconomic and Sectoral Developments

### Macroeconomic Developments
- "India remains the fastest-growing major economy."
- "Private consumption has started to pick up."
- Consumption dynamics:
  - "Consumer durables and rural demand are recovering,"
  - "with the latter likely supported by the favorable monsoon this year."
- Investment dynamics:
  - "Investment growth has been led by general government capital expenditure and housing..."
  - "... whereas private corporate investment has been less dynamic, especially in machinery and equipment."
- Chart data points and labels preserved from source (calendar year format; e.g., "2024Q3 = Q2 of FY2024/25"):
  - Real GDP Growth (In percent, year-on-year): axis spanning "-1.0" to "9.0" with years "2023", "2024".
  - Contribution to Real GDP Growth (In percent, year-on-year): axis spanning "-10.0" to "20.0" with components "Private Consumption", "Public Consumption", "Gross Fixed Capital Formation", "Change in Stocks", "Net Exports", "Statistical Discrepancy", "Real GDP (YoY)".
  - Consumption and Inflation (Growth in percent, year-on-year): axis spanning "-8.0" to "14.0" across quarters "2023Q1" to "2024Q4"; series: "Consumer Durables", "FMCG Volume Growth: Urban", "FMCG Volume Growth: Rural", "CPI Inflation: Urban", "CPI Inflation: Rural".
  - Monsoon Rainfall (In percent departure from long period average): regional series "All India", "NW India", "NE India", "Central India", "South", "Peninsula" with years "2023", "2024".
  - Gross Fixed Capital Formation (In percent of GDP): series "Housing", "General Government (RHS)" with values "3.2", "3.3", "3.4", "3.5", "3.6", "3.7", "3.8", "3.9", "4.0", "4.1" for years "2015/16" through "2022/23".
  - Private Corporate Gross Fixed Capital Formation (In percent of GDP): series "Total", "Machinery and Equipment (RHS)" with index years "2015/16" through "2022/23".

### Labor Market Developments
- "Headline labor market indicators continue to improve, ..."
- "mostly driven by self-employment (own-account and unpaid family workers)."
- Sectoral and formality notes:
  - "Employment has risen the most in agriculture.  Formal employment is expanding from a low base..."
  - "... as informal sector employment is slowly shrinking, even in absolute terms."
  - "Youth unemployment remains high for the most educated but has declined significantly."
- Key chart labels and data frames preserved:
  - Headline Labor Market Indicators in India (Aged 15 and above, in percent): series "Labor Force Participation Rate", "Unemployment Rate (RHS)"; subseries "Total", "Rural", "Urban"; years "2017/18" through "2023/24"; axis values include "0", "2", "4", "6", "8", "10", "12", "44" through "60".
  - Cumulative Change in LFPR by Employment Status (Comparison using 2017/18 as the base year, percentage points, aged 15 and above): categories "Total", "Rural", "Urban"; employment statuses "Own-account Worker & Employer", "Unpaid Family Worker", "Regular Wage Worker", "Casual Worker", "Unemployed"; years "2017/18" through "2023/24" with axis "-4" to "14".
  - Cumulative Change in Employment Rate by Sector (Comparison using 2017/18 as the base year, percentage points, aged 15 and above): sectors "Agriculture", "Manufacturing", "Construction and Others", "Services"; years "2017/18" through "2023/24" with axis "-2" to "14".
  - Formal Employment (In percent of total employment, primary status, aged 15 and above): values "8.5", "9.0", "9.5", "10.0", "10.5", "11.0", "11.5" for years "2017/18" through "2023/24".
  - Employment Growth (Between 2015/16 and 2022/23, in percent) by industry: categories "Manufacturing", "Trade", "Other Services", "All Covered Industries", "Unincorporated Enterprises", "Entire Economy 1/".
  - Youth Unemployment (Aged 15-29, in percent): education categories "Below Primary", "Primary", "Middle", "Secondary", "Higher Secondary", "Graduate +" with years "2017/18" through "2023/24".

### External Sector Developments
- "The current account balance has been contained in recent quarters..."
- Trade and commodity imports:
  - "... as oil and coal import costs remained stable or declined, but gold imports increased."
  - Imports: Main Commodities (In millions of USD, 3mma): series "Coal", "Oil", "Gold (RHS)" with dates "Dec-18" through "Dec-24" and axis values "0" to "20,000".
- Financial account and capital flows:
  - "The financial account remained in surplus despite subdued net FDI flows, ..."
  - "... in part supported by portfolio investment inflows into debt instruments in the context of bond index inclusion."
  - Financial Account (BPM5 Presentation) (In percent of GDP): components "Bank capital, including NRI", "Loans", "FII 2/", "FDI", "Financial Account" with quarterly axis "2015Q1" through "2024Q3" and axis "-3" to "8".
  - FII Flows (Equity and Debt) and FDI (In billions of USD, monthly): series "Equity", "Debt", "FDI" with dates "Nov-18" through "Nov-24" and noted "SENSEX Index (RHS)".
- External position and reserves:
  - "India’s external debt is relatively low compared to peers"
  - "Adequate FX reserves mitigate external vulnerabilities."
  - Total External Debt (In percent of GDP): chart comparing countries including "Russia", "China", "India", "Mexico", "Indonesia", "Brazil", "Korea", "Thailand", "South Africa", "Türkiye" for "2023" and "2024".
  - Estimated Reserve Adequacy 1/ (Official reserves as a percent of IMF country-specific metric): country comparison with "China", "Turkey", "South Africa", "India", "Brazil", "Indonesia", "Mexico", "Thailand", "Russia" for "2022", "2023", "2024 2/"; note "Recommended adequacy range".

### Financial Market Developments
- Exchange rate and volatility:
  - "The rupee has traded within a narrow range against USD, though volatility has increased recently."
  - "The rupee’s real effective exchange rate has remained broadly stable."
  - Rupee Exchange Rate and Volatility: series "INR/USD", "Implied Volatility (1 month, RHS)", "Implied Vol (Avg Since 2018, RHS)" with dates "Dec-20" through "Dec-24" and axis values "0" to "16" and "70" through "88".
  - Nominal and Real Effective Exchange Rates (Index, January 2020=100): series "Average NEER for EM Asia (ex. China)", "India NEER", "India REER", "USD/INR Bilateral Rate" with dates "Nov-19" through "Nov-24" and index range "80" to "105".
- Equity markets and flows:
  - "India has been one of the best performing major equity markets in the world, ... supported by large domestic fund inflows."
  - Stock Market Indices (Jan 2022=100): series "India (SENSEX)", "China (MSCI)", "EM (MSCI)", "United States (S&P 500)", "EM Asia (MSCI)", "India USD (MSCI)" for "Feb-22" through "Dec-24" with index range "50" to "150".
  - Cumulative Equity Fund Inflows (In percent of GDP): axis "0" to "8" with years "2021" through "2024".
- Bond yields:
  - "Government bond yields have trended lower amid expectations of policy easing ..."
  - "... and compare favorably to peer emerging markets considering the stock of government debt."
  - Government Bond Yields (In percent): tenors "3 month", "1 year", "10 year" with dates "Jan-22" through "Dec-24".
  - 10-year Government Bond Yields, December 2024 (In percent): chart juxtaposing "Real 10-year Government Bond Yield (adjusted with 1-year ahead inflation survey)" against "General government gross debt, percent of Fiscal year GDP".

### Inflation and Monetary Developments
- "Inflation has returned to the target range ..."
- "with the shares of CPI basket items above the tolerance band having declined significantly."
- Food price volatility and inflation expectations:
  - "Food prices remain volatile, largely reflecting strong fluctuations in vegetable prices."
  - "Inflation expectations remain well anchored."
  - Inflation (In percent, year-on-year): series "CPI-Headline", "CPI-Core" with dates "Dec-14" through "Dec-24"; marker for "Target band (formally from Feb. 2015)".
  - Percentage of CPI with Increases Greater than 6 Percent: series "Headline", "Core" at dates "Jun-21" through "Dec-24" with axis "0" to "60".
  - CPI Food Inflation Contributions (In percent, year-on-year): components "Cereals", "Milk", "Vegetables", "Pulses", "Others" with dates "Dec-19" through "Dec-24" and axis "-4" to "16".
  - Inflation Expectations (In percent): series "Household Expectations: 1-year Ahead", "Consensus Expectations: 1-year Ahead", "Consensus Expectations: 5-year Ahead", "CPI-Headline" with dates "Dec-16" through "Dec-24"; note "Target band (formally from Feb. 2015)".
- Interest rates, real rates, and liquidity:
  - "With declining inflation, the real policy interest rate has been rising."
  - "Liquidity tightened in late 2024, with effective overnight rates moving higher."
  - Interest Rates and Inflation (In percent): series "Real Interest Rate", "Repo Rate", "Inflation: 1-year Ahead" with dates "Jun-22" through "Dec-24" and axis "-2" to "10".
  - RBI Interest Rates and Net Liquidity Provision (LHS: in percent, RHS: INR trillions): series "Repo Policy Rate", "Weekly Avg Call Lending Rate", "Marginal Standing Facility", "Standing Deposit Facility", "RBI Net Liquidity Provision (RHS)" with dates "Jun-22" through "Dec-24".

### Fiscal Sector Developments
- "Fiscal consolidation continues..."
- "supported by buoyant revenues..."
- "... and restraint in central government recurrent expenditure."
- Subsidies and capital spending:
  - "Moderating of some commodity prices have also driven a narrowing of the subsidy bill."
  - "General government capex has increased in recent years, partly offset by a reduction in SOE capex."
  - "Interest payments remain elevated at around 30 percent of tax revenue."
- Chart labels and fiscal indicators preserved:
  - Government Balance (In percent of GDP) 1/: series "Central Government", "State Governments"; historical axis from "2000/01" to "2024/25*" with note "*IMF staff estimates." and "1/ Includes subsidy-related bond issuance."
  - Government Tax Revenue (In percent of GDP): series "Central", "State" with years "2000/01" to "2024/25*" and note "*IMF staff estimates."
  - Government Recurrent Expenditure (In percent of GDP): series "Central Government", "State Government" for years "2017/18" through "2024/25*".
  - Central Government Subsidies (In percent of GDP): components "Food", "Fertilizer", "Petroleum", "Total" with years "2000/01" through "2024/25*" and note "*IMF staff estimates."
  - Capital Spending (In percent of GDP): series "Central Government", "State Governments" with historical axis "2000/01" through "2024/25*".
  - Interest Payments (In percent of GDP): series "Central Interest Payments", "State Interest Payments" with years "2000/01" through "2024/25*" and note "*IMF staff estimates."

### Corporate and Banking Sector Developments
- "Interest coverage ratios for nonfinancial corporates have continued to trend higher."
- "Bank credit growth has decelerated but averaged" (source text ends here; full series and values not provided in supplied excerpt).

*Source: IMF staff figures and text as presented in the supplied content unit.*

### 14.8 percent from January to November 2024.

### 1indea2025001-print-pdf - 14.8 percent from January to November 2024.

### Banking, credit, and financial soundness
- "14.8 percent from January to November 2024."
- Credit composition and recent dynamics:
  - Shares of services and personal loans have grown, while those for loans to industry has declined.
  - Credit Growth by Sector (year-on-year) series shown for Agriculture, Industry-large, Industry-MSME, Services, Personal Loans, Gross Credit (chart references).
  - Bank Credit Decomposition series and Scheduled Commercial Banks New Rupee Loans WALR and Outstanding Rupee Loans WALR tracked with the Repo Policy Rate (cumulative change in basis point, January 2022 baseline).
- Bank lending rates:
  - Bank lending rates have remained steady over the past few months (chart: cumulative change in basis points, January 2022 baseline).
- Nonperforming assets and capital:
  - Nonperforming asset ratios have declined across most financial institutions.
  - Capital buffers were broadly steady and well above regulatory minimums.
  - Nonperforming Assets of Financial Institutions (In percent of total assets) and Capital Adequacy Ratio of Financial Institutions (In percent of Risk-Weighted Assets) show public sector banks, private sector banks, all commercial sector banks, and NBFCs (excluding core investment companies) indicators.
- Financial soundness indicators (selected exact figures):
  - Scheduled commercial banks: Risk-weighted capital adequacy ratio (CAR) — 14.8, 16.3, 16.8, 17.2, 16.8 (2019/20–2023/24).
  - Net nonperforming assets (percent of outstanding net advances) — 2.8, 2.4, 1.7, 1.0, 0.6 (2019/20–2023/24).
  - Gross nonperforming assets (percent of outstanding advances) — 8.2, 7.3, 5.8, 3.9, 2.8 (2019/20–2023/24).
  - Return on assets — 0.1, 0.7, 0.9, 1.2, 1.3 (2019/20–2023/24).
  - Balance sheet structure: Total assets (percent of GDP) — 88.6, 98.6, 91.9, 90.2, 95.1 (2019/20–2023/24); Credit-to-deposit ratio — 78.1, 73.1, 74.3, 77.4, 80.3.
  - NBFCs (selected): Total assets (percent of GDP) — 16.6, 17.7, 15.8, 16.2, 17.2; Gross nonperforming assets — 6.8, 6.4, 6.3, 4.3, 4.0; CAR — 23.7, 25.0, 26.8, 27.5, 26.6.

### Macroeconomic outlook and fiscal stance
- Key national-level indicators:
  - Nominal GDP (in billions of U.S. dollars): 3,353 (GDP (2022/23) line).
  - GDP per capita (U.S. dollars) (IMF staff est.): 2,348.
  - Poverty rate $2.15 a day (2021): 12.9.
  - Undernourished (2021): 16.6.
  - Total population (in billions, 2022/23): 1.42; Urban population (percent of total): 35.9; Life expectancy at birth (years): 67.7; Gini index: 32.8.
- Growth and inflation projections (fiscal years, April–March unless otherwise noted):
  - Real GDP growth (at market prices): 2020/21 -5.8, 2021/22 9.7, 2022/23 7.0, 2023/24 8.2, 2024/25 6.5, 2025/26 6.5.
  - Consumer prices - Combined (period average): 2020/21 6.2, 2021/22 5.5, 2022/23 6.7, 2023/24 5.4, 2024/25 4.8, 2025/26 4.3.
- Saving and investment (percent of GDP):
  - Gross saving: 29.8, 30.9, 31.0, 32.6, 32.7, 32.2 (2020/21–2025/26).
  - Gross investment: 28.9, 32.1, 33.0, 33.3, 33.6, 33.5 (2020/21–2025/26).
- Fiscal balances and debt (percent of GDP):
  - Central government overall balance: -8.5, -6.7, -6.6, -5.6, -4.8, -4.5 (2020/21–2025/26).
  - General government overall balance: -12.9, -9.4, -9.0, -8.1, -7.4, -7.0 (2020/21–2025/26).
  - General government debt: 88.4, 83.5, 82.0, 82.7, 82.7, 81.4 (2020/21–2025/26).
  - Cyclically adjusted balance (% of potential GDP): -7.6, -7.7, -8.4, -8.2, -7.4, -7.1.
  - Cyclically adjusted primary balance (% of potential GDP): -2.5, -2.6, -3.3, -2.8, -2.0, -1.6.

### External sector, balance of payments, and reserves
- Balance of payments (billions of U.S. dollars, April–March fiscal years, BPM6):
  - Current account balance: 24.0 (2020/21), -38.7 (2021/22), -67.0 (2022/23), -26.0 (2023/24), -34.7 (2024/25), -53.8 (2025/26).
  - Merchandise exports: 296.3, 429.2, 456.1, 441.4, 443.3, 458.7 (2020/21–2025/26).
  - Merchandise imports: 398.5, 618.6, 721.4, 686.3, 728.8, 768.6 (2020/21–2025/26).
  - Services balance (credit/debit): Credit — 206.1, 254.5, 325.3, 341.1, 380.3, 407.3; Debit — 117.5, 147.0, 182.0, 178.3, 200.7, 213.7.
  - Direct investment, net: -44.0, -38.6, -28.0, -10.1, 1.9, -6.4.
  - Portfolio investment, net: -36.1, 16.8, 5.2, -44.1, -4.6, -20.4.
  - Reserve Assets, net (overall balance impact): 87.3, 47.5, -9.1, 63.7, 2.8, 25.0.
- External buffers and indicators:
  - Foreign exchange reserves (in billions of U.S. dollars, end-period): 577.0, 607.3, 578.4, 646.4, 649.2, 674.2 (2020/21–2025/26).
  - Reserves in months of next year's imports (goods and services): 9.0, 8.1, 8.0, 8.3, 7.9, 7.8.
  - External debt (in billions of U.S. dollars, end-period): 573.7, 619.1, 624.1, 668.9, 726.5, 787.3.
  - External debt (percent of GDP, end-period): 21.4, 19.5, 18.6, 18.7, 18.9, 18.6.
  - Ratio of gross reserves to short-term debt (end-period): 2.3, 2.3, 2.1, 2.2, 2.0, 1.9.

### Monetary aggregates and RBI balance sheet (selected)
- Reserve money (in billions of rupees, end-period): 34,902; 39,203; 43,135; 46,823; 47,388 (2022/23–October 2024/25 series).
- Net domestic assets of RBI (in billions of rupees): -7,092; -5,222; -2,738; -5,585; -8,914.
- Net foreign assets of RBI (in billions of rupees): 41,994; 44,425; 45,874; 52,408; 56,302.
- Monetary survey (billion rupees, end-period):
  - Broad money (M3): 188,446; 204,937; 223,438; 248,316; 262,167.
  - Currency with public: 27,518; 30,357; 32,764; 34,103; 34,152.
  - Deposits: 160,454; 173,996; 189,896; 213,268; 227,032.
- Twelve-month percent change (selected):
  - Broad money (M3): 12.2, 8.8, 9.0, 11.1, 11.1.
  - Domestic credit: 9.5, 9.0, 13.1, 12.0, 11.1.

### Climate and energy developments (selected findings)
- Vulnerability and emissions:
  - India is highly vulnerable to climate-related natural hazards.
  - While India is one of the largest GHG emitters in the world, its per capita emissions are low.
- Energy mix and renewable progress:
  - India’s energy sector, largely coal-powered, has high emissions intensity.
  - Fossil fuels remain the dominant energy source, but India has made significant progress in renewable energy.
  - India ranks fourth in renewable energy power capacity around the world as of 2023.
- Climate finance and instruments:
  - With most of its climate finance from domestic sources, India started issuing sovereign green bonds in 2023.
  - Green Bond Issuances (In USD billions) series shown for Sovereign Green Bond and Other Green Bond (2015–2024).

### Key tables and projections (concise numeric highlights)
- Table 1 (Selected Social and Economic Indicators):
  - Nominal GDP (in billions of U.S. dollars): 3,353.
  - GDP per capita (U.S. dollars): 2,348.
  - Real GDP growth projections: 2024/25 6.5; 2025/26 6.5.
  - Consumer prices: 2024/25 4.8; 2025/26 4.3.
- Table 2 (Balance of Payments highlights):
  - Current account balance (percent of GDP): 0.9 (2020/21), -1.2 (2021/22), -2.0 (2022/23), -0.7 (2023/24), -0.9 (2024/25), -1.3 (2025/26).
- Table 6 (Macroeconomic Framework):
  - Real GDP (at market prices) long-run projection: 6.5 percent (2024/25–2029/30 entries show sustained 6.5).
  - Gross reserves (in billions of U.S. dollars, end-period) projections extend to 901.2 by 2029/30 in the full series.
  - GDP in billions of U.S. dollars projected: 3,568 (2023/24), 3,843 (2024/25), 4,243 (2025/26).

*Source: 1indea2025001-print-pdf - 14.8 percent from January to November 2024.*

### Annex I. Uptake of Previous IMF Advice

### Annex I. Uptake of Previous IMF Advice

### Overall assessment of policy uptake
- Policies have largely been aligned with staff recommendations, though challenges remain.
- Fiscal and monetary policy stances, along with macroprudential policies, have been broadly consistent with staff advice.
- Some external sector policies have deviated from staff’s advice, and challenges remain in some structural reform areas.

### Monetary policy
- The RBI’s monetary policy stance has been appropriate.
- The RBI has maintained its strong commitment to align inflation with the target.
- The RBI’s transparent communications regarding the monetary policy stance have continued to guide market expectations.

### Fiscal policy and transparency
- The consolidation in the 2024/25 and 2025/26 budgets is broadly in line with staff advice.
- Policy focus: infrastructure, employment, factor market reforms, and streamlining regulations.
- Authorities aim to continue reducing central government debt as a percent of GDP.
- More is needed for a complete medium-term fiscal framework in line with staff’s advice.
- Fiscal transparency improvements:
  - Release of data on liabilities of two large state-owned enterprises: the National Highways Authority of India and the Indian Railway Finance Corporation.
  - Bulk of funds previously mobilized by these enterprises have been brought on-budget, improving transparency.

### Financial sector policies and vulnerabilities
- Financial sector policies have been responsive to emerging vulnerabilities.
- Rapid growth in unsecured personal lending prompted the RBI to increase risk weights for this segment, in line with staff advice.
- Risk weights were increased for bank lending to NBFCs as borrowing from banks increased to historic highs.
- Progress made on improving governance of PSBs and committing additional resources to speed up the insolvency resolution process.
- Lagging priorities:
  - Passing a bank resolution law.
  - Fully implementing supervisory standards in line with IFRS9.

### External trade, FX policy, and capital flows
- India has increasingly aligned its external trade and FX policies with staff’s advice.
- Trade policy changes:
  - Food export restrictions introduced in 2022–23 have been removed or relaxed.
  - In early February 2025, authorities simplified and lowered import tariffs for various industrial goods and medicines.
- Exchange rate and intervention:
  - The rupee’s exchange rate flexibility has increased in recent months.
  - Significant FX intervention (FXI) has continued in periods outside of disorderly market conditions, potentially impeding the exchange rate’s role as an absorber of external shocks.

### Structural reforms
- Progress aligned with staff advice:
  - Initiatives to address skill mismatches through upgrading training institutes and other skilling programs.
  - Financial incentives to sub-national governments to update and digitize land registers to support land markets.
  - Commitment to set up creches and women-specific skilling programs to help narrow gender gaps in the labor market.
  - Planned rollout of the CCTS with emission intensity targets for obligated entities.
- Areas with limited progress or stalled:
  - Broader land reforms.
  - Agricultural and labor market reforms.
  - Privatization efforts, including of PSBs.

---

### Annex II. Indian Stock Market, Household Assets, and the Economy

### Market size, performance, and valuation
- India’s domestic market capitalization has grown rapidly in recent years.
- India has the 4th largest stock market in the world with a market capitalization of over $4 trillion.
- Market capitalization is above 100 percent of GDP in India.
- India became the second largest member of the MSCI Emerging Markets Index in August 2024, nearly doubling its weight since 2021.
- Indian equities provide close to 4 percent of global market capitalization.
- India’s equity market accounted for nearly 40 percent of EM equity offerings in 2024 (in U.S. dollar terms), up from 6 percent during 2010–2020.
- Index returns (2021 through 2024):
  - MSCI India Index returned 78 percent (52 percent in dollar terms).
  - EM MSCI Index: −17 percent.
  - S&P500: 57 percent.
- Corporate earnings and valuation:
  - Earnings per share in India have grown considerably faster than most peer EMs since 2019.
  - Corporate profits as a share of GDP increased from an average of 2.1 percent of GDP in 2015–2019 to 4.1 percent in 2023, supported by corporate tax cuts in 2019.
  - Market valuations—measured by price-to-forward earnings—have risen materially since 2019.
  - Equity risk premia have declined substantially.

### Investor base and flows
- Domestic mutual funds and retail investors have taken on a larger role:
  - Domestic equity funds have received cumulative inflows worth nearly 3.5 percent of GDP since 2021 (nearly $125 bn).
  - Peer countries average cumulative inflows: 0.6 percent of GDP.
  - During periods of large foreign outflows (late 2021 to mid-2022, second half of 2024), domestic investors have been an effective counterweight.
- Stock market ownership and accounts:
  - Investor accounts increased to 162 million in June 2024, from 40 million in 2019.
  - NSE reported close to 100 million unique investors in June 2024 (note: may overstate active/unique investors).
  - In September 2023, NSE Chairman stated that 50 million households (or 17 percent of total) had direct equity exposure.

### Household financial assets
- Household financial asset levels and composition:
  - RBI’s estimates of household financial assets (excluding unlisted equity) at 135 percent of GDP in March 2023.
  - Currency and deposits accounted for 51.6 percent of financial assets in March 2023, down from 61.1 percent around a decade earlier.
  - Listed equity and mutual fund assets account for about 17 percent of financial assets.
  - Pension and insurance assets growing steadily: National Pension Scheme and Employee Provident Fund Organizations have over $400 billion in assets.
    - NPS equity allocation: around 20 percent.
    - EPFO equity allocation: around 10 percent.
  - Household financial assets per capita: just under USD3,000 per capita in India vs. average USD17,000 across peer countries.

### Derivatives markets and retail participation
- Trading of equity derivatives:
  - Volume of options traded has increased more than five-fold since 2021.
  - India accounts for over 80 percent of options contracts traded globally.
  - Market structure and expiry concentration:
    - In a sample of trading days in August-September 2024, about 70 percent of all options contracts (30 percent of premium turnover) expired the same day.
    - Close to 90 percent of contracts (70 percent of premium turnover) expired in less than a week.
    - SEBI case study: between 26–40 percent of the notional turnover in weekly options occurred within the last hour before expiry.
- Risks and regulatory response:
  - Rapid growth and scale warrant careful monitoring for potential amplification of market volatility due to dealer dynamic hedging and short-dated expiries.
  - In October 2024, SEBI announced reforms: increasing minimum contract size, limiting weekly index options, and intraday monitoring of position limits.
- Retail investor outcomes and behavior:
  - Retail participants now account for about 35 percent of equity option turnover on the NSE.
  - Number of investors in equity futures and options rose close to 75 percent since January 2023.
  - Growth in turnover via mobile platforms and proliferation of independent financial marketers on social media; average age of such investors skews younger.
  - SEBI study: close to 90 percent of retail participants lost money trading options in FY2022.
  - Academic evidence from outside India: retail investors incur average losses of 5-9 percent, with larger losses around high volatility events.
  - Policy implication: continued efforts on consumer education and adequate risk disclosures recommended to protect retail investors and ensure efficient capital market intermediation.

---

### Annex III. External Sector Assessment (summary)

### Overall assessment and risks
- Overall assessment (preliminary): external position in FY2024/25 (ending in March 2025) is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies.
- Implication: current account (CA) deficit will be somewhat smaller than implied by India’s level of per capita income, favorable growth prospects, demographic trends, and development needs.
- External vulnerabilities: weakening demand in some partner countries, geoeconomic fragmentation, potentially volatile global financial conditions and commodity prices.
- Drivers: buoyant services exports and steady oil prices contribute to CA deficit being smaller than estimated norm in FY2024/25; projected to converge to norm over the medium term.
- Policy recommendations (short- to medium-term):
  - Continue government focus on infrastructure spending and support expected strengthening of private consumption (near-term effect: raise CA deficit, reducing positive CA gap).
  - To facilitate external rebalancing over the medium term:
    - Develop export infrastructure.
    - Negotiate free trade agreements with main trading partners.
    - Further liberalize investment regime and reduce import tariffs, especially on intermediate goods.
    - Pursue structural reforms to improve business environment, induce private investment, deepen integration into GVCs, attract FDI.
    - Pursue industrial policies cautiously, narrowly targeted, and minimize trade and investment distortions.
    - Allow exchange rate flexibility to act as main shock absorber; limit intervention to disorderly market conditions.

### Foreign asset and liability position (2024 data and assessment)
- Background:
  - By end-2024, NIIP estimated at −9.4 percent of GDP (from −10.7 percent of GDP at end-2023).
  - Gross foreign assets: 30.3 percent of GDP (from 28.6 percent at end-2023).
  - Gross foreign liabilities: 39.7 percent of GDP (from 39.2 percent at end-2023).
  - Debt assets: 3.9 percent of GDP.
  - Debt liabilities: 19.9 percent of GDP.
  - Bulk of assets: official reserves and FDI. Liabilities: mostly debt and FDI.
- Assessment:
  - With CA deficit projected below its medium-term norm in FY2024/25 and converging by FY2030/31, NIIP-to-GDP ratio expected to increase modestly over the medium term as robust nominal GDP expansion offsets nominal NIIP decline.
  - India’s external debt liabilities are relatively low compared with peers; short-term rollover risks limited.
  - Moderate level of foreign liabilities reflects incremental capital account liberalization with focus on attracting FDI.

### Current account (2024/25 projections and assessment)
- Background projections:
  - CA deficit projected to widen to about 0.9 percent of GDP in FY2024/25, from 0.7 percent of GDP in previous year, driven by rising domestic demand for imports.
  - Domestic perspective: gross savings inch up from 32.6 to 32.7 percent of GDP; gross domestic investment increases from 33.3 to 33.6 percent of GDP.
  - Steady oil prices and buoyant services exports increasingly offset contained merchandise trade deficit.
  - CA deficit projected to increase to about 1.3 percent of GDP in FY2025/26 due to rebounding domestic demand.
  - Medium-term convergence: CA deficit projected to converge to norm of about 2.2 percent of GDP.
- Assessment (EBA results and staff judgment for FY2024/25):
  - CA: −0.9 percent of GDP.
  - Cycl. Adj. CA: −0.7 percent of GDP.
  - EBA Norm: −2.2 percent of GDP (standard error: 0.7 percent).
  - EBA Gap: 1.5 percent of GDP.
  - Other Adj.: 0.0 percent of GDP.
  - Staff Gap: 1.5 percent of GDP (range: 0.8 to 2.2 percent of GDP).
  - IMF staff view: a CA deficit of up to around 2½ percent of GDP is financeable in the medium term by steady FDI inflows, public and private external borrowing, and portfolio flows (though portfolio flows may remain susceptible to global risk appetite changes).

### Real exchange rate (REER) assessment
- Background:
  - First half of 2024: contained CA deficit and portfolio inflows (partly from inclusion in global bond indices) led to appreciation pressures on the rupee.
  - Pressures reversed in second half of 2024 as CA widened seasonally and portfolio outflows occurred.
  - As of December 2024, the REER was about 5 percent above its 2023 average.
- Assessment and model estimates:
  - IMF staff CA gap implies a REER gap of −8.3 percent (elasticity: 0.18).
  - EBA REER index suggests overvaluation of 4.9 percent; EBA REER level model suggests overvaluation of 3.6 percent.
  - IMF staff projects REER gap range for FY2024/25: −12.2 to −4.4 percent, midpoint −8.3 percent.

### Capital and financial accounts: flows and policy measures
- Background (FY2024/25 projections):
  - Net FDI inflows projected to decrease to an almost zero balance as steady gross inflows are offset by rising disinvestment and outward FDI.
  - Net portfolio investment inflows and outflows expected to be almost evenly balanced, reflecting large equity outflows in late 2024 amid a weakening economic outlook despite bond index inclusion.
  - Other investments (mostly debt-creating inflows) projected to remain steady at about 1.3 percent of GDP.
  - Authorities have widened scope of government bonds available to foreign investors and relaxed FDI restrictions.
- Assessment:
  - Expected rebound in net FDI inflows projected to cover more than half of the CA deficit over the medium term, but the compression of net FDI inflows in 2024/25 warrants further structural reforms and improvement of the investment regime.
  - Volatile portfolio flows remain sensitive to global financial conditions and country risk premia.
  - Inclusion in international bond indices has significantly increased foreign participation in India’s bond market (from a low base) and supported net portfolio inflows that financed the CA deficit.

### FX intervention and reserves
- Background:
  - Official FX reserves increased in 2024 overall.
  - Reserve Bank of India interventions aimed to smooth market volatility perceived as excessive and contributed to exchange rate stability.
  - Reserves: $622.5 billion at end-2023 → $640.3 billion at end-December 2024 (increases through September followed by decline on equity outflows).
- Assessment of adequacy:
  - End-December 2024 reserves represent:
    - about 210 percent of short-term debt (on residual maturity),
    - about 105 percent of the IMF’s composite metric (for a de facto stabilized exchange rate arrangement),
    - about eight months of import coverage.
  - Given India’s moderately strong external position, deep and liquid FX markets, limited FX mismatches, well-anchored inflation expectations, and adequate reserves, Integrated Policy Framework analysis indicates FX interventions should be limited to addressing disorderly market conditions.

*Source: Annex I–III, 1indea2025001-print-pdf, IMF.*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### External Risks — key risks, likelihood, expected impact, and policy responses
- Intensification of Regional Conflicts
  - Likelihood: High
  - Expected impact: Escalation or spread of the conflict in Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism disrupt trade (e.g., energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increase refugee flows.
  - Policy response: Diversify critical import sources; secure export market access through multilateral and bilateral trade agreements; accelerate the transition towards renewable energy. Should conflicts intensify with significant repercussions on the Indian economy, use available fiscal/monetary policy space to support economic activity and the vulnerable.
- Commodity Price Volatility
  - Likelihood: High
  - Expected impact: Supply and demand fluctuations (e.g., due to conflicts, export restrictions, OPEC+ decisions, and green transition) cause recurrent commodity price volatility, external and fiscal pressures and food insecurity in EMDEs, cross-border spillovers, and social and economic instability.
  - Policy response: Accelerate shift to renewable energy; better target subsidies; allow greater exchange rate flexibility to absorb shocks. Upside scenario: relax price controls and increase excise taxes. Downside scenario: provide transfers to protect the most vulnerable.
- Monetary Policy Calibration
  - Likelihood: Medium
  - Expected impact: Major central banks’ stances turn out to be too loose (hindering disinflation) or too tight for longer than warranted (stifling growth and triggering capital-flow and exchange-rate volatility in EMDEs).
  - Policy response: Adjust policy rate in line with developments, with clear communication; allow exchange rate to adjust to interest rate differentials; use FX interventions as complementary tool if FX market becomes shallow and destabilizing premia emerge.
- Global Growth Slowdown
  - Likelihood: Medium
  - Expected impact: Growth slowdown in major economies from supply disruptions, tight monetary policy, rising corporate bankruptcies, or deeper real estate contraction, with adverse spillovers and sudden stops in some EMDEs.
  - Policy response: Rebuild fiscal buffers; maintain strong external position; maintain exchange rate flexibility; if shocks materialize, use fiscal/monetary policy space to support activity and the most vulnerable.
- Deepening Geoeconomic Fragmentation
  - Likelihood: High
  - Expected impact: Less efficient trade and FDI, supply disruptions, protectionism, policy uncertainty, technological and payments systems fragmentation, rising shipping and input costs, financial instability, fracturing of international monetary system, and lower growth.
  - Policy response: Accelerate structural reforms; diversify and secure supply of critical commodities; play a stabilizing regional role by promoting cooperation; avoid introducing further trade restrictions.
- Cyberthreats
  - Likelihood: High
  - Expected impact: Cyberattacks on physical or digital infrastructure (including digital currency and crypto assets), technical failures, or misuse of AI trigger financial and economic instability.
  - Policy response: Improve protection of India’s digital assets against hacking and maintain back-up copies of critical databases.

### Domestic Risks — key risks, likelihood, expected impact, and policy responses
- Weaker Investment
  - Likelihood: Medium
  - Expected impact: Weaker public investment execution and subdued private investment could weigh on growth.
  - Policy response: Improve public investment management; pursue productivity-enhancing reforms; vigilant supervision of lending; if weaker growth materializes, consider slower fiscal consolidation by letting automatic stabilizers operate and ease monetary policy if headline inflation aligns closer to target.
- Weaker Private Consumption
  - Likelihood: Medium
  - Expected impact: Real incomes not recovering strongly due to persistently high food inflation could depress consumption and growth.
  - Policy response: Advance structural reforms for sustainable, job-rich growth; if weaker growth materializes, consider slower fiscal consolidation and easing monetary policy if headline inflation aligns closer to target.
- Social Discontent
  - Likelihood: Medium
  - Expected impact: Difficulties securing good quality jobs, increases in food and fuel prices, or pursuit of difficult reforms could generate social discontent, capital outflows, and slower growth.
  - Policy response: Advance labor market reforms; strengthen education quality; work with industry to reduce skill mismatches; increase social protection spending for the poorest; communicate benefits of reforms; use monetary and fiscal space if growth slows.
- Weaker Credit Growth
  - Likelihood: Medium
  - Expected impact: Subdued demand and rising credit costs could hamper growth.
  - Policy response: Ensure macroeconomic stability; remain vigilant on financial stability risks; provide strong policy frameworks; improve ease of doing business to support investment and credit demand in productive sectors.
- Materialization of Fiscal Risks
  - Likelihood: Medium
  - Expected impact: Sharp increase in commodity prices and/or realization of contingent liabilities weakens fiscal position and could raise financing costs with broader financial implications.
  - Policy response: Enhance fiscal policy space via credible medium-term fiscal consolidation anchored on stronger revenue mobilization and increased expenditure efficiency; reduce sovereign–banks interconnectedness; strengthen SOE financial health; absorb contingent liabilities onto government budget using long-dated securities if needed.
- Climate Change and Extreme Weather Events
  - Likelihood: Medium
  - Expected impact: Rising temperature, increased rainfall variability, and intensified extreme events damage infrastructure, increase inflationary pressures, cause water and food shortages, worsen health outcomes, and reduce growth.
  - Policy response: Invest in climate-resilient infrastructure; prepare disaster management plans; accelerate green energy transition; strengthen social safety net and public health; promote climate-resilient agriculture.
- Stronger-than-expected Acceleration of Domestic Demand
  - Likelihood: Medium
  - Expected impact: Structural reforms, stronger consumption and investment, and rising consumer confidence contribute to higher potential growth.
  - Policy response: Rebuild buffers and reduce public debt; consider faster consolidation and tighter monetary policy if output gap is significantly positive with rising inflation; tighten macroprudential policies if credit growth accelerates.

*The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is staff’s subjective assessment (“low” = probability below 10 percent, “medium” = between 10 and 30 percent, “high” = between 30 and 50 percent).*

---

### Annex V. India in an Increasingly Fragmented World — findings, scenarios, and policy implications

### Channels and recent developments
- Deepening geoeconomic fragmentation affects global economy via reduced trade links, migration restrictions, capital flow limits, reduced technology transfers, and payments system disruptions; declining cooperation weakens global financial safety net and hinders global public goods (climate action, pandemic preparedness, debt resolution, food security, AI regulation).
- Countries imposed around 3,000 trade restrictive measures in 2023, up from around 1,000 in 2019.
- Trade-distorting industrial policy measures affecting imports covered more than 20 percent of global trade in 2023.
- Since the start of the war in Ukraine, trade growth between politically distant countries slowed by about 2½ percentage points more than between politically aligned countries.

### Scenario analysis and estimated GDP losses
- IMF analysis indicates most countries, including India, would not gain from deeper fragmentation; short-term near-term FDI and export gains to certain partners can be more than offset by reduced export opportunities from slower global growth.
- Table (scenario results): India: Estimated Cumulative GDP Loss for Country Groups Including India
  - World divides into two blocs, with no trade in high-tech and energy sectors between them: GDP loss, percent = 1.5
  - In addition to elimination of trade in energy and high-tech sectors, nontariff restrictions in other sectors are also increased between blocs: GDP loss, percent = 3.3
  - FDI between country blocs drop by 50 percent, and substantial policy uncertainty for economies that try to remain open to both blocs: GDP loss, percent = .7

- Scenario conclusion: cumulative long-term cost of a further increase in geoeconomic fragmentation could range from 1.5 to 3.3 percent of GDP for countries like India depending on degree of disruption to trade and FDI flows and related policy uncertainty.

### India’s exposure and policy recommendations
- India is relatively less vulnerable due to lower exports as a share of GDP and less integration in global value chains; comparative advantage in services reduces tariff exposure.
- US and China together account for more than 20 percent of India’s merchandise trade.
- Table: India: Main Trade Partners, FY 2023/24 (Merchandise trade turnover, percent of India's total)
  - 1 United States: Export of goods, US$ billion = 77.5; Import of goods, US$ billion = 42.2; Merchandise trade turnover, US$ billion = 119.7; Percent of India's total = 10.7
  - 2 China: Export of goods, US$ billion = 16.7; Import of goods, US$ billion = 101.7; Merchandise trade turnover, US$ billion = 118.4; Percent of India's total = 10.6
  - 3 United Arab Emirates: Export of goods, US$ billion = 35.6; Import of goods, US$ billion = 48.0; Merchandise trade turnover, US$ billion = 83.7; Percent of India's total = 7.5
  - 4 Russia: Export of goods, US$ billion = 4.3; Import of goods, US$ billion = 61.2; Merchandise trade turnover, US$ billion = 65.4; Percent of India's total = 5.9
  - 5 Saudi Arabia: Export of goods, US$ billion = 11.6; Import of goods, US$ billion = 31.4; Merchandise trade turnover, US$ billion = 43.0; Percent of India's total = 3.9
  - India's total: Export of goods, US$ billion = 437.1; Import of goods, US$ billion = 678.2; Merchandise trade turnover, US$ billion = 1,115.2

- Policy recommendations to overcome fragmentation:
  - Embrace trade integration with partner countries.
  - Widen network of bilateral free trade agreements.
  - Consider joining additional trade blocs (e.g., RCEP).
  - Enhance trade integration policies and reduce trade restrictions to integrate into global value chains.
- Sectoral opportunities: pharmaceuticals, automotive, electronics, and textiles noted as areas where India could potentially play a larger role.

---

### Annex VI. The Impact of Oil Prices on India’s Economy and External Position — facts, elasticities, and policy implications

### Key facts and exposure
- India imports almost 90 percent of the oil it consumes.
- In FY2023/24, India imported about 230 million tons of crude oil, making it the third-largest oil importer in the world.
- In FY2023/24, India’s oil import bill (crude oil and oil products) amounted to about US$178.7 billion (5.1 percent of GDP, 26.4 percent of goods imports).
- Exports of refined oil products in that fiscal year were US$84 billion (2.4 percent of GDP).

### Sensitivity and historical impacts
- RBI staff estimates and market-analyst elasticities: an increase in oil prices by about US$10/bbl, sustained for a year, adds about 0.4 percent of GDP to the current account deficit (CAD).
- Projected CAD for FY2024/25: 0.9 percent of GDP.
- India’s FX reserves: well above US$600 billion.
- Example of past shock: when oil prices surged above $100/bbl following Russia’s invasion of Ukraine, India’s oil import bill rose to US$209 billion in FY2022/23 (about 6.2 percent of GDP), and CAD rose to 2.0 percent of GDP that fiscal year.

### Macro effects and policy context
- Historical macro effect: a 10 percent higher oil price reduced real GDP growth by 20 basis points and increased CPI inflation by 30-40 basis points in India.
- Mitigating factor: pass-through of global oil prices to activity and inflation has been mitigated recently because state-owned oil marketing companies (OMCs) have kept retail gasoline and diesel prices broadly unchanged since July 2022.
- Petrol and diesel retail prices were deregulated since 2010 and 2014, respectively. Gasoline and diesel prices were reduced by around 2 percent in March 2024.
- Long-run policy: acceleration of the energy transition can strengthen energy security and reduce exposure to global oil price dynamics.

### Fiscal channels and recent fiscal impacts
- Fertilizer and LPG subsidies are impacted by oil price movements.
- Fertilizer subsidies increased to 0.9 percent of GDP in FY2022/23 from 0.7 percent of GDP in the prior year.
- In FY2022/23, a 0.1 percent of GDP transfer was made to state-owned OMCs for under-recoveries of domestic LPG sales between 2020 and 2022.
- Excise tax adjustments: excise taxes on road fuels were increased early in 2020 (pandemic) and subsequently reversed beginning in late 2021, causing a 0.4 percent of GDP loss in revenue.
- Windfall tax levied between July 2022 and December 2024 on domestically produced crude oil and exports of petrol, diesel and jet fuel; revenue from these taxes was 0.1 percent of GDP in 2022/23 and falling to 0.04 percent of GDP in 2023/24.
- To date, state-owned OMCs have not received additional distributions to compensate for keeping retail fuel prices fixed, in part because declining world oil prices reduced input costs.

### Recent trade and supply shifts
- India sharply increased oil imports from Russia: Kpler data indicate share of Russian oil and oil products in Indian imports increased from about 3 percent in FY2021/22 to 41 percent in January-December 2024/25.
- Official Indian statistics indicate somewhat lower volumes (example: October 2024 DGCIS data indicated about 30 percent of India’s oil imports originated from Russia versus 39 percent according to Kpler).
- Composition of India’s exports of oil products shifted toward Europe: share to Europe rose from about 14 percent in FY2021/22 to almost 27 percent in FY2023/24. Share to Asian countries decreased from about 51 percent in FY2021/22 to about 40 percent in FY2023/24.

*Prepared by Michael Gorbanyov (SPR), with contributions from Cristian Alonso and Dinar Prihardini (both APD).*

### 7.       Importing oil at discounted prices from Russia has likely reduced the overall oil

### 7.       Importing oil at discounted prices from Russia has likely reduced the overall oil

### Oil import pricing and estimated savings
- Russian oil has been offered at a substantial discount to price benchmarks in international markets—reportedly reaching at times up to $40/bbl, though significantly lower over the past year—due to international sanctions regimes against Russia.
- Higher costs of shipment and insurance have likely rendered the resulting CIF price discounts much less pronounced.
- Conservatively estimating the CIF price savings at about $10/bbl in FY 2023/24 yields savings estimates of around US$7 billion per year (about 0.2 percent of GDP).
- Comparing the actual oil import price derived from Indian statistics with the Ministry of Petroleum and Natural Gas’s reference oil price of the “Indian basket” (weighted average of sour grade and sweet grade crude oil) yields similar results.
- Market-analyst consistency: a study by ICRA estimates India saved around $5.1 billion on oil imports in 2022/23 and $7.9 billion in the first eleven months of 2023/24.

### Risks from increased reliance on Russian oil
- Increased reliance on oil imports from Russia has exposed India to risks related to changes in the international sanctions regimes against Russia.
- Example: in mid-January 2025 oil deliveries from Russia were temporarily disrupted by the announcement of new international sanctions, which targeted Russian oil producers as well as vessels and insurance companies involved in transporting Russian oil.
- The sanctions prompted Indian refineries to reassess oil import strategies, explore alternative supply sources, and take proactive measures to mitigate potential disruptions.

### Oil product exports and profitability
- Available data do not confirm substantial gains from exports of oil products produced from discounted crude oil imports.
- Total Indian exports of oil products have remained broadly stable, with higher exports to Europe offset by lower exports to other regions.
- Note: based on Kpler data; there is insufficient information on profitability of India’s oil exports by region.

### QPM (Quarterly Projection Model) for India — model purpose and structure
- The recalibrated QPM is an open-economy New Keynesian gap model capturing dynamic interlinkages among inflation, output, monetary policy, and exchange rate.
- The model separates dynamics for food, energy, and core inflation, subject to passthrough from world oil prices, the exchange rate, and the output gap.
- The non-agriculture output gap is affected by the real interest rate and real exchange rate. The monetary policy rate reacts to headline inflation, core inflation, and the non-agriculture output gap. Exchange rate dynamics deviate from uncovered interest parity by a lag component.
- Calibration builds on Benes et al. (2017) and staff’s estimates of the steady state and the historical output gap.
- Kalman smoothing is applied to historical data to decompose observations into structural components and shocks, identifying large negative shocks to non-agriculture output during the pandemic and finding the policy rate mostly explained by its own lag and the neutral rate.

### QPM forecast characteristics
- The QPM forecast is similar to staff’s baseline scenario except for energy inflation, with the model predicting slightly softer average growth for FY 2024/25.
- Core inflation according to the QPM will be slightly above the staff baseline, but headline inflation will be very close to the staff baseline.
- The model finds a moderately negative output gap for 2024Q3 and sees the output gap rebound to 0.2 percent at the end of the fiscal year.
- The model attributes non-agriculture output benefits to a weaker-than-trend real exchange rate (higher trade competitiveness) and a decrease in the long-term real rate.

### Shock experiments and their modeled impacts
- World oil price shock: an unexpected transitory increase in the world oil price (10 percent) leads to currency depreciation, higher energy inflation, spillover to core inflation, monetary policy tightening, eventual real appreciation of the rupee, and a negative output deviation due to tighter policy and diminished trade competitiveness.
- US policy rate shock: an unexpected, transitory increase in the US policy rate (100 basis points) leads to rupee depreciation, a boost to exports and a positive output deviation initially, followed by higher inflation, monetary tightening, and a subsequent negative output deviation as real exchange rate returns to equilibrium and competitiveness diminishes.
- Domestic food price shock: an unexpected transitory rise in domestic food CPI (10 percent) immediately raises inflation and prompts monetary tightening; the rupee appreciates as interest rates rise and a negative output deviation emerges from higher policy rates and weaker foreign demand.
- Foreign output shock: a negative transitory shock to foreign output (1 percent) reduces domestic output through lower foreign demand, lowers inflation, leads to monetary loosening, and causes rupee depreciation that eventually boosts exports and helps reverse the output impact as the economy converges to steady state.

*Source: IMF staff calculations and analysis as presented in the original content unit.*

### 3.      There is room to improve the efficiency of public investment in India. Using data up to

### 3.      There is room to improve the efficiency of public investment in India. Using data up to

### Infrastructure efficiency: measured gap and comparators
- Estimated gap between India and the efficiency frontier is 29 percent.
- The gap between India and the best performing large EM is 8 percent.
- India’s efficiency score is below the median of all countries in the sample, in line with the median of EMs and emerging and developing Asia, and above the median of large EMs.
- Efficiency frontier captures the relationship between coverage and quality of infrastructure assets against the level of public capital stock and income per capita.
- Measures of physical infrastructure include: length of road network, electricity production, access to water, number of secondary teachers, and quantity of hospital beds.
- Quality measure is based on the World Economic Forum’s survey of business leaders’ perceptions of the quality of infrastructure services.
- Source: IMF Tool for Investment and Efficiency (2021).

### Potential gains from improved public investment management
- With improved public investment management, India could narrow half of the efficiency gap from the frontier and see greater access and quality improvements from its public investment (Baum et al 2020).
- Reviews of procedures, tools, decision-making and monitoring processes (for example, the IMF’s Public Investment Management Assessment (PIMA) framework) can identify required reforms.
- National-level reforms highlighted by the NIP Taskforce: improve project preparation processes, including planning and design, to achieve the required scale in infrastructure investments (GOI, 2020).
- PIMAs completed between 2015–2019 indicate common room for improvement in project selection, maintenance funding, and project appraisal.

### Fiscal context: debt and fiscal targets
- General government debt peaked at nearly 90 percent of GDP during the pandemic.
- Debt reduced to around 83 percent of GDP in 2023/24 (authorities’ definition: 82 percent).
- Authorities announced aim to reduce central government debt to 50±1 percent of GDP by 2030/31.

### Reform scenario: composition and quantified fiscal impacts
- Staff’s proposed reform scenario aims to deliver on debt reduction while supporting growth-enhancing expenditures.
- Aggregate point: one possible reform scenario leads to an additional 0.9 percentage point of GDP narrowing of the deficit over the next five years, relative to the baseline.

Reform measures and targeted fiscal savings or revenue:
- Simplify the GST:
  - Move towards a single rate and rationalize exempt/zero-rated items.
  - Gain from removing all exemptions except for food and having a uniform rate of 14 percent is estimated to be 1 percent of GDP (de Mooij and others, 2019).
  - Distributional concerns to be addressed via increased transfers through existing Direct Benefit Transfer mechanism using updated household expenditure survey.
- Reverse excise tax cuts on petroleum products and reinstate adjustment of fuel prices in line with international oil prices:
  - Reversal of excise increases in November 2021 and May 2022 led to 0.3 percent of GDP in foregone revenue annually.
- Broaden corporate and personal income tax base:
  - Revenue gains from these reforms are targeted to be 0.1 percent of GDP.
  - Suggestions include moving taxpayers to newer tax schedule, reviewing personal income tax rates and thresholds (keep nominal PIT threshold unchanged over the medium term), and taxing agriculture income above a reasonable threshold.
- Reform subsidies:
  - Subsidies at center and state level average 3 percent of GDP (18 percent of tax revenue).
  - Fiscal savings targeted to be 0.3 percent of GDP, a saving of around 10 percent of current subsidy expenditure.
  - Examples: use DBT for LPG subsidies, expand cash transfers (PM Kisan), leverage Agri Stack for targeting; pilot expansion to electricity subsidies for agriculture.
- Rationalize schemes:
  - Fiscal savings targeted to be 0.1 percent of GDP from rationalizing and merging overlapping or low-impact schemes.
- Enhance social safety net and continue to invest in infrastructure:
  - Consolidation measures provide room to increase expenditure on health and expand infrastructure investment; additional cash transfers can compensate vulnerable groups affected by consolidation.

### Macroeconomic modelling: approach and key dynamics
- Model used: G20MOD, part of the IMF’s Flexible System of Global Models (Andrle and others, 2015).
  - Annual, multi-region general equilibrium model with a block calibrated to India’s macroeconomic and fiscal characteristics.
  - Fiscal sector includes eight tax and spending instruments and overlapping generations households; includes liquidity-constrained households.
- Short- to medium-term effects:
  - Fiscal consolidation places a small drag on growth in the short to medium term.
  - Real GDP (in level terms) is approximately 0.1 percent beneath baseline, but recovers to be above baseline from 2029/30 onwards.
  - GDP growth is lower in the first three years of the consolidation scenario, then recovers.
  - Higher tax revenue collection, particularly the GST, causes consumption to drop below baseline initially.
- Risk premium channel and long-term gains:
  - Consolidation is assumed to reduce government borrowing costs by an estimated 13 basis points, lowering financing costs for private sector and boosting private investment.
  - By the end of consolidation period, private investment is 0.7 percent above baseline.
  - Additional government investment supports GDP growth by expanding productive capacity.
  - By 2030/31, debt is 3.7 percentage points below the baseline.
  - Without the reduction in financing costs, the peak GDP loss is greater at 0.2 percent of GDP, and recovery takes longer as private investment remains lower.

### Simulated macro outcomes (selected metrics as presented)
- Real GDP (level): ~0.1 percent below baseline initially; above baseline from 2029/30.
- Private investment: 0.7 percent above baseline by end of consolidation period.
- Estimated risk premium reduction: 13 basis points.
- Debt by 2030/31: 3.7 percentage points below baseline.
- Targeted aggregate deficit narrowing from reforms: 0.9 percentage point of GDP over five years.
- Fiscal composition examples: subsidy expenses average 3 percent of GDP (18 percent of tax revenue).

_Italic: Source: IMF staff chapter content provided in the PDF._

### Annex XII. Reigniting Private Investment in India

### Annex XII. Reigniting Private Investment in India

### Private investment levels and capital stock
- Private investment in India is "above 20 percent of GDP" and is above the median across Emerging Market Economies (16.7 percent) and G20 EMs (18.2 percent), aligning with the 75th percentile in these groups.
- India’s private capital stock per capita is around a third of the median among EMs and G20 EMs (Private Capital Stock per Capita, 2019, in thousands of constant 2017 international dollars, India well below interquartile ranges shown in Figure 1).
- A regression-based "Aspirational Level by 2047" is constructed by estimating log capital per capita on log GDP per capita, log population density, age dependency, log land area, log surface area, log average elevation, log coastline length, and a dummy for large countries, then projecting for India by 2047 assuming it achieves the threshold for a high-income economy as defined by the World Bank in 2017.
- Implication: despite relatively high investment-to-GDP, substantial catch-up in capital stock per capita is needed to meet the authorities’ target of becoming an advanced economy by 2047.

### Recent investment dynamics and composition
- Historical trajectory: gross fixed capital formation rose from 15.5 percent of GDP in 1970/71 to a peak of 35.8 percent of GDP in 2007/08, declined thereafter, hit a low of 27.3 percent of GDP in 2020/21, and recovered to 30.8 percent of GDP in 2023/24.
- Post-pandemic recovery has been driven by dwellings and public sectors; private corporate investment has been sluggish compared with historical averages.
- Machinery and equipment investment by private corporates: 4.3 percent of GDP in 2022/23 compared to an average of 5.9 percent of GDP between 2011/12 and 2015/16 and 3.9 percent in 2020/21.
- Nominal investment growth by private corporates decelerated from 21 percent in 2022/23 to 13 percent in 2023/24 (based on balanced panels described below).
- Data notes: Balanced panel of firms up to 2022/23 aggregates capex for 11,251 firms reporting 2019/20–2022/23; balanced panel up to 2023/24 aggregates capex for 2,009 firms reporting 2019/20–2023/24.
- RBI (2024) reports a more favorable dynamic based on sanctioned investment projects but excludes self-financed investments.

### Accelerator model evidence and FDI dynamics
- A simple accelerator model is estimated: I_t / K_{t−1} = γ + α / K_{t−1} + Σ β_i Δy_{t−i} / K_{t−1} + ζ M_t + ε_t (with lagged GDP changes, controls including global variables and domestic interest rates; Newey-West standard errors with lag 3).
- Findings from the model:
  - Investment in 2023/24 was below what a demand-only model would predict.
  - Part of the negative investment gap is explained by global factors and domestic interest rates.
  - The gap is especially evident in net FDI, even when accounting for global factors.
- FDI trends:
  - India’s share in global FDI fell to about 2 percent in 2023 from about 6½ percent in 2020.
  - Gross cumulative FDI inflows reached $1 trillion over 2000–24.
  - Gross FDI inflows rose by nearly 30 percent y/y during April-September 2024.
  - Net FDI diminished considerably over recent years and turned negative in 2024Q3, reflecting repatriation, profit-taking, and increasing outward FDI by Indian entities.
- Possible explanations for FDI gap: higher geopolitical uncertainty, friendshoring, domestic policy changes (including renegotiation of Bilateral Investment Treaties), or other factors beyond traditional indexes.

### Bilateral Investment Treaties (BITs) and investment policy
- Between 2013 and 2023, India issued termination notices to 68 countries for BITs.
- India adopted a Model BIT 2015 and has since signed BITs with Belarus, Kyrgyzstan, Brazil, UAE, and Uzbekistan, plus agreements with Taipei and an Investment Incentive Agreement with the USA; negotiations are ongoing with other countries on the basis of Model BIT 2015.
- The 2025/26 Budget Speech announced a revamp of the Model BIT.
- The share of global GDP represented by India’s counterparties in BITs in force is currently small.
- Evidence on BITs and FDI is mixed:
  - Literature finds both positive and negative/insignificant effects.
  - Firm-level studies indicate investment agreements (particularly with investor-state dispute settlement) can increase the probability of first foreign entry when accompanied by a double-taxation treaty.
  - Hartmann and Spruk (2022) estimate a reduction of more than 30 percent in FDI inflows to India in response to BIT terminations compared to countries without termination.
- Conclusion: BITs may not be the main driver of FDI but likely contribute positively.

### Corporate financial health and heterogeneity
- Aggregate improvements over last five years (CMIE Prowess data):
  - Median corporate profit: 8.3 percent of sales in 2022/23 (from 6.8 percent in 2018/19).
  - Median cash flow generation: 3.3 percent of assets in 2022/23 (from 2.1 percent in 2018/19).
  - Median leverage: declined from 0.60 in 2018/19 to 0.51 in 2022/23 (debt to assets ratio).
  - Median liquidity (cash and bank balances to lagged assets): rose from 2.6 percent in 2018/19 to 3.2 percent in 2022/23.
  - Share of distressed firms (interest bill greater than profits before interest and taxes) halved from 21 percent to 11 percent.
- Heterogeneity:
  - Only 52 percent of firms reported higher profitability in 2022/23 compared to 2018/19.
  - 57 percent had lower leverage and 59 percent showed higher interest coverage versus 2018/19.
  - Interest coverage varies significantly across sectors; high in information and communication and professional services.
- Preliminary evidence for 2023/24 suggests these improving trends persisted.

### Capacity utilization and investment appetite
- Manufacturing capacity utilization reached 75.8 percent in 2024Q2, in line with 2019 levels.
- After moderation of production expectations, 85.7 percent of manufacturing firms expected capacity to be adequate to meet demand within the next six months.
- Across the economy, 49 percent of firms had a higher sales-to-assets ratio in 2023/24 compared to 2018/19.
- Investment expectations:
  - 57 percent of firms in services expect physical investments to increase.
  - 75 percent of firms in infrastructure expect physical investments to increase.
- Overall: no broad-based evidence of widespread capacity constraints, but pockets of investment appetite in services and infrastructure.

### Economic policy uncertainty and project-level evidence
- Economic Policy Uncertainty (EPU) for India (Baker, Bloom, and Davis, 2016 index) was high in the early 2010s, at COVID-19 onset, and increased again in late 2023; it has remained elevated and above trend since then, partly due to heightened global uncertainty, particularly regarding trade policy.
- CMIE CapEx database:
  - Covers projects from 1995 onward.
  - Project composition (all private projects): New Unit 64,593; Renovation & Modernisation 1,401; Substantial Expansion 11,513.
  - Word-cloud analysis: "electricity" is the most frequently mentioned term; "commercial," "hotels," "shops," and "housing" also frequent.
- Empirical approach to uncertainty and projects:
  - Regression estimated: log ProjectCount_t = γ + δ Uncertainty_t + Σ β_i (log y_{t−i} − log y_{t−i−4}) + ζ M_t + ε_t, where ProjectCount_t can be announced, abandoned, announced-and-stalled, stalled implementation, or shelved projects; y_t is real GDP; M_t includes domestic credit and policy rate and quarter fixed effects; standard errors Newey-West lag 3.
- Interpretation: economic policy uncertainty can reduce new project announcements and increase abandoned projects during a project’s lifetime.

### Structural reform implications and policy levers (as identified in text)
- Cross-country analysis suggests structural improvements—such as judicial, business regulation, and credit market reforms—can boost private investment.
- Reducing trade restrictions is important to incentivize FDI.
- Reforms in these areas can yield sizable gains for India.

*Annex XII. Reigniting Private Investment in India*

### 11.      Economic policy uncertainty is associated with lower investment and delayed projects

### 11.      Economic policy uncertainty is associated with lower investment and delayed projects

### Investment effects of economic policy uncertainty
- A one-standard deviation increase in uncertainty (that is, 40 points) is associated with:
  - a decline in the number of new projects announced by 11 percent, which is around 66 fewer projects per quarter.
  - 8 more projects abandoned even after implementation had begun.
  - 5 projects temporarily stalled.
  - 8 projects permanently shelved before implementation began.
  - 4 projects whose implementation stalls.
- Table 1 (selected entries):
  - Economic Policy Uncertainty regression coefficients shown (across columns): -0.003**, -0.004***, 0.011***, 0.009***, 0.012***, 0.009***, 0.015***, 0.014***, 0.009***, 0.009***. (Standard errors in parentheses follow the table.)
  - Real Repo Rate (India) entries (selected): -0.064***, -0.050***, -0.019, 0.019, -0.069, -0.019, -0.067, -0.037, 0.013, 0.026.
  - Lagged Credit to GDP coefficients (selected): 0.006***, 0.018***, 0.024***, 0.014***, 0.006.
  - Observations: 92 (in all regressions reported).
  - R-squared (selected): 0.28, 0.48, 0.25, 0.53, 0.26, 0.63, 0.34, 0.46, 0.23, 0.27.
  - Average Quarterly Count (by dependent category): 600, 600, 15, 15, 8, 8, 5, 5, 17, 17.
- Note: CMIE’s CapEx database tracks the lifecycle of investment projects that entail a capital expenditure of Rs. 10 million or more.

### Drivers of state-level manufacturing investment
- Key structural correlates:
  - Education attainment measured by middle school enrollment 15 years prior (so those then-middle-schoolers would be in their late 20s during the reference period).
  - Labor force participation rate (LFPR) measured by the worker-to-population ratio by current weekly status from the Periodic Labour Force Survey (PLFS).
  - Intensity of ease-of-doing-business reforms measured by the percentage of reforms implemented under the Business Reform Action Plan (BRAP).
- Empirical specification used to estimate drivers (notation preserved):
  - 풚풊풕 = 훌풕 + 휶⋅푹풆풇풐풓풎푰풏풕풆풏풔풊풕풚풊풕 + ∑휷풌⋅풙풌,풊풕 + 휷ퟎ + 흐풊풕풌
  - 풚풊풕 is manufacturing investment in percent of gross state domestic product (GSDP).
  - Reform intensity is the percentage of BRAP reforms implemented.
  - Controls include initial conditions (pre-reform investment and per capita income) and current macro and structural conditions (output growth and LFPR).
- Main quantitative findings:
  - A 10-percentage point increase in reform intensity under BRAP is associated with higher manufacturing investment by around 0.1 percent of GSDP.
  - Trade openness, labor force participation, and education attainment predict stronger manufacturing investment.
- Instrumental-variable causality check:
  - Instrument: neighboring states/UTs’ average reform intensity used as IV for a state/UT’s own reform intensity.
  - First-stage conditional correlation between IV and own reform intensity: 0.7.
  - IV estimates (Columns 2, 4, and 6 of Table 2) have magnitudes similar to OLS estimates and are robust to controls for neighbors’ manufacturing investment growth or GSDP growth and inclusion of own and neighbors’ reform intensity together.

### Gains from structural reforms — cross-country and India-specific estimates
- Local projection results for 160 countries (2000–2019) find:
  - Major judicial reform: boost private investment by up to 3 percent in two years.
  - Major business regulation reform: increase investment by about 2 percent.
  - Major credit market reforms: raise investment by up to 6 percent.
  - External sector reforms (lowering non-tariff restrictions): can boost inward FDI by almost 10 percent in the medium term.
- India-specific potential gains (assuming closing structural reform gaps by 25 percent relative to the EM frontier and applying local projection coefficients):
  - Judicial reforms could raise private investment by up to 5 percent over the medium term.
  - Credit market reforms could raise private investment by up to 5 percent over the medium term.
  - Business regulation reforms: smaller gains relative to EM frontier, but larger gains if narrowing the gap to the global benchmark by 25 percent.
  - Lowering tariff restrictions: boost inward FDI by about 5 percent over the medium term.
  - Lowering non-tariff restrictions: boost inward FDI by about 6 percent over the medium term.
  - Better governance: could foster FDI by almost 10 percent.
  - Improving business regulation: could foster FDI by about 8 percent.
- Note on calibration: Figures for reform impacts are based on historical reforms that raise the respective reform indicator by two standard deviations (footnote context preserved).

### Policy implications and recommended priorities
- Reduce economic policy uncertainty where policymakers can (tax and regulatory certainty) to mitigate disincentives for investment.
- Improve judicial capacity and functioning:
  - Address large case backlogs and insufficient resources.
  - Further improve the functioning of the Insolvency and Bankruptcy Code.
- Strengthen credit markets:
  - Increase the private sector’s footprint in the financial system.
  - Promote efficient allocation of financial resources across sectors.
- Continue improvements in business regulation:
  - Streamline bureaucratic procedures and reduce administrative requirements to unlock efficiencies and support a dynamic business environment.
- Enhance human capital:
  - Raise the quality of education and improve governance of public school systems to support medium- to long-term private investment.
- Reduce trade restrictions to boost inward FDI and integration into global supply chains.
- Emphasize center-state cooperation:
  - Many reforms (education, business regulation, judicial system) occur at the state level and require close cooperation among center and states to enact quality reforms and learn from state reform experiences.

*Source: IMF staff estimates.*

### Annex XIII. Enhancing the Contribution of Labor to the Economy

### Annex XIII. Enhancing the Contribution of Labor to the Economy

### Labor market potential and contribution to growth
- India has experienced relatively higher growth in both its working-age population and employment over the past decade compared to the median of G20 Emerging Markets (EMs), indicating a robust expansion of its labor market.
- India’s employment-to-WAP ratio is lower than that of the median G20 EMs, implying scope to raise employment participation.
- Growth decomposition (average 2010–19) attributes a modest role of labor inputs to India’s GDP growth relative to peers; using RBI’s KLEMS, employment contributed 25 percent and labor quality contributed 5 percent to output growth between 1980/81 to 2021/22.

### Labor shares and sectoral dynamics
- Labor share trends:
  - Labor’s contribution to growth in India has increased but remains small relative to other emerging markets.
  - The labor share declined in manufacturing and services until the late-2000s but has been increasing since roughly 2007.
- Drivers of sectoral labor-share changes:
  - Within-industry changes in labor shares have been the main driver of sectoral labor share dynamics since 1980.
  - Manufacturing production has reallocated towards higher-labor-share industries (e.g., textiles, electrical and optical equipment), supporting a gradual rise in the manufacturing labor share since 2007.
- Cross-country sectoral positioning:
  - India’s labor share in manufacturing is relatively low compared to China, Korea, and the US.
  - India’s labor share in services is relatively high given its income level.

### Returns to education and training (microdata evidence)
- Data and methodology:
  - Mincer earnings regressions estimated using PLFS (Periodic Labour Force Survey) individual-level microdata between July 2017 and June 2024.
  - Sample size and regressions: Observations = 908,693; models report R-squared values 0.190, 0.240, 0.282, 0.307 across specifications.
- Returns to formal education:
  - An additional year of formal schooling increases earnings by 6–7 percent (coefficients reported: 0.072***, 0.071***, 0.066***, 0.059*** across specifications).
  - Returns in India are somewhat lower than the global average of 9.7 percent (Montenegro and Patrinos, 2014).
- Gender and location differentials:
  - Gender earnings gap: women earn 37 percent less than men on average (Female coefficient: -0.369***, -0.380***).
  - Returns to education are 1.4 percentage points higher for women than for men.
  - Urban earnings premium: earnings in urban areas are 26 percent higher than in rural areas (Urban coefficient: 0.262***).
  - Returns to education in urban areas are 3.9 percentage points higher than in rural areas.
- Returns to experience:
  - Experience coefficient 0.024*** (specification 1) with a small negative experience-squared term (indicating diminishing returns to experience).

- Training and earnings:
  - Formal training boosts earnings by 18.5 percent.
  - Learning on the job increases earnings by 7.3 percent.
  - Hereditary training and self-learning are associated with lower earnings of 10.1 and 2.7 percent, respectively.
  - Returns by source of funding: government-funded training ~19 percent; own funding ~19 percent; other sources slightly higher.
  - Returns by duration: even training of less than 3 months yields a return of 15.2 percent; returns generally increase with duration up to "24 months or more".
  - Returns by education level:
    - Formal training especially useful for workers with less than primary education completed (22 percent) and with secondary education (12 percent).
    - Workers with tertiary education benefit significantly from on-the-job training (14 percent).
- Employment probabilities from training:
  - Formal training raises the probability of being employed by 16 percentage points and the probability of having a regular-wage job by 18 percentage points.
  - Hereditary training and self-learning increase the probability of employment but not regular-wage employment.
  - On-the-job learning is associated with higher employment and regular employment.
  - The probability of getting a job and a regular-wage job increases after a year of training, suggesting matching frictions post-training.

### Labor market reforms: potential employment gains
- IMF panel local projection analysis (74 EMs, 2001–2021) finds that implementing labor market reforms can lead to significant employment growth in the short and medium term; gains depend on progress relative to the EM frontier.
- For India:
  - Reducing the labor market reform gap by 25 percent relative to frontier EMs (i.e., closing the labor reform gap to levels similar to Brazil, Chile, Mexico, and Malaysia) could potentially create an additional 44 million jobs by FY2029/30 compared to the baseline.

### Human capital policies and policy recommendations
- Education access and outcomes:
  - India has achieved 100 percent enrollment in elementary grades after fifteen years of implementing the Right to Education (age 6–14).
  - Expenditure on education increased at a compounded annual growth rate (CAGR) of 9.4 percent from FY2018 to FY2024.
  - Despite expanded access, student performance has shown significant declines for students above third grade (Economic Survey 2023–24).
- Early Childhood Care and Education (ECCE):
  - Global medical consensus cited: 85 percent of cognitive development is complete by the age of six.
  - NEP 2020 ECCE priorities include strengthening foundational literacy and numeracy, promotion of experiential learning, and multilingual education.
  - Recommendations: continue investing in teacher training, pedagogical innovation, performance-based incentives, and school infrastructure to strengthen ECCE and foundational learning.
- Tech-enabled interventions and evidence (Box on Gujarat VSK):
  - Vidya Samiksha Kendra (VSK) coverage: 11.5 million students.
  - Outcomes and metrics:
    - 26 percent rise in students' attendance within the first year of VSK implementation ((NCERT), 2023).
    - 392,000 teachers register daily attendance, monitored digitally (UNDP, 2023).
    - Parents receive weekly digital report cards on smartphones.
    - VSK helped 20,000 head teachers reduce clerical work and contribute more than 10 million man-hours to academic work every year.
    - Central government fiscal support offered to all states and union territories to set up VSKs; World Bank recognition as a global best practice.
  - Policy implication: digital, data-enabled monitoring and management can yield sizable gains in attendance and administrative efficiency.
- Strengthening skill development and labor market matching:
  - National Skill Mission (NSM) initiatives: Pradhan Mantri Kaushal Vikas Yojana (PMKVY), National Apprenticeship Promotion Scheme (NAPS).
  - Budget 2024 initiatives: skill an additional 2 million youths over the next five years; upgrading 1,000 industrial training institutes; Employment-linked incentives (ELIs) targeting on-the-job training for first-time employees across India’s top 500 companies.
  - Recommendations to improve skilling outcomes:
    - Better link skill development with education.
    - Engage industry ecosystem to develop market-relevant courses.
    - Enhance training of trainers.
    - Ensure geographic availability of training across India.
    - Use active labor market policies to improve matching of students and firms.

*Annex XIII. Enhancing the Contribution of Labor to the Economy*

### 15.      The authorities are implementing interventions to foster matching between workers

### 15.      The authorities are implementing interventions to foster matching between workers and firms, entrepreneurship, and formalization

### Employment generation, skilling, and formalization programs
- Programs and reach:
  - Aatmanirbhar Bharat Rojgar Yojana (ABRY): aided over 6 million beneficiaries.
  - Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): aided over 12 million beneficiaries.
  - ELIs (Employment-Linked Interventions) are designed to aid on-the-job skilling and active formalization, and are expected to support 41 million young people over the next five years, enhancing employment, skilling, and education opportunities.
- Entrepreneurship and credit support programs:
  - Pradhan Mantri Mudra Yojana (PMMY)
  - Stand-up India
  - Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
  - Deen Dayal Antyodaya Yojana-National Urban Livelihoods Mission (DAY-NULM)
  - Deen Dayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM)
- Policy guidance:
  - Active monitoring of programs to track tangible gains in entrepreneurship and firm-level graduation will aid effective policy adjustments.

### Labor codes and incentives for firm investment in human capital
- Rationale:
  - Implementing the new labor codes can remove disincentives against hiring more regular workers and improve incentives to invest in human capital.
  - On-the-job training benefits require firms to expect employees to remain with the organization; firms are unlikely to invest substantially in training for contractual or informal staff.
- Policy implication:
  - There is a premium on implementing the new labor codes that facilitate formal employment arrangements to unlock firm-level investment in training.

### Health, nutrition, and human capital constraints
- Nutritional challenges and impacts:
  - Stunting (low height for age) and wasting (low weight for height) hinder physical and cognitive development, diminishing learning capacities and reducing economic productivity in adulthood.
  - Despite progress over two decades, the rate of decline in stunting has slowed and disparities persist across socio-economic groups.
- Charted prevalence indicators (Percent of Children Under 5):
  - Series shown (as presented in source): 20.0, 15.1, 20.8, 17.3, 18.7, 47.8, 38.7, 37.9, 34.7, 35.5
  - Chart title labels: "Prevalence of Wasting: Weight for Height: Percent of Children Under 5" and "Prevalence of Stunting: Height for Age: Percent of Children Under 5"
- Targeted health programs and roles:
  - Janani Shishu Suraksha Karyakram (JSSK): free and cashless services to pregnant women and sick newborns to reduce maternal and neonatal mortality.
  - Rashtriya Bal Swasthya Karyakram (RBSK): health screening and early intervention for children with birth defects, diseases, deficiencies, and developmental delays.
  - Ayushman Bharat, including Pradhan Mantri Jan Arogya Yojana (PM-JAY): health insurance for economically vulnerable families.
- Policy recommendation:
  - Continued policy focus on reducing incidence of stunting and wasting is needed to support better public health outcomes and India’s human capital.
  - Going forward, a policy focus on mental health and its impact on productivity will contribute to a more comprehensive understanding of enhancing the multifaceted quality of human capital.

### Female labor force participation measures
- Legislative and programmatic measures:
  - Paid maternity leave increased from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers in 2017.
  - Occupational Safety and Health Code, 2020: women shall be entitled to be employed in all establishments for all types of work with their consent before 6 a.m. and beyond 7 p.m., subject to conditions relating to safety, holidays and working hours, removing long-standing restrictions on female employment in night shifts.
  - Working Women Hostels scheme: aims to provide safe accommodation to working women.
  - Code on Social Security, 2020: provisions for mandatory crèche facilities in establishments having 50 or more employees; government extended care support through Anganwadi cum Crèche.
  - Reservation notified in 2023 for one-third of seats for women in the House of People (Lok Sabha) and in the State Legislative Assemblies.

### Conclusion: role of human capital policies
- Findings:
  - Human capital policies are essential to raise the contribution of labor to the economy.
  - Contribution of labor to economic growth in the decade before the pandemic was relatively limited, but there has been a gradual upward trend in the labor share as major industries have become more labor intensive.
  - Manufacturing in India is less labor intensive than expected given its level of development; services are more labor intensive.
  - There are substantial returns to education and some types of training.
- Policy implication:
  - Continued advancement of human capital policies is important to raise labor productivity and to reap India’s demographic dividend.

---

### Annex XIV — The Impacts of AI on India’s Economy: findings and policy recommendations
- Exposure and opportunities:
  - Around 43 percent of India’s labor force is in agriculture, suggesting potentially lower exposure to AI disruptions relative to more advanced economies.
  - An IMF study shows about 26 percent of Indian workers are in occupations with high AI exposure:
    - 14 percent in jobs where AI may be largely complementary, raising labor productivity and earnings.
    - 12 percent in occupations at higher risk of being displaced.
  - India’s youthful demography presents an opportunity for upskilling and reskilling for high-skill, AI-related fields.
- Service sector risks and potential:
  - AI and automation in IT services reduce demand for routine labor handling tasks (customer service, transaction processing, technical support).
  - Evidence shows AI adoption in the service sector leads to slower growth in vacancies and wages, especially in higher wage brackets, indicating substitution of AI for human labor.
  - Main export markets for IT services (e.g., the US, the UK, Singapore) are more prepared for AI, raising reshoring risks, but Gen-AI can also boost productivity and spur innovation.
- Financial market and systemic risks:
  - Greater AI adoption could increase algorithmic trading, market turnover, and speed of information incorporation into prices.
  - Risks include higher market volatility under stress, monitoring challenges, operational risks from dependency on a few AI service providers, and elevated cyber and market manipulation risks.
- AI Preparedness:
  - The IMF’s AI Preparedness Index (AIPI) shows India scores slightly higher than the average of emerging markets.
  - AIPI assesses digital infrastructure, human capital and labor market policies, innovation and economic integration, and regulation and ethics.
  - India scores relatively higher on regulatory areas but needs improvement in human capital and labor market policies, including diffusion of digital skills.
- Policy recommendations to harness AI:
  - Develop human capital through enhanced STEM education and digital literacy programs.
  - Improve social safety nets with retraining programs, including skilling and reskilling for vulnerable workers.
  - Accelerate economic integration and further enhance digital infrastructure to ensure affordable high-quality internet access.
  - Strengthen regulatory framework to prevent abuse and foster trust in AI technologies.
  - Build on India’s Digital Public Infrastructure to broaden AI access.
  - Deploy targeted fiscal measures if AI increases income and wealth inequalities to incentivize innovation that complements human labor.
  - Strengthen regulation and supervision to address potential financial stability risks in banking and NBFI sectors, and adapt legal systems to technological advances.
  - India’s national AI mission (IndiaAI) is noted as progressing on AI education access, public AI infrastructure, public sector deployment, and startup financing facilitation.

*Source: International Monetary Fund.*

### 2. India: Data Standards Initiatives

### 2. India: Data Standards Initiatives

### Data adequacy assessment for surveillance
- The data provided to the Fund are adequate for surveillance; some shortcomings exist but are broadly adequate for surveillance.
- Staff does not use any data and/or estimates in the staff report in lieu of official statistics.
- Other data gaps:
  - Deficiencies in employment data:
    - The Periodic Labour Force Survey questionnaire can be strengthened to reduce the role of self-classification in capturing employment.
    - Employment indicators for rural areas are published on annual basis, albeit the microdata is published biannually.
- Changes since the last Article IV consultation:
  - Data weaknesses have remained broadly unchanged since the last Article IV consultation.
  - All microdata for the Periodic Labour Force Survey have been published biannually, allowing computation of employment and labor income indicators at such frequency.
- Corrective actions and capacity development priorities (authorities’ actions and priorities):
  - Improve the national accounts series, including collection of key data sources to update the base year.
  - Increase the number of activities using double deflation or volume extrapolation to compile volume measures, aiming to minimize use of single deflation.
  - Strengthen deflation practices by relying on producer price indices rather than wholesale price indices to the extent possible.
  - Regular use of unincorporated businesses data to better capture dynamics in the informal sector.
  - Assess data sources and use of the supply and use framework to reduce discrepancies.
  - Update CPI base year using weights based on the results of the 2022-23 Household Consumption and Expenditure Survey.

### Rationale for sectoral assessments and main shortcomings
- National accounts:
  - Adequate frequency and timeliness and broadly adequate granularity.
  - Methodological weaknesses somewhat hamper surveillance:
    - Outdated base year (2011/12).
    - Lack of Producer Prices Indices and excessive use of single deflation, which may introduce cyclical biases.
    - At times sizable discrepancies between production and expenditure approaches.
    - Lack of seasonally adjusted data.
  - Overall sectoral rating for national accounts: "C".
- Consumer Price Index (CPI):
  - Available at adequate frequency and timeliness, but outdated base year (2011/12) implies CPI basket likely fails to accurately represent current spending habits.
- Fiscal data:
  - Granularity broadly adequate, but coverage and timeliness can be improved.
  - Consolidated central and state government fiscal data has not been published since mid-2019 (covering outturns for FY2015-16).
  - Consolidated general government data (including local government and extrabudgetary funds) is not compiled.
  - Monthly data on fiscal operations for the central government and individual states is published on a timely basis; consolidated fiscal accounts across all states are available with a long lag.
- Monetary and financial statistics:
  - Broadly adequate for surveillance, with scope for improvement in coverage and timeliness.
  - Limited data provided on NBFCs.
  - Data reported to the IFS lack some granularity in terms of financial instruments and counterparts; some discrepancies between assets and liabilities.
  - Reported FSI data use dated reporting forms and could be upgraded to FSI 2019 Guidelines.
  - Banking sector data available with a lag of about 3 quarters.
  - Information on international reserves does not include pledged or encumbered assets and foreign exchange swaps.

### Key methodological issues in real sector statistics
- Base year and CPI weights:
  - Current base year of the national accounts is 2011/12.
  - International best practices recommend updating the base year every five years, or not more than ten.
  - Current CPI weights and item basket are derived from the 2011/12 Household Consumption and Expenditure Survey (HCES).
  - Results from the 2022/23 HCES indicate significant changes in consumption patterns since 2011/12 (e.g., substantial reduction in share of expenditure on vegetables and cereals; increase in beverages, processed food, and non-food products including durables).
- Volume estimation methods:
  - Best practice: double deflation (deflating gross output and intermediate consumption separately).
  - In India, estimates rely on single deflation for a significant share of the economy (around 70 percent of gross value added over 2011–12 to 2022–23), where value added in volume is derived through single deflation assuming input and output prices are identical.
  - Wholesale Price Index (WPI) is widely used to calculate volume estimates; WPI is not recommended for deriving volume estimates because it includes taxes, includes imports and excludes exports. A Producer Price Index (PPI) would be preferable.
- Discrepancies between production and expenditure approaches:
  - May indicate need to further assess data sources for GDP compilation, especially expenditure-side estimates.
  - Require better coverage of the informal sector for household final consumption expenditure and improved government final consumption expenditure data at the state level.
  - Implementing supply and use tables would help validate source data and reduce discrepancies.
- Taxes and subsidies on products:
  - Room for improvement in methods to calculate net taxes on products.
  - International best practices recommend use of accrual data where possible and aligning volume change rates of net taxes with the related good or service.
  - Current practice: constant price estimate for subsidies on products is obtained by deflating current price estimates using the gross value added deflator, which may impact volatility of quarterly GDP estimates.

### Recent progress and ongoing initiatives
- MoSPI project to improve national accounts quality, using the base year update to 2022/23 as an opportunity to incorporate improved compilation methods.
- Steps already taken:
  - Collection of key data sources for updated national accounts: Annual Survey of Unincorporated Sector Enterprises; 2022-23 HCES; Periodic Labor Force Survey; Annual Survey of Industries; additional studies for input-output ratios and economy structure.
  - Enhanced use of available administrative data planned.
  - Planned improvement in compilation of volume estimates through use of double deflation or single extrapolation depending on data availability; minimize single deflation.
  - Extensive IMF technical assistance to Office of the Economic Adviser for development of PPIs for agriculture and manufacturing; results pending publication.
  - Planned PPI update to align with national accounts base year, efforts to extend coverage to selected services and start collecting input PPIs.
  - Plan to rely on PPI series to replace use of WPI data where possible.
  - To enhance household final consumption expenditure estimates, MoSPI plans to implement the commodity-flow approach.
  - Assessment of implementing supply and use table framework to estimate annual GDP.
  - Consideration of improved statistical techniques for quarterly national accounts, including dissemination of seasonally adjusted series as part of the first publication of the updated national accounts series.
  - Compilation of an updated industrial production index with updated weights and base year aligned with national accounts.
- CPI compilation progress:
  - Work started to update CPI base year from 2012 to 2024.
  - New CPI weights based on the 2022-23 HCES (already published).
  - Price collection for base year 2024 has started based on the updated items basket.
  - Expected improvements: enhanced market coverage including e-commerce transactions; improved technology for data collection; implementation of COICOP 2018 to the extent possible.

### Timelines, outputs, and communication
- Publication of results of the updated national accounts series is tentatively planned for February 2026, including estimates for the new base and current years and quarterly national accounts estimates consistent with the new annual estimates.
- Revised CPI series are expected to become available in January 2026.
- MoSPI is starting to develop a strategy to communicate the changes to users.

### Surveillance, program priorities, and capacity development (CD) activities
- Surveillance and program priorities:
  - Strengthen compilation of macroeconomic statistics, including national accounts, according to internationally accepted statistical standards.
  - Develop a well-articulated medium-term fiscal consolidation path which rebuilds buffers at an appropriate pace.
  - Upgrade the financial sector regulatory framework and supervisory processes.
  - Implement structural reforms to support private investment, productivity, and job creation.
- Recent CD activities:
  - Real sector statistics: compiling producer price indices; updating CPI weights; developing double deflation procedures to derive volume estimates of GDP; use of GST data in national accounts; building national accounts statistics capacity at the sub-national level.
  - Support the GST Network in developing a model to estimate the revenue impacts of GST rate changes.
  - Fiscal support at state level: PIMA/C-PIMA; strategic budgeting; fiscal risk management; medium-term fiscal framework; green PFM reform; commitment control; cash management; performance measurement and budget documentation.
  - Technical dialogue with MOF’s Budget Division on gender budgeting; cash and debt management; and fiscal risks.
  - Continued technical cooperation with RBI’s Financial Stability Department on stress testing model framework.
  - AML/CFT workshop in context of India’s upcoming FATF (fifth round) assessment.
  - Training for RBI officers; officers in the Indian Economic Service, Indian Statistical Service and the Indian Administrative Service as well as for the Central Board of Direct Taxes and the Central Board of Indirect Taxes and Customs.
  - Debt sustainability analysis workshop for EXIM Bank of India.
- Planned CD activities:
  - Real sector statistics: compilation of the financial accounts and balance sheets; continue supporting PPI development; improve compilation techniques of high-frequency indicators; rebasing of national accounts and CPI.
  - Continued engagement with states on fiscal issues: budget preparation; improving medium-term fiscal frameworks; strengthening management of fiscal risks.
  - PFM support for newly engaged states under discussion.
  - Sub-national PFM workshops showcasing reform topics under implementation by the host state.
  - Workshop on digitalization for MOF.
  - SARTTAC dedicated seminar series for officials of MOF and other government agencies on key economic issues.
  - SARTTAC dedicated seminar series for officials of the Ministry of Statistics and Programme Implementation.
  - Workshop on the Sovereign Risk and Debt sustainability analysis framework for Indian government officials.

*Source: 2. India: Data Standards Initiatives (PDF chapter).*

### Annex XVII. Recent and Planned Capacity Development

### Annex XVII. Recent and Planned Capacity Development

### Fund Relations — Membership and Quotas
- Membership Status: Joined December 27, 1945; Article VIII.
- Quota: SDR Million 13,114.40 (100.00 percent of Quota).
- Fund Holdings of Currency (Holdings Rate): SDR Million 9,888.15 (75.40 percent).
- Reserve Tranche Position: SDR Million 3,233.87 (24.66 percent).

### SDR Department and Financial Arrangements
- Net cumulative allocation (SDR Department): SDR Million 16,547.82 (100.00 percent).
- Holdings (SDR Department): SDR Million 13,704.73 (82.82 percent).
- Outstanding Purchases and Loans: None.
- Historical Financial Arrangements:
  - Stand-By: Date of Arrangement 10/31/91; Expiration Date 06/30/93; Amount Approved (SDR Million) 1,656.00; Amount Drawn (SDR Million) 1,656.00.
  - Stand-By: Date of Arrangement 01/18/91; Expiration Date 04/17/91; Amount Approved (SDR Million) 551.93; Amount Drawn (SDR Million) 551.93.
  - EFF: Date of Arrangement 11/09/81; Expiration Date 05/01/84; Amount Approved (SDR Million) 5,000.00; Amount Drawn (SDR Million) 3,900.00.

- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Principal forthcoming in 2025–2029: 0.00, 0.00, 0.00, 0.00, 0.00.
  - Charges/interest forthcoming in 2025–2029: 90.74, 89.94, 89.94, 89.98, 89.90.
  - Total forthcoming in 2025–2029: 90.74, 89.94, 89.94, 89.98, 89.90.

### Exchange Rate Arrangement and Restrictions
- Currency: Indian rupee; exchange rate determined in the interbank market with frequent Reserve Bank of India (RBI) interventions aimed at curbing excessive volatility.
- De jure arrangement: floating.
- De facto arrangement classification: stabilized for the period from December 2022 to November 2024. Note: while the rupee depreciated moderately from November 2024, more observations are necessary to determine any new trend; until then, the de facto arrangement remains classified as stabilized.
- Methodology: classification based on a backward-looking statistical methodology relying on past exchange rate movement and historical data; any potential reclassification considers any six-month span beginning from the onset of a new trend.
- Accepted obligations: On August 20, 1994, India accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement.
- Maintained exchange restrictions subject to Fund approval under Article VIII, Section 2(a):
  1. Restrictions related to the non-transferability of balances under the India-Russia debt agreement.
  2. Restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries.
  3. Restriction on the transfer of amortization payments on loans by nonresident relatives.
  4. Four exchange restrictions arising from transfer taxes for personal remittances and payments for educational, medical and travel services under the Liberalized Remittance Scheme:
     - (i) 20 percent tax on personal remittances above the annual Rs 700,000 threshold;
     - (ii) 0.5 percent tax on remittances above the annual Rs 700,000 threshold for education payments where financed by loan;
     - (iii) 5 percent tax on payments above the annual Rs 700,000 threshold for education and medical services;
     - (iv) 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 (that is, to a non-resident seller).
- Executive Board approval: The Executive Board has not approved these restrictions.

### Article IV Consultation, FSAP, and Capacity Development
- Previous Article IV consultation discussions: held in September 2023. Staff Report discussed by the Executive Board on November 20, 2023.
- FSAP 2024: Conducted in Delhi and Mumbai from March 2024, with a virtual concluding meeting in October 2024. Findings presented to the Executive Board alongside the Article IV consultation on February 21, 2025.
- Previous FSAP Update: December 2017 (Country Report No. 17/390).
- Capacity Development (Technical Assistance and Training): Recent and planned IMF capacity development and training activities with India are discussed in Appendix XVII of the staff report.
- Resident Representative: Office opened in November 1991. Mr. Ranil Manohara Salgado has been the Senior Resident Representative since March 2024.

### Authorities’ Statement — Growth and Labor Market
- Authorities’ view: India remains the fastest-growing major economy with steady economic growth and recovery post-pandemic.
- Post-pandemic GDP growth averaged 7.8% during 2021-22 to 2024-25, supported by prudent macroeconomic policies.
- GVA: Surpassed pre-pandemic trend in Q1: 2024/25.
- Sectoral performance:
  - Agriculture operated well above trend throughout.
  - Industry found footing above pre-pandemic trajectory.
  - Services remained closer to trend with catch-up in contact-intensive services.
- Poverty and inequality:
  - Headcount poverty ratio declined to below 1% in 2023/24 from 12.2% in 2011-12.
  - Gini coefficient of consumption expenditure:
    - Rural: 23.7% in 2023/24 (down from 26.6% a year before).
    - Urban: 28.4% in 2023/24 (down from 31.4% a year before).
- Employment:
  - Employment picked up by 27 million in 2023/24 while the working age population (WAP) increased by 14 million.
  - Labor force participation rate (LFPR) stood at 60.1% in 2023/24 (up from 57.9% in 2022/23 and 49.8% in 2017/18).
  - Female LFPR rose from 23.3% in 2017-18 to 41.7% in 2023-24, driven mainly by rising participation of rural women.
  - Net additions to employees’ provident fund subscriptions: 6.1 million in 2018/19 to 13.1 million in 2023/24; net additions of 9.6 million in April-November, 2024.
  - Nearly 61 percent of net payroll additions came from less than 29 years of age.
  - Emphasis on reskilling, upskilling, and new-skilling to enhance employability.

### Output, External Sector, and Projections
- Authorities’ GDP estimate: First advance estimates indicate GDP growth of 6.4% in 2024/25 (staff’s estimate: 6.5%).
- Q2: 2024/25 current account deficit: 1.2% of GDP, supported by services trade surplus and remittances.
- Forecasts for 2025-26:
  - Staff retained forecast: 6.5% for 2025-26.
  - Reserve Bank of India (RBI) projection: 6.7% for 2025-26.
  - World Bank forecast: 6.7% for 2025-26.
- Inflation:
  - Headline inflation returned to tolerance band of 4 (+/-) 2% in November 2024 after October breach.
  - Headline inflation: 4.3% in January 2025.
  - Core inflation: 3.7% in January 2025.
  - RBI projected headline inflation for 2025-26: 4.2% (staff projection: 4.3%).
  - Food inflation expected to soften absent supply shocks due to good kharif production, winter-easing in vegetable prices, and favorable rabi crop prospects.

### Fiscal Policy and Risks
- Central government gross fiscal deficit (GFD): estimated at 4.8% of GDP in 2024-25 (budgeted 4.9%).
- Fiscal targets:
  - GFD set at 4.4% for 2025-26 as announced in 2021.
  - New glide path: central government debt-GDP ratio targeted to decline to about 50 (+/-) 1% by March 31, 2031; GFD to be managed during 2026-27 to 2030-31 to achieve this.
  - Move away from rigid fiscal rules toward more transparent and operationally flexible fiscal standards.
- Government actions: Reduction in budget size and subsidies in the Union Budget 2025-26 with capital expenditure (capex) retained at similar level; measures on better targeting of subsidies noted as already acted upon.
- Fiscal risks flagged by staff: government guarantees; loss-making SOEs (particularly power sector); unfunded civil service pension liabilities.
  - FRBM Act, 2003: caps incremental guarantees in a financial year at 0.5% of GDP.
  - Outstanding central government guarantees: 1.1% of GDP at end-March 2024 (down from 3.3% at end-March 2005).
  - Growth in outstanding guarantees for 20 states and union territories: declined to 10.6% by end-March 2024 (from 20.5% by end-March 2023).
  - Union Budget 2025-26: announced incentives for electricity distribution reforms and augmentation of intra-state transmission capacity by states; additional borrowing of 0.5% of GSDP proposed for states, contingent on these reforms.
  - Unified Pension Scheme effective for central government employees from April 1, 2025: a fund-based pension system with contributions from both the employee and the employer.
- Sub-national fiscal conditions:
  - Staff assess higher primary deficit in more than half of states, coupled with high debt and low growth, as vulnerabilities.
  - RBI’s ‘‘State Finances: A Study of Budgets of 2024-25’’: states contained aggregate gross fiscal deficit within 3% of GDP for three consecutive years (2021-22 to 2023-24), revenue deficit at 0.2% in 2022-23 and 2023-24.
  - States' total outstanding liabilities: declined from 31% of GDP at end-March 2021 to 28.5% at end-March 2024 (approaching pre-pandemic 25.3% at end-March 2019).

### Monetary Policy and Exchange Rate Policy
- Inflation dynamics and policy action:
  - Headline inflation reverted to tolerance band in November 2024 and moved closer to target by January 2025.
  - Given growth-inflation dynamics, the Monetary Policy Committee (MPC) cut the policy repo rate by 25 bps to 6.25% on February 07, 2025.
- Exchange rate policy stance:
  - RBI focuses on maintaining orderliness and stability without compromising market efficiency; FX interventions aim to smooth excessive volatility rather than target specific levels.
  - INR/USD exchange rate moved in a narrow band in the recent past, reflecting low macroeconomic volatility captured in the VIX index for India; from July 2024 onwards larger movements observed.
  - INR depreciation of 4.0% during November 6, 2024 to February 6, 2025, largely mirroring 4.1% appreciation in the USD index during the same period.
  - Authorities note exchange rate flexibility as first line of defence in absorbing external shocks.
- Reserves and reserve adequacy:
  - India’s official FX reserves at about 105% of the IMF’s composite metric as at end-December 2024; authorities note reserves are adequate for precautionary purposes.
  - Staff advocated greater exchange rate flexibility to reduce need for costly precautionary FX reserves and to encourage firm-level hedging; authorities comment on hedging costs and note that around two-thirds of external commercial borrowings remain hedged as on September 2024 (RBI Financial Stability Report, December 2024).

### Financial Sector Soundness and Resilience
- Banks and non-banks:
  - Scheduled commercial banks (SCBs): soundness bolstered by strong profitability, declining non-performing assets (NPA), adequate capital and liquidity buffers.
  - Gross NPA ratio: 2.6% at end-September 2024 (multi-year low).
  - Return on assets and return on equity at decadal highs.
  - Macro stress tests: most SCBs have adequate capital buffers relative to regulatory minimum even under adverse stress scenarios.
- Non-banking financial companies (NBFCs):
  - Remain healthy with sizable capital buffers, robust interest margins and earnings, and improving asset quality.
  - NBFC gross NPA: 3.4%.
- Insurance sector:
  - Consolidated solvency ratio remains above the minimum threshold limit.
- System resilience:
  - Stress tests validate resilience of mutual funds and clearing corporations.

*Source: INDIA — STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (Annex XVII. Recent and Planned Capacity Development), February 6, 2025.*

### 17. Staff  have  observed  that  the  credit-to-GDP  gap  has  broadly  closed.  In  this  context,  it

### 1indea2025001-print-pdf - 17. Staff  have  observed  that  the  credit-to-GDP  gap  has  broadly  closed.  In  this  context,  it

### Credit penetration, digital infrastructure, and MSME support
- Staff observed the credit-to-GDP gap has broadly closed; RBI’s FSR places it at (-) 0.7% in Q4: 2023-24, down from (-) 10.3% in Q1:2022-23.
- Initiatives to deepen and broaden credit access:
  - Unified Lending Interface (ULI): digital public infrastructure for frictionless credit; has on-boarded 36 lenders so far, including banks and NBFCs, using more than 50 data services (authentication and verification; land records from six states; satellite service; transliteration; property search services; dairy insights).
  - Open Credit Enablement Network (OCEN): aims to enable cash-flow based unsecured financing for MSMEs as against balance sheet and collateral based financing.
- Policy intervention: Mutual Credit Guarantee Scheme launched in January 2025 to boost credit growth to MSME manufacturing (fulfills the 2024-25 budget announcement of July 2024).

### Banks’ government securities holdings, liquidity tools, and stress resilience
- Banks’ share in government securities has been declining:
  - 37.5% of central government dated securities as at end-June 2024.
  - 34.4% of state government securities as at end-June 2024.
- Regulatory changes and implications:
  - From April 2024, symmetric treatment is imparted to fair value gains and losses and ceiling on Held to Maturity (HTM) portfolio is removed, providing operational flexibility for banks.
  - Stress test: system level CRAR would continue above the regulatory minimum even if yield goes up by 250 basis points.
  - Statutory Liquidity Ratio (SLR) currently at 18% is aligned with Liquidity Coverage Ratio (LCR) and does not pose a binding constraint to banks.
- Staff advice: reduce SLR given LCR introduction; authorities note SLR is time-tested and helped maintain liquidity prior to LCR.

### Social discontent, inflation, and policy space
- Risk assessment: staff judge likelihood of social discontent as medium.
- Authorities’ observations:
  - No evidence that increases in food and fuel prices have caused social discontent in India; India has not experienced hyperinflation.
  - Even during the pandemic, inflation did not increase abruptly, reflecting coordinated monetary-fiscal measures.
  - Government’s free food program remains in force until 2029.
  - Economic resilience and social fabric have prevented shocks from creating instability.
- On staff advice to avoid trade restrictions: authorities note that such advice may conflict with sovereign rights to respond to higher tariff and/or non-tariff barriers.

### Priority Sector Lending (PSL) — trade-offs and recommendations
- Staff view: PSL could promote credit access and financial inclusion but has opportunity costs and may cause less-than-fully-efficient capital allocation.
- Staff suggested actions:
  - Continue making PSL more flexible, including through expanded co-lending arrangements.
  - Conduct a comprehensive cost-benefit analysis of PSL.
- Authorities’ contextual points:
  - High transaction costs and information asymmetries lead to market failures restricting credit to agriculture, MSME, and weaker sections covered under PSL.
  - Directed lending is a common global instrument (examples cited: Fannie Mae, Freddie Mac, Home Affordable Modification Program (HAMP) in the US).
  - PSL sectors are reviewed periodically to include dynamic sectors like renewables; banks short on PSL can purchase participation certificates; co-financing PSL with NBFCs is allowed.
  - RBI Bulletin study (September 2024): high growth in PSL is not associated with deterioration in banks’ asset quality.

### Financial market participation, retail investors, and market volatility
- Market capitalization: India is one of few countries with market capitalization exceeding 100% of GDP; staff expressed concern about sudden volatility and rising household participation.
- Retail participation surge:
  - Number of client codes at the National Stock Exchange (NSE) rose from a little under 60 million at end-2019 to nearly 210 million as of December 2024.
- Regulatory measures (October 2024 by SEBI) to limit speculative trading: increasing minimum contract size; limiting weekly index options; intraday monitoring of position limits.
- Recent dynamics:
  - Corrections amid sizeable foreign outflows since end-September 2024.
  - Majority of households invest for long-term gains and are largely unaffected by short-term volatility.
  - Association of Mutual Funds in India (AMFI) data: retail investors continue to hold 60.8% of equity assets in mutual funds for more than 24 months.
  - Majority of households still rely on traditional savings instruments.
  - Term spread declined during 2022 to 2024, suggesting lower risk premia on government securities despite foreign outflows and broad dollar strength.

### Structural reforms, labor market, and employment initiatives
- Reform approach: steady, irreversible process rooted in broad political consensus, including granular process reforms.
- Formal sector and employment indicators:
  - Net Employees’ Provident Fund Organisation (EPFO) subscriptions more than doubled; during April-November 2024 net additions reached 9.6 million, driven largely by youth.
  - Women’s labour force participation rate (LFPR) has also increased.
  - Government skilling initiatives: Antyodaya Yojana National Rural Livelihood Mission (DAY-NRLM).
- Union Budget 2024-25 programs for youth:
  - Package of five key schemes aimed at benefiting 41 million youth over five years with a central outlay of ₹2 lakh crore (approx. USD 27 billion).
  - Prime Minister’s Internship Scheme envisages internships in 500 top companies for 10 million youth in five years.

### Education, health, social spending, and learning outcomes
- Social sector expenditures (2020/21 to 2024/25 (BE)):
  - Social sector expenditure grew at a CAGR of 15%.
  - Expenditure on education grew at a CAGR of 12% over the same period.
- TeacherApp and CASEL:
  - TeacherApp: digital platform offering CASEL resources — over 260 hours of resources and Teaching Kits with 900 hours of content.
- Education outcomes and access:
  - ASER (Rural) 2024: substantial gains in pre-primary enrollment (three-/four-/five-year olds) in rural India between 2018 and 2022.
  - Reading levels improved in government schools in elementary grades (Std I-VIII) since 2022.
  - Basic arithmetic levels improved in government and private schools, reaching the highest level in over a decade.
  - Student and teacher attendance in government primary schools show small but consistent improvements since 2018.
  - Nearly all Indian children between ages 14 and 16 have access to cell phones; about 82% said they knew how to use one.
  - Recovery in learning outcomes attributed to regular return to schools post pandemic and New Education Policy (2020) focus on foundational skills including digital literacy.
- Health spending:
  - Expenditure on health grew at a CAGR of 18% during the five-year period (2020/21 to 2024/25 (BE)).
  - Share of out-of-pocket expenditure declined from 62.6% to 39.4%, supported by government-supported voluntary insurance schemes like Ayushman Bharat Pradhan Mantri Jan Arogya Yojana, Rashtriya Swasthya Bima Yojana, and state-specific government health insurance schemes.

### Ease of doing business and regulatory reforms (Budget 2025-26 announcements)
- Union Budget 2025-26 announced four measures for a modern, flexible, people-friendly regulatory framework:
  - High Level Committee for Regulatory Reforms to review non-financial sector regulations, certifications, licenses, permissions, inspections, and compliances.
  - Investment Friendliness Index of States to further competitive and cooperative federalism.
  - Mechanism under the Financial Stability and Development Council (FSDC) to evaluate current financial regulations and enhance their responsiveness and development orientation.
  - Jan Vishwas Bill 2.0 to decriminalise more than 100 provisions in various laws.

### Tariffs, non-tariff measures (NTMs), and trade policy
- Union Budget 2025/26 announcements on tariffs:
  - (i) remove seven tariffs, (ii) apply appropriate cess to maintain effective duty incidence, and (iii) levy not more than one cess or surcharge.
- Authorities’ points:
  - India’s average tariff rate has declined substantially.
  - Staff reiterated advice to reduce trade restrictions; authorities note India’s NTMs are significantly lower than leading economies (citing UNCTAD’s TRAINS database and World Bank’s WITS).
  - Higher NTMs in leading economies especially impact India’s service sector and limit exploitation of India’s comparative advantage.
  - Trade-off: tariffs are transparent and objective; NTMs are non-transparent and subjective. India uses tariffs; many economies use opaque NTMs.
  - India’s tariff structure should be viewed in context of trade barriers to global services vis-à-vis goods; removal could help realise India’s demographic dividend.

### Sovereign credit ratings and global coordination
- Authorities’ critique of rating agencies:
  - Rating agencies place high premium on institutional quality and prioritize GDP-per-capita over overall GDP, which may not reflect repayment capacity.
  - Overemphasis on debt-to-GDP ratio is seen as simplistic and may miss the real picture.
  - Historical note: fifth largest economy has been rated at the lowest rung of investment grade; India has zero sovereign default history.
  - India’s foreign exchange reserves can pay for almost the entire stock of India's external debt.
  - Low sovereign ratings raise cost of capital and hinder EMDEs’ ability to mobilize private investment, particularly for climate transition financing.
- Recommendation: global coordination and engagement (including by IMF) with credit rating agencies to adopt more comprehensive models to facilitate optimal financing for development and climate initiatives in EMDEs.

### AI, labor, and capacity building
- Staff estimates on AI impacts:
  - AI may be largely complementary for 14% of Indian workers, raising labor productivity.
  - 12% of Indian workers are at a higher risk of being displaced, particularly in services.
- IMF’s AI Preparedness Index: India scores slightly higher than the average of emerging markets.
- Staff advice: implement policies to harness human capital and foster favorable economic conditions to capitalize on AI opportunities.
- Additional considerations:
  - AI’s significant demand for water and electricity requires policymaker attention.
  - India’s national AI mission envisions augmenting graduates, post-graduates, and PhDs in AI and setting up Data and AI Labs in tier 2 and tier 3 cities.

### Climate change, emissions, and adaptation financing
- Emissions and targets:
  - India is among the largest emitters globally, though per capita emissions are well below the G20 EM average.
  - Staff observed India is on track to meet its targets for the 2030 NDC with currently announced policies.
  - India is among the top four countries in setting up 100 GW of solar power generation in record time.
  - India’s climate commitment: net zero emissions by 2070.
- Vulnerability and adaptation:
  - India is the seventh most vulnerable country to climate change.
  - Faces weather extremes, slow onset events (sea-level rise, biodiversity loss, water insecurity).
  - Adaptation expenditure increased from 3.7% to 5.6% of GDP between 2015/16 and 2021/22.
- Financing gaps and international context:
  - International flows for climate actions are highly inadequate and have a mitigation bias.
  - Proposal cited: small mobilisation target of USD 300 billion annually for developing countries by 2035, compared with estimated requirement of USD 6.8 trillion by 2030.
  - Observations on global behavior: past energy transitions driven by commercial interests; advanced economies continuing to use fossil fuels while expecting developing countries to adopt costlier, less efficient options.

### Official statistics, data adequacy assessment, and staff ratings
- Staff observed India’s official statistics, while having shortcomings, are broadly adequate for surveillance.
- Authorities disagree with overall rating of national accounts based on higher weight assigned to coverage; argue the weighted approach is misleading and contradicts transparency and even-handedness.
- Cross-country survey of official statistics ratings (overall and sectoral) allegedly contradicts claims of greater objectivity and granularity in the Data Adequacy Assessment for Surveillance, 2023; highlights perceived lack of even-handedness in staff assessment.

### Concluding assessment
- Summary judgment: Indian economy on steady growth path with robust macroeconomic fundamentals.
- Key points:
  - Inflation is in the tolerance band and closer to the target.
  - External sector is strong with steady fiscal consolidation and eminently manageable current account balance, aided by remittances and services exports.
  - Domestic corporate and financial sectors have built strong balance sheets.
  - Globalization retreat places private consumption at center stage with steady public investment to lift private investment.
  - Deregulation drive underway to further unleash "animal spirits" as part of transition to India@100 as a developed nation.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025001-print-pdf.pdf_