## 1. State-level Fiscal Dynamics

## Source details

**Canonical URL:** [1. State-level Fiscal Dynamics](https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025003-source-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1indea2025003-source-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1indea2025003-source-pdf.pdf.json)

---

### Context and long-term goals
- India’s strong economic performance supported by GST, flexible inflation targeting, and rapid expansion of digital public infrastructure.
- Share of population in extreme poverty fell to 5.3 percent (FY2022/23).
- Remaining challenges: relatively low income per capita, need to shift growth engine from public to private investment, elevated public debt, and limited high-quality employment for a large labor force.
- Success requires continued prudent macroeconomic policies and coordinated reforms across Centre, states, and local governments.

### Recent macroeconomic developments
- Real GDP growth: 6.5 percent in FY2024/25; 7.8 percent in 2025Q2 (real).
- Private consumption growth: 7.2 percent in FY2024/25.
- Investment growth: 7.1 percent in FY2024/25; private investment less dynamic.
- Nominal GDP growth: 8.8 percent in 2025Q2, down from 9.8 percent in FY2024/25.
- Output gap: broadly closed as of FY2024/25.

### Inflation and monetary developments
- Headline inflation: 1.5 percent in September 2025; FY2024/25 average was 4.6 percent.
- Core inflation: 4.6 percent (recent), up from 3.5 percent FY2024/25 average.
- Projections:
  - Headline inflation expected to average 2.8 percent in FY2025/26.
  - Core inflation projected to average 3.5 percent in FY2025/26.
  - Headline inflation expected to converge to 4 percent in FY2026/27.
- RBI actions:
  - Policy rate lowered since February 2025; policy repo rate maintained at 5.5 percent as of June/October 2025 in different references.
  - Cumulative policy easing of 100 basis points since February 2025 to 5.5 percent (June 2025 reference).
  - Liquidity measures including OMO purchases, variable rate repo auctions, FX swaps, and a 100-bp cut in CRR ratio to 3 percent.
  - Durable liquidity injections and reversal of higher risk weights on microfinance loans and bank credit to NBFCs back to November 2023 norms.

### Labor market developments
- Labor force participation rate: 56.2 percent (unchanged).
- Employment:
  - Regular wage earners: 12.3 percent in 2023 to 12.7 percent in 2024.
  - Formal employment (social security coverage): 11 percent to 11.2 percent.
- Real hourly wages: grown by 16 percent (rural) and 26 percent (urban) since 2018.
- Unemployment: 5.2 percent in September.
- Persistent challenges: high informality, underemployment, and declining but still high youth unemployment for the most educated.

### Fiscal sector developments (central and state)
- General government deficit: estimated to have fallen to 7.9 percent of GDP in FY2024/25, from 8.1 percent in FY2023/24.
- Central government deficit: declined to 4.9 percent of GDP (4.8 percent per authorities’ definition).
  - Consolidation driven by lower recurrent spending (including fertilizer and fuel subsidies) and steady post-pandemic restraint.
  - Capital expenditure: 3.2 percent of GDP in FY2024/25.
  - Revenue: slight decline as a share of GDP; larger RBI dividend and PIT gains partly offset declines in GST, excise, and customs revenue.
- Combined state government deficit: estimated to have risen to 3.3 percent of GDP in FY2024/25, from 2.9 percent of GDP in FY2023/24.

### GST reform (effective September 22, 2025)
- Simplified rate structure: two main slabs (5 and 18 percent) and a new 40 percent slab for selected luxury and sin goods.
- Administrative measures to reduce compliance burden and broaden the tax net.
- Expectation: lowering effective GST rate to support consumption; higher buoyancy should result in only a minor drag on tax revenue.
- Selected pre-/post-reform item counts by rate:
  - 5 percent: Pre-reform 216; Post-reform 516.
  - 18 percent: Pre-reform 650; Post-reform 640.
  - 40 percent: Pre-reform 0; Post-reform 13.
  - 12 percent: Pre-reform 274; Post-reform 0.
  - 28 percent: Pre-reform 47; Post-reform 0.

### Financial market and credit developments
- Equity prices recovered; government bond yields, particularly front end, eased as RBI lowered policy rate.
- S&P upgraded India’s credit rating to BBB.
- Credit growth:
  - Bank credit growth moderated to 10.4 percent y/y in September (from 13 percent in September 2024).
  - NBFC credit growth increased from 16 percent y/y in September 2024 to 20.7 percent in March 2025.
- Credit gap: estimated broadly closed or slightly negative.
- Housing prices: modest growth in 2025H1.
- FX reserves:
  - $668 billion in March 2025 (from $706 billion in September 2024).
  - $695 billion as of October (buoyed by valuation gains), covering over eight months of prospective imports and 109 percent of the IMF reserve adequacy metric.
- Net FDI: dropped to about zero in FY2024/25.
- Net foreign portfolio investment inflows: decreased to 0.1 percent of GDP in FY2024/25 from 1.2 percent of GDP in FY2023/24.
- CAD: declined to 0.6 percent of GDP in FY2024/25, from 0.7 percent in FY2023/24.

### External sector and trade measures
- Since August 27, 2025: India subject to 50 percent tariffs on merchandise exports to the U.S., raising effective tariff rate to 37.8 percent.
  - Around 30 percent of U.S. merchandise imports from India are exempted based on pre-tariff trade flows.
  - Merchandise exports to the U.S. accounted for 2.2 percent of GDP in FY2024/25.
- Expected impacts: marked reduction in exports to the U.S. for affected sectors (textiles, jewelry, shrimp) if tariffs persist; dampening of domestic investment and FDI.
- Trade policy adjustments and measures:
  - Relaxed/removed export restrictions on onions, broken rice, sugar.
  - Simple average industrial tariff reduced to 10.7 percent, from 13.5 percent in 2023.
  - Import duty on cotton suspended until end-2025.
  - Equalization Levy on online advertisement services supplied by nonresidents repealed.
  - July: India and the UK signed a free trade agreement eliminating most bilateral tariff lines over ten years.
  - Ongoing negotiations with Australia, the EU, New Zealand, and the U.S.
  - New or extended restrictions: import management system for IT hardware extended to end-2025; import ban and port restrictions on selected neighboring countries; safeguard duty on steel and around 30 anti-dumping and countervailing duties in 2025.
  - TCS threshold under LRS raised from INR 0.7 million to INR 1 million; TCS on loan-financed remittances for educational purposes removed.

### Outlook and risks (baseline and scenarios)
- Growth projections:
  - FY2025/26: staff baseline real GDP growth projected at 6.6 percent.
  - FY2026/27: projected growth 6.2 percent.
  - Medium term: return to potential rate of 6.5 percent.
- Inflation outlook:
  - FY2025/26 headline inflation average projected at 2.8 percent.
  - FY2026/27 headline inflation expected to converge to 4 percent.
- External sector projections:
  - CAD projected at 1.0 percent of GDP in FY2025/26.
  - Over medium term, CAD expected to widen and converge close to norm of 2 percent of GDP.
- Scenario effects (relative to July WEO or showing impacts):
  - Q1 growth surprise (incl. carryover): 0.5 for 2025/26.
  - Tariffs impact: -0.4 for 2025/26 and -0.3 for 2026/27 relative to July WEO.
  - GST Reform: +0.1 for 2025/26 and +0.1 for 2026/27.
  - Net revision: +0.2 for 2025/26 and -0.2 for 2026/27 (from July WEO).

### Near-term risks and authorities’ views
- Upside drivers:
  - Conclusion of new trade agreements and faster structural reforms could boost exports, private investment, and employment.
- Downside risks:
  - Further escalation of trade tensions and geoeconomic fragmentation; sharp decline in household confidence; unpredictable weather patterns affecting crops and food prices.
- Authorities’ views:
  - General concurrence with staff’s outlook and risks but disagreement with staff’s tariff assumption (authorities do not assume 50-percent U.S. tariffs remain indefinitely).
  - Authorities emphasize robust domestic demand, expected positive effects of GST reform, and benign inflation dynamics.
  - Authorities consider staff’s potential growth estimate conservative.

### Policy discussion: overarching guidance
- Maintain prudent macroeconomic policies; be nimble given high external uncertainty.
- Fiscal support to mitigate adverse tariff impacts should be targeted, transparent, and time-bound.
- Medium-term fiscal consolidation needed to rebuild buffers; rising domestic revenue mobilization to provide space for public investment.
- Monetary policy: data-driven with room for further easing if tariffs persist; exchange rate should act as shock absorber.
- Financial policy: address pockets of vulnerability and safeguard financial stability.
- Structural reforms: deep and comprehensive reforms to buttress growth potential.

### A. Fiscal policy — near term and FY2025/26
- Assessment: planned moderate fiscal consolidation remains achievable with strong spending discipline.
- Revenue-side notes:
  - Downwardly revised nominal GDP and PIT and GST reductions may test tax revenue intake.
  - Central government’s deficit target of 4.4 percent of GDP (4.5 percent of GDP, IMF definition) remains within reach.
  - 2025/26 budget raised personal income tax-free threshold, leading to 0.3 percent of GDP in foregone revenue.
  - The GST rate cut expected to reduce Centre and state FY2025/26 revenue each by less than 0.1 percent of GDP.
  - PIT reduction could support private consumption but narrows the tax base.
  - Divestment proceeds from public enterprises count towards authorities’ fiscal balance.
- Spending-side guidance:
  - Consolidation should be driven by recurrent expenditure rationalization; capital spending expected to be maintained.
  - Limited, targeted, transparent, and time-bound support to tariff-affected industries and workers is appropriate.
- States:
  - State-level fiscal deficits expected to return to about 3 percent of GDP on aggregate in FY2025/26.
  - GST rate cut applies to state GST and adds to state-level fiscal pressures.
  - Focus on capital expenditure execution while keeping recurrent expenditure in line with revenues.

### FY2026/27 stance and tax administration reforms
- FY2026/27 guidance:
  - With an output gap expected to open next FY under the baseline (assuming 50 percent tariffs remain), a neutral fiscal stance rather than consolidation would be warranted.
  - If tariff reduction avoids an output gap, fiscal consolidation should continue next year.
- Tax administration measures expected to reduce compliance burden and aid buoyancy:
  - Notification of the Income Tax Act, 2025, GST reform, rationalization of customs tariff, and capital gains tax reform.
  - Data analytics for PIT interventions and nudges to improve compliance.
  - GST reform included simplified registration and audit processes; customs processing expedited by digitalization and time-bound rules.

### Fiscal risks and contingent liabilities
- Contingent liabilities and fiscal risks:
  - Government guarantees: 5.6 percent of GDP for the general government.
  - Loans to loss-making SOEs—particularly in the power sector: 2.3 percent of GDP.
  - Unfunded civil service pensions liabilities.
  - Central government incentives to reduce states’ contingent liabilities in the power sector have shown progress.
- Policy response:
  - Better-targeted subsidies, replacing subsidies with cash transfers where possible, and credible medium-term fiscal consolidation.

### Central government fiscal table (selected percent of GDP series)
- Total Revenues (FY2023/24 Actual; FY2024/25 Budget; FY2024/25 RE Est.; FY2025/26 Budget Proj.): 9.3; 9.6; 9.6; 9.2; 9.7; 9.0 (as presented in source table rows).
- Net tax revenues: 7.8; 7.9; 7.8; 7.4; 7.9; 7.2.
- PIT: 3.5; 3.6; 3.8; 3.6; 4.0; 3.4.
- GST: 3.2; 3.2; 3.2; 3.1; 3.3; 2.9.
- Non-tax revenues: 1.5; 1.8; 1.8; 1.8; 1.8; 1.8.
- Total Expenditure: 14.8; 14.6; 14.3; 14.1; 14.1; 13.4.
- Recurrent expenditure: 11.6; 11.2; 11.2; 10.9; 11.0; 10.4.
- Capital expenditure: 3.2; 3.4; 3.1; 3.2; 3.1; 3.0.
- Central Government (CG) Fiscal Deficit: 5.5; 5.0; 4.7; 4.9; 4.4; 4.5.
- Memo: State Government Fiscal Deficit: 2.9; 2.5; 3.0; 3.3; 3.1; 3.1.
- Nominal GDP (Rs billions): 301,230; 330,682; 358,841 (as reported).

### Medium-term projections, debt dynamics, and consolidation options
- General government debt projected to decline to 77 percent of GDP in FY2030/31 under current policies.
- Authorities’ medium-term target: central government targeted debt ratio of 50±1 percent of GDP by FY2030/31 is achievable under staff’s baseline assumptions without further fiscal measures.
- Consolidation timing under tariff scenarios:
  - Under baseline assuming prolonged 50 percent U.S. tariffs, consolidation would start in FY2027/28 to allow for a neutral fiscal stance next year.
  - If tariff shock resolved this fiscal year, reform measures would start in FY2026/27.
  - Under reform path, Centre debt-to-GDP reaches close to budget’s ‘high degree of consolidation’ scenario, reaching 48.5 percent of GDP in FY2030/31.
- Need for greater state-level fiscal discipline to sustain deficits below 3 percent of GSDP.
- State consolidated debt: 28.2 percent of GSDP in FY2022/23 (up from 22.2 percent in FY2012/13).

### Medium-term fiscal target design and state-level reforms
- Recommendations:
  - Revisit debt target following GDP rebasing in February 2026 with view to making it more ambitious.
  - Broaden debt anchor to include state government debt.
  - Operationalize medium-term target with annual fiscal adjustment paths.
  - Establish independent fiscal body for oversight, debt sustainability analyses, contingent liability disclosures, and stress tests.
  - Improve state-level fiscal statistics, timely reporting, and transition to accrual accounting.
- State-level issues:
  - High share of non-discretionary expenditure (salaries and pensions) and low spending efficiency constrain consolidation.
  - With state borrowing limited to 3 percent of GSDP, greater revenue mobilization needed to avoid squeezing growth-enhancing spending.
  - Current devolution formula provides little incentive for high-deficit states to consolidate; 16th Finance Commission should balance equity with performance-based incentives.
  - Minimal bond spreads across states due to RBI as debt manager and implicit central government guarantee; greater market differentiation recommended.
  - States on average overestimated both revenue and expenditures by 10-11 percent between FY2015/16 and FY2022/23.

### Monetary policy, financial sector policy, and structural reforms (selected guidance)
- Monetary policy:
  - Neutral stance broadly adequate; policy rate lowered cumulatively by 100 basis points since February 2025 to 5.5 percent as of June 2025.
  - Real policy rate around neutral rate of 1.6 percent (Platzer and Peruffo, 2022 based estimate).
  - Policy should remain data-driven with an easing bias given uncertainty and potential negative output gap under prolonged tariffs.
  - FX intervention should be sterilized promptly; exchange rate should be allowed to act as shock absorber.
- Financial sector:
  - Systemic risks broadly contained; banking capital above required levels; GNPA ratios continue to decline.
  - Strengthen prudential frameworks: implement IFRS-9 with prudential backstops, enforce bank-specific Pillar-2 capital add-ons (currently zero), expand DSTI limits, consider activating CCyB when cyclical conditions improve.
  - NBFCs: align regulations for state-owned and private NBFCs; enhance liquidity regulations and supervision; collect LCR returns for NBFCs.
  - Financial market development: promote covered bonds, securitization, reduce government ownership in PSBs below 75 percent, adopt resolution legislation consistent with Key Attributes.
- Structural reforms to raise potential growth:
  - Reduce trade restrictions, implement labor codes, sustain public investment with public investment management reforms, remove red tape, deepen reforms in agriculture/land/judicial system, strengthen education/skills/health, advance climate policies.
- CBDC and AML/CFT:
  - Retail CBDC in circulation: INR10.2 billion as of March 2025 (up from INR2.3 billion in 2024).
  - AML/CFT: FATF 2024 assessment found strengths and shortcomings; authorities to address supervisory gaps.

### Insolvency framework and firm dynamics (key findings & recommended reforms)
- Performance challenges:
  - Average CIRP time doubled from 324 days to 724 days as of June 2025 (statutory limit 330 days).
  - Recovery rates for successful corporate resolutions declined from 43 percent in March 2019 to 33 percent in June 2025.
  - Operational creditors: pre-admission waits averaged 650 days in 2022 versus 450 days in 2019.
  - NCLTs capacity constrained: 30 courts and 16 additional benches.
  - Over 55 percent of cases remain pending after two years.
- Recommended reforms:
  - Expand NCLT capacity; revise treatment of operational creditors; provide enterprise group and cross-border insolvency provisions; operationalize personal insolvency regime; use digital technologies and Information Utilities.
- IBC Amendment Bill highlights:
  - New creditor-initiated out-of-court mechanism (150 days, possible 45-day extension); group insolvency chapter; mandatory admission timelines (14 days); liquidation timelines clarified; some gaps remain (e.g., operational creditors’ participation, executory contracts, personal insolvency).

### Productivity, innovation, land, and R&D (selected findings)
- TFP growth:
  - Average TFP growth 1.4 percent (2000–2019); strong in services, flat in manufacturing.
- Labor & firm structure:
  - Over 40 percent of workers in agriculture.
  - Nearly three quarters of manufacturing establishments employ fewer than five paid workers.
  - Firm entry and exit rates <1 percent annually (2018–22); 15 percent of continuers are zombies (ICR < 1).
- R&D and innovation:
  - R&D expenditure 0.6 percent of GDP in 2020 (G20 EM avg 0.9; advanced economies 2.2).
  - Fewer than 300 researchers per million inhabitants.
  - Only 4.3 percent of firms report R&D spending (World Bank Enterprise Survey, 2022).
  - Patents granted rose from about 4,000 to over 100,000 between 2013/14 and 2023/24.
- Policy priorities:
  - Land and agricultural reforms; reduce regulatory compliance burdens; strengthen insolvency resolution; remove trade barriers and promote FDI; increase and reorient R&D spending; improve university‑industry collaboration; deepen financial markets and access to credit for MSMEs.
- Land access specifics:
  - 7.4 percent of firms identify access to land as primary obstacle (World Bank, 2022).
  - Consolidated industrial land concentration: top 6 states account for 77 percent of reported industrial land.
  - Digitalization progress: 95 percent of land records across 626 thousand villages computerized; 68 percent digitization of cadastral maps.
  - Policy recommendation: implement Land Title Act, expand conclusive titling, leverage industrial parks, accelerate digitalization.

### Data, statistics, and IMF capacity development
- Planned publication of updated national accounts and CPI series: early 2026 (rebasing).
- Data weaknesses:
  - National accounts base year outdated (2011/12); excessive use of single deflation; gaps in production vs expenditure approaches; limited PPI.
  - Consolidated general government fiscal accounts not compiled; state consolidated accounts lagged.
  - Limited granularity on NBFCs, households, and systemwide financial interconnectedness.
- IMF capacity development:
  - Support to MOSPI on supply and use tables, seasonal adjustment, IPI update, and national accounts/CPI compilation training.
- DAA sectoral rating for national accounts: "C".
- Table of Common Indicators timing examples preserved in source.

### Staff appraisal and concluding guidance
- India remains resilient with firm growth supported by GST reduction and domestic demand; headline inflation declined mainly on lower food prices and is expected to remain subdued.
- The imposition of 50 percent U.S. tariffs will weigh on the outlook but the magnitude is expected to remain manageable given limited exposure to merchandise exports.
- Policy recommendations summarized:
  - Near term: targeted, transparent, and time-bound fiscal support for tariff-affected groups; maintain capital expenditure; recurrent expenditure rationalization.
  - Medium term: more ambitious fiscal consolidation including states, stronger public financial management, independent fiscal oversight, deepen structural reforms (trade, labor, land, education, R&D), and strengthen financial sector prudential frameworks.
  - Monetary policy: agile with easing bias if tariffs persist; allow exchange rate flexibility to absorb shocks.
  - Climate: advance adaptation and mitigation policies, tighten emission trading targets over time, and expand climate finance access.

*Italic: IMF staff report text, "1. State-level Fiscal Dynamics" (from the provided IMF PDF content).*

### 1. State-level Fiscal Dynamics _____________________________________________________________________ 14

### 1. State-level Fiscal Dynamics

### Context and long-term goals
- India’s strong economic performance supported by sound macroeconomic policies and structural reforms such as the goods and services tax (GST), a flexible inflation targeting framework, and rapid expansion of digital public infrastructure.
- Share of population in extreme poverty fell to 5.3 percent (FY2022/23).
- Remaining challenges: relatively low income per capita, need to shift growth engine from public to private investment, elevated public debt, and limited high-quality employment for a large labor force.
- Success requires continued prudent macroeconomic policies and coordinated reforms across Centre, states, and local governments.

### Recent macroeconomic developments
- Real GDP growth: 6.5 percent in FY2024/25; 7.8 percent in 2025Q2 (real).
- Private consumption growth: 7.2 percent in FY2024/25.
- Investment growth: 7.1 percent in FY2024/25; private investment less dynamic.
- Nominal GDP growth: 8.8 percent in 2025Q2, down from 9.8 percent in FY2024/25 (low deflator driven by declining food prices).
- Output gap: broadly closed as of FY2024/25.

### Inflation and monetary developments
- Headline inflation: 1.5 percent in September 2025; FY2024/25 average was 4.6 percent.
- Core inflation: 4.6 percent (recent), up from 3.5 percent FY2024/25 average; core excl. gold and silver and food components noted.
- Projection: headline inflation expected to average 2.8 percent in FY2025/26; core inflation projected to average 3.5 percent in FY2025/26; headline inflation expected to converge to 4 percent in FY2026/27 driven by rebound in domestic food prices.
- RBI actions: policy rate lowered since February 2025; durable liquidity injections; reversal of higher risk weights on microfinance loans and bank credit to NBFCs back to November 2023 norms.

### Labor market developments
- Labor force participation rate: 56.2 percent (unchanged).
- Employment: regular wage earners 12.3 percent in 2023 to 12.7 percent in 2024; formal employment (social security coverage) 11 percent to 11.2 percent.
- Real hourly wages: grown by 16 percent (rural) and 26 percent (urban) since 2018.
- Unemployment: 5.2 percent in September.
- Persistent challenges: high informality, underemployment, and declining but still high youth unemployment for the most educated.

### Fiscal sector developments (general and state-level)
- General government deficit: estimated to have fallen to 7.9 percent of GDP in FY2024/25, from 8.1 percent in FY2023/24.
- Central government deficit: declined to 4.9 percent of GDP (4.8 percent per authorities’ definition).
  - Consolidation driven by lower recurrent spending (including fertilizer and fuel subsidies) and steady post-pandemic restraint.
  - Capital expenditure: 3.2 percent of GDP in FY2024/25 (again).
  - Revenue: slight decline as a share of GDP; larger RBI dividend and PIT gains partly offset declines in GST, excise, and customs revenue.
- Combined state government deficit: estimated to have risen to 3.3 percent of GDP in FY2024/25, from 2.9 percent of GDP in FY2023/24 — pressure from revenue constraints, higher social cash transfers, and sustained capital expenditure.

### GST reform
- Effective September 22, 2025: simplified rate structure with two main slabs (5 and 18 percent) and a new 40 percent slab for selected luxury and sin goods.
- Administrative measures to reduce compliance burden and broaden the tax net.
- Expectation: lowering effective GST rate to support consumption; higher buoyancy should result in only a minor drag on tax revenue.
- Detailed pre-/post-reform item counts by rate (excerpt):
  - 5 percent: Pre-reform 216; Post-reform 516.
  - 18 percent: Pre-reform 650; Post-reform 640.
  - 40 percent: Pre-reform 0; Post-reform 13.
  - 12 percent and 28 percent slabs eliminated in reform (12: Pre-reform 274 to Post-reform 0; 28: Pre-reform 47 to Post-reform 0).
  - Other small-rate movements include rough precious stones and diamonds at low rates.

### Financial market and credit developments
- Equity prices recovered despite global uncertainty.
- Government bond yields, particularly front end, eased as RBI lowered policy rate since February 2025.
- S&P upgraded India’s credit rating to BBB.
- Credit growth:
  - Bank credit growth moderated to 10.4 percent y/y in September (from 13 percent in September 2024).
  - NBFC credit growth increased from 16 percent y/y in September 2024 to 20.7 percent in March 2025 (partly due to reclassification of a housing finance company).
- Credit gap: estimated broadly closed or slightly negative.
- Housing prices: modest growth in 2025H1.
- Equity derivatives trading volume: declined significantly amid tighter regulatory measures.
- FX reserves: $668 billion in March 2025 (from $706 billion in September 2024); $695 billion as of October (buoyed by valuation gains), covering over eight months of prospective imports and 109 percent of the IMF reserve adequacy metric.
- Net FDI: dropped to about zero in FY2024/25 amid elevated disinvestment and repatriation and growing outward FDI.
- Net foreign portfolio investment inflows: decreased to 0.1 percent of GDP in FY2024/25 from 1.2 percent of GDP in FY2023/24.
- CAD: declined to 0.6 percent of GDP in FY2024/25, from 0.7 percent in FY2023/24.

### External sector and trade measures
- Since August 27, 2025: India subject to 50 percent tariffs on merchandise exports to the U.S., raising effective tariff rate to 37.8 percent. Around 30 percent of U.S. merchandise imports from India are exempted based on pre-tariff trade flows. Merchandise exports to the U.S. accounted for 2.2 percent of GDP in FY2024/25.
- Expected impacts: marked reduction in exports to the U.S. for affected sectors (textiles, jewelry, shrimp) if tariffs persist; dampening of domestic investment and FDI due to heightened bilateral trade policy uncertainty.
- India’s trade policy adjustments:
  - Relaxed/removed export restrictions on agricultural products (onions, broken rice, sugar).
  - Simple average industrial tariff reduced to 10.7 percent, from 13.5 percent in 2023.
  - Import duty on cotton suspended until end-2025 to support textile industry facing high U.S. tariffs.
  - Equalization Levy on online advertisement services supplied by nonresidents repealed.
  - July: India and the UK signed a free trade agreement eliminating most bilateral tariff lines over ten years and promoting cross-border mobility of professionals.
  - Ongoing trade negotiations with Australia, the EU, New Zealand, and the U.S.
- New or extended trade restrictions:
  - Import management system for IT hardware extended to end-2025.
  - Import ban and port restrictions on selected neighboring countries implemented.
  - Introduced/extended safeguard duty on steel and around 30 anti-dumping and countervailing duties in 2025.
- Regulatory tax relaxations: TCS threshold under LRS raised from INR 0.7 million to INR 1 million; TCS on loan-financed remittances for educational purposes removed.

### Outlook and risks (baseline and scenarios)
- Growth projections:
  - FY2025/26: staff baseline real GDP growth projected at 6.6 percent.
  - FY2026/27: projected growth 6.2 percent.
  - Medium term: return to potential rate of 6.5 percent.
- Drivers and offsets:
  - FY2025/26 projection helped by strong 2025Q2 outturn, GST reform, and 2025Q3 nowcast (Annex III).
  - Adverse impact from U.S. tariffs assumed to persist in baseline.
- Inflation outlook:
  - FY2025/26 headline inflation average projected at 2.8 percent (below 4-percent target but within RBI tolerance band).
  - FY2026/27 headline inflation expected to converge to 4 percent.
- External sector projections:
  - CAD projected at 1.0 percent of GDP in FY2025/26 (merchandise exports weaken and REER declines on elevated U.S. tariffs).
  - Over medium term, CAD expected to widen and converge close to norm of 2 percent of GDP.
  - FDI and FPI balances expected to remain muted near term; medium-term inflows could rise due to removal of caps on foreign portfolio investment in corporate debt and relaxation of FDI limits for additional sectors.
- Scenario analysis (select impacts):
  - July WEO baseline vs revisions: FY2025/26 current projection 6.6; July WEO 6.4.
  - Q1 growth surprise (incl. carryover): 0.5 for 2025/26.
  - Tariffs impact: -0.4 for 2025/26 and -0.3 for 2026/27 relative to July WEO.
  - GST Reform: +0.1 for 2025/26 and +0.1 for 2026/27.
  - Net revision: +0.2 for 2025/26 and -0.2 for 2026/27 (from July WEO).

*Source: IMF staff report text, "1. State-level Fiscal Dynamics" (from the provided IMF PDF content).*

### 14.      There are significant near-term risks to the economic outlook (Annex IV). On the upside,

### 14.      There are significant near-term risks to the economic outlook (Annex IV). On the upside,

### Near-term risks and upside scenarios
- Upside drivers:
  - Conclusion of new trade agreements and faster implementation of structural reform domestically could boost exports, private investment, and employment.
  - Authorities emphasized upside potential from newly concluded and forthcoming FTAs.
- Downside risks:
  - Further escalation of trade tensions and deepening geoeconomic fragmentation could lead to tighter financial conditions, higher input costs, and lower trade, FDI, and economic growth.
  - A sharp decline in household confidence—potentially induced by heightened uncertainty, weakening stock market performance, or tightening of bank lending standards—could weigh on private consumption.
  - Unpredictable weather patterns could affect crops, rural consumption, and food prices, posing risks on both sides.

### Authorities’ views on outlook and risks
- General concurrence with staff's assessment of the outlook and risks, but disagreement with staff’s tariff assumption.
- Authorities highlighted:
  - Robust domestic demand as a main driver of growth.
  - Expected meaningful positive effects of the GST reform on private consumption and the ease of doing business.
  - View that the overall economic impact of the tariff shock should be manageable in the near term, though some industries would be heavily affected.
  - Disagreement with staff’s baseline assumption that the 50-percent U.S. tariffs would remain in place indefinitely, and considered staff’s estimated growth impact to be on the high side given frontloading and potential to develop other export markets.
  - Expectation that benign inflation dynamics will persist.
  - Belief that staff’s potential growth estimate was on the conservative side.
- Policy stance: stressed upside potential from FTAs and considered the medium-term fiscal anchor credible.

### Policy discussion: overarching guidance
- Maintaining prudent macroeconomic policies is critical to create enabling conditions for sustained growth.
- High external uncertainty—including evolution of tariffs—warrants nimble policy responses.
- Fiscal support to mitigate adverse tariff impacts should be targeted, transparent, and time-bound; pace of fiscal consolidation should depend on the impact of tariffs on the output gap.
- Medium-term fiscal consolidation is needed to rebuild buffers, with rising domestic revenue mobilization providing space for continued public investment and other priority spending.
- Monetary policy: following significant easing earlier in the year, policy should be data-driven, with room for further easing especially if current tariffs remain in place for a prolonged period.
- Exchange rate: should be allowed to act as a shock absorber.
- Financial policy: should address pockets of vulnerability and continue to safeguard financial stability.
- Structural reforms: deep and comprehensive reforms are key to buttress the economy’s growth potential.

### A. Fiscal policy — near term and FY2025/26
- Current assessment: this year’s planned moderate fiscal consolidation remains achievable with strong spending discipline.
- Revenue-side pressures and assumptions:
  - Downwardly revised nominal GDP (reflecting a low deflator) together with the PIT and GST reductions may test this year’s tax revenue intake.
  - Central government’s deficit target of 4.4 percent of GDP (4.5 percent of GDP, IMF definition) remains within reach.
  - The 2025/26 budget substantially raised the personal income tax-free threshold, leading to 0.3 percent of GDP in foregone revenue.
  - The GST rate cut, netting revenue and expenditure impacts, is expected to reduce Centre and state FY2025/26 revenue each by less than 0.1 percent of GDP.
  - PIT reduction could support private consumption but will further narrow the tax base.
  - GST reform simplifies tax structure and administration, likely reducing disputes and encouraging compliance, but the resulting reduction in the effective rate adds to near-term fiscal pressures and may complicate future efforts to raise effective GST.
  - Public enterprises will likely yield further divestment proceeds, which count towards the authorities’ definition of the fiscal balance.
- Spending-side guidance:
  - Consolidation should be driven by recurrent expenditure rationalization; capital spending expected to be maintained, though declining slightly as a share of GDP.
  - Limited support to tariff-affected industries and workers—targeted, transparent and time-bound—appropriate while tariffs remain high; focus on affected workers and households and preventing widespread bankruptcies.
- States:
  - State-level fiscal deficits expected to return to about 3 percent of GDP on aggregate in FY2025/26.
  - GST rate cut applies to state GST and will add to state-level fiscal pressures.
  - Focus on capital expenditure execution while keeping recurrent expenditure in line with revenues would improve the composition of expenditure.

### FY2026/27 stance and tax administration reforms
- FY2026/27 guidance:
  - With an output gap expected to open next FY under the baseline (assuming that the 50 percent tariffs remain in place) and high external uncertainty, a neutral fiscal stance rather than consolidation would be warranted.
  - If a tariff reduction avoids an output gap, fiscal consolidation should continue next year.
- Tax administration measures expected to reduce compliance burden and aid buoyancy:
  - Notification of the Income Tax Act, 2025, the GST reform, rationalization of the customs tariff structure, and capital gains tax reform aim to simplify the tax system and administration.
  - Data analytics have allowed new PIT interventions and nudges to improve compliance and broaden the tax net.
  - GST reform included simplified registration and audit processes; customs processing expedited by digitalization and new time-bound rules.
  - Together, these measures should contribute to tax buoyancy and ease of doing business.

### Fiscal risks and contingent liabilities
- Heightened global uncertainty and contingent liabilities add to fiscal risks:
  - Commodity price risks and need to support the vulnerable in face of growth shocks could require higher subsidy spending.
  - Better-targeted subsidies and replacing them with cash transfers, where possible, could mitigate both risks.
- Contingent liabilities:
  - Government guarantees: 5.6 percent of GDP for the general government.
  - Loans to loss-making SOEs—particularly in the power sector: 2.3 percent of GDP (see ¶34) (Annex V).
  - Unfunded civil service pensions liabilities.
  - Central government incentives to reduce states’ contingent liabilities in the power sector have shown progress.

### India: Summary Central Government Fiscal Developments (In percent of GDP)
- FY 2023/24 Actual; FY2024/25 Budget; FY2024/25 RE Est.; FY2025/26 Budget Proj.
- Total Revenues: 9.3; 9.6; 9.6; 9.2; 9.7; 9.0
- Net tax revenues: 7.8; 7.9; 7.8; 7.4; 7.9; 7.2
- PIT: 3.5; 3.6; 3.8; 3.6; 4.0; 3.4
- GST: 3.2; 3.2; 3.2; 3.1; 3.3; 2.9
- Non-tax revenues: 1.5; 1.8; 1.8; 1.8; 1.8; 1.8
- Total Expenditure: 14.8; 14.6; 14.3; 14.1; 14.1; 13.4
- Recurrent expenditure: 11.6; 11.2; 11.2; 10.9; 11.0; 10.4
- Food Subsidy: 0.7; 0.6; 0.6; 0.6; 0.6; 0.6
- Fertilizer Subsidy: 0.6; 0.5; 0.5; 0.5; 0.5; 0.5
- Capital expenditure: 3.2; 3.4; 3.1; 3.2; 3.1; 3.0
- Central Government (CG) Fiscal Deficit: 5.5; 5.0; 4.7; 4.9; 4.4; 4.5
- Memo Items:
  - CG Fiscal Deficit (authorities' definition) 1/: 5.5; 4.9; 4.7; 4.9; 4.4; 4.4
  - CG Primary Deficit: 2.0; 1.4; 1.3; 1.5; 0.9; 0.9
  - State Government Fiscal Deficit 2/: 2.9; 2.5; 3.0; 3.3; 3.1; 3.1
  - Nominal GDP (Rs billions) 3/: 301,230; 330,682; 358,841
- Notes:
  - 1/ Authorities' definition includes asset sales in receipts, and excludes certain non-tax revenue items, hence the difference with staff's definition.
  - 2/ The authorities treat states' divestment proceeds, including land sales, above-the-line as miscellaneous capital receipts. IMF staff definition treats divestment receipts as a below-the-line financing item.
  - 3/ Nominal GDP reflects the outturn or the most recent staff projection.

### Medium-term projections, debt dynamics, and consolidation options
- Debt and deficits trajectory (selected figures, percent of GDP):
  - General government debt projection: decline to 77 percent of GDP in FY2030/31 under current policies.
  - Risks: under shock scenarios (lower growth or slower fiscal adjustment), debt paths skew towards elevated debt levels.
- Debt composition and financing:
  - India has some fiscal space to support domestic demand and shelter vulnerable households in case of adverse shocks.
  - Demand from financial institutions for government securities remains robust.
  - Banks hold a relatively high—though declining—share of government securities and are sufficiently healthy and liquid to act as a residual financier for the government; concentration could amplify macro-financial shocks under severe adverse scenarios.
  - Risks from elevated debt are mitigated as debt is largely domestic with a long duration; interest-growth differential expected to remain favorable.
- Authorities’ medium-term debt target:
  - Central government targeted debt ratio of 50±1 percent of GDP by FY2030/31 is achievable under staff’s baseline assumptions without further fiscal measures.
  - Faster consolidation would ease the high debt service burden sooner and help rebuild fiscal buffers.
- Potential reform measures to create fiscal space:
  - Further GST reform, reversal of earlier excise tax reductions, and expansion of the income tax base.
  - Better targeting of subsidies and rationalizing legacy expenditure schemes to create space for growth-enhancing expenditure on infrastructure and health.
- Timing of consolidation under tariff scenarios:
  - Under the baseline assuming prolonged 50 percent U.S. tariffs, the consolidation plan would start in FY2027/28 to allow for a neutral fiscal stance next year.
  - If the tariff shock is resolved this fiscal year, reform measures would start in FY2026/27.
  - Under the reform path, Centre debt-to-GDP reaches close to the budget’s ‘high degree of consolidation’ scenario, which reaches 48.5 percent of GDP in FY2030/31.
  - Consolidation scenario also targets declining state-level deficits.
- Need for greater state-level fiscal discipline and stronger public financial management to sustain deficits below 3 percent of gross state domestic product (GSDP).

### Medium-term fiscal target design and state-level fiscal reforms
- Recommended reforms to the medium-term fiscal target:
  - Revisit debt target following the rebasing of GDP in February 2026 (Annex VI) with a view to making it more ambitious.
  - Broaden the debt anchor to include state government debt.
  - Operationalize the medium-term target with well-defined annual fiscal adjustment paths.
  - Strengthen institutional architecture of public finances with an independent fiscal body providing advice and oversight, publishing independent assessments, debt sustainability analyses, contingent liability disclosures, and conducting stress tests and scenario analysis for Center and states.
  - Improve fiscal statistics at the state level, including more timely reporting, comprehensive contingent liability disclosures, and plans to transition to accrual accounting (Annex VII). Progress visible in states’ reporting of off-budget borrowing.
- State-level reform needs:
  - Debt owed by some states increased substantially over past ten years; consolidated debt stood at 28.2 percent of GSDP in FY2022/23 (up from 22.2 percent in FY2012/13).
  - Growing interest payment burden and high share of non-discretionary expenditure (salaries and pensions) constrain consolidation.
  - Spending efficiency is low and social support can be better targeted, leaving room for recurrent expenditure consolidation.
  - With state borrowing limited to 3 percent of GSDP, greater revenue mobilization would help avoid squeezing growth-enhancing spending on infrastructure, education and health.
  - The current devolution formula provides little incentive for high-deficit states to consolidate or increase own-revenue; the 16th Finance Commission should create a devolution formula balancing equity with performance-based incentives.
  - With the RBI as debt manager and an implicit central government guarantee, bond spreads across states are minimal and do not reflect differences in debt levels and fiscal management quality; promoting greater market differentiation would support fiscal discipline.
  - States have on average overestimated both revenue and expenditures by 10-11 percent between FY2015/16 and FY2022/23; states should bring more realism into budgets.

### Authorities’ views on fiscal targets and state fiscal management
- Authorities’ commitments and views:
  - Strong commitment to this year’s fiscal deficit target of 4.4 percent of GDP and the medium-term fiscal anchor.
  - Point to upside potential from non-tax revenue and tax administration measures and commitment to spending discipline.
  - Highlight dynamic nature of India’s personal income tax base.
  - Felt it would be premature to consider a pause in fiscal consolidation in FY2026/27 given credible and transparent fiscal guidance.
  - Expressed confidence in adequacy of the debt target of 50±1 percent of GDP by FY2030/31.
  - Considered specifying a fiscal deficit path may not be optimal given the nature of the fiscal target (declining debt-to-GDP ratio).
  - Regarding state deficits, noted that the Government of India places caps on state fiscal deficit targets to determine borrowing ceilings, and has factored off-budget borrowings when fixing annual borrowing ceilings.

*Source: IMF staff summary of the content unit.*

### 25.      The currently neutral monetary policy stance has been broadly adequate. The RBI has

### Monetary Policy, Financial Sector Policy, and Structural Reforms

### Monetary policy stance and recent actions
- The currently neutral monetary policy stance has been broadly adequate.
- The RBI has lowered the policy rate cumulatively by 100 basis points since February 2025 to 5.5 percent as of June 2025, as inflation has declined sustainably to below the target.
- The real policy rate has declined to around the neutral rate of 1.6 percent, indicating a broadly neutral stance. (Neutral rate estimation based on Platzer and Peruffo, 2022.)
- To support transmission of easing, the RBI has undertaken liquidity measures since January 2025, including:
  - open market operations (OMO) purchases;
  - main and fine-tuning variable rate repo auctions;
  - foreign exchange swaps;
  - a 100-bp cut in cash reserve requirement (CRR) ratio to 3 percent.
- As a result, system liquidity turned into surplus since end-March 2025 and remains adequate.

### Policy outlook and guidance
- In the currently highly uncertain environment, monetary policy needs to remain nimble, with an easing bias.
- Under the baseline assumption of prolonged 50 percent U.S. tariffs, there is room for lowering the policy rate modestly, given the expected emergence of a negative output gap amid benign inflation dynamics; a swift reversal of the tariffs would limit the need for further monetary easing.
- The RBI should look through the one-off direct impact on inflation from the GST reform.

### Flexible inflation targeting framework and data updates
- The flexible inflation targeting framework, anchored on headline CPI inflation, has served India well.
  - The framework’s flexibility (the band of 2–6 percent) allows the RBI to look through short-term supply shocks.
  - Headline CPI inflation is appropriate because:
    - core inflation components account for less than half of the CPI basket;
    - non-core price increases (food or fuels) can spill over into higher core inflation;
    - headline inflation is easier to communicate to the public.
- The updated CPI basket, expected in February 2026, should improve effectiveness as the weight of non-food components will increase.

### Enhancing monetary policy effectiveness: passthrough and liquidity management
- Passthrough to NBFCs:
  - Monetary transmission to NBFC lending rates has remained lower compared to banks due to differences in customer bases, business models, and funding structures.
  - Policy efforts to enhance transmission should prioritize preserving sound internal risk management and emphasize market-based pricing of credit risks and a transparent pricing framework and lending practices.
- Liquidity management:
  - The revised liquidity management framework, including shortening the maturity of operations primarily to 7 days and advance notice of liquidity operations, is welcome. (Issued September 30, 2025.)
  - Given volatility and unpredictability of government-related revenue and expenditure flows, and moves such as 24/7 settlement, daily RBI reserve requirement limit, and foreign exchange interventions:
    - RBI liquidity management should remain nimble and rely primarily on market-based tools, with use of CRR as an exceptional measure.
    - FX intervention should promptly be sterilized to avoid unintended liquidity fluctuations and preserve monetary policy transmission.
    - Strengthen coordination with the Treasury to enhance liquidity forecasting capabilities and improve forecasts of government balances.
    - Strengthen communication related to unexpected liquidity shocks, including publishing autonomous factors’ forecasts and explanations of liquidity-affecting factors.

### Exchange rate flexibility and FX intervention
- India is well positioned to allow greater exchange rate flexibility: limited FX mismatches, well-anchored inflation expectations, and generally deep FX market.
- Under the Integrated Policy Framework (IPF), FX intervention should be used only when large shocks cause disruptions in liquidity conditions and malfunctioning of the FX market.
- Allowing greater exchange rate flexibility would:
  - help absorb external shocks;
  - reduce the need for costly reserve accumulation;
  - encourage FX market development;
  - strengthen incentives for firms to hedge currency risk;
  - help moderate liquidity fluctuations in the domestic financial system.
- Regular publication of FX interventions has fostered transparency and could be supported by enhanced communications on objectives and triggers.

### Authorities’ views (monetary)
- Authorities commit to a data-driven approach and note unusually high uncertainty.
- They stated full transmission of previous easing will take time; further action will depend on domestic developments and tariffs’ impact.
- They noted adoption of the revised liquidity framework and progress on review of the monetary policy framework.
- The authorities maintain INR/USD exchange rate is market determined without targeting any particular level; interventions aim to contain excessive volatility.

### Financial sector: overall assessment
- Systemic financial risks are broadly contained.
- Banking system capital remains well above required levels.
- Gross and net non-performing asset ratios among banks have continued to decline, though new GNPA accumulation in unsecured personal loans—particularly among private sector banks (PVBs)—warrants continued monitoring.
- Aggregated firm-level risk metrics (interest coverage ratios and corporate leverage) indicate the non-financial corporate sector has remained financially healthy.
- Bank credit growth, after moderating, is expected to recover gradually as monetary and macroprudential policy easing takes effect.

### Strengthening prudential frameworks and capital
- Credit risk management framework should be upgraded:
  - Implement IFRS-9 with prudential backstops and enforce bank-specific Pillar-2 capital add-on charges, which are currently set at zero for all banks.
  - RBI’s proposals to adopt an Expected Credit Loss framework for provisioning and a Basel III standardized approach for credit risk are welcome.
  - Expand the Debt-Service-to-Income (DSTI) limit to all household loans while ensuring informal economy workers are not inadvertently excluded.
  - Once cyclical conditions improve, consider activating the countercyclical capital buffer (CCyB), currently set at zero.
- Public sector banks (PSBs):
  - PSBs’ regulatory capital adequacy ratio (CAR), despite improving, has been consistently lower than private and foreign banks.
  - PSBs face lower asset quality and accumulated provisions, weighing on capital quality.
  - 2024 FSAP solvency stress test shows PSBs are relatively more vulnerable; PSBs should strengthen capital bases, including by retaining a larger share of earnings.

### NBFCs, exposures, and systemic risk monitoring
- Authorities should remain vigilant against NBFC vulnerabilities as NBFCs play an increasing role.
- Concentration risks high for state-owned infrastructure financing companies (NBFC-IFCs) heavily exposed to the potentially vulnerable power sector (including electricity distribution companies).
- Policy recommendations:
  - Align regulations for state-owned and private-sector-owned NBFCs; eliminate exemptions on a case-by-case basis for state-owned NBFCs from prudential standards, including large exposure limits.
  - For state-owned NBFCs exempt from large exposure rules, consider stricter exposure limits on bank lending to these entities (for example, imposing higher risk weights).
  - Enhance liquidity regulations and supervision for NBFCs; collect liquidity coverage ratio (LCR) returns and consider other measures to reflect NBFC risk profiles.
- Emphasize monitoring and in-depth analysis of systemic risks arising from financial interconnectedness:
  - Close data gaps by collecting more granular data on sectoral financial accounts and ease data sharing by creating a central data depository.
  - Enhance systemwide risk analysis, including systemwide stress tests, and discuss assessments via the Financial Stability and Development Council periodically.
  - Broaden policy options for systemic liquidity support and emergency liquidity assistance, including expanding eligible collaterals beyond government securities with adequate risk controls.

### Financial market development, state footprint, and resolution
- Promote financial innovation while addressing state influence and public sector footprint:
  - Corporate bond issuances remain concentrated in higher-rated bonds, reflecting institutional risk aversion and stringent regulations.
  - Develop infrastructure for covered bonds and securitization and credit enhancement mechanisms to bridge financing gaps for smaller and lower-rated firms and high-return high-risk projects.
  - Reduce government ownership in public sector banks and expedite reduction to below 75 percent to facilitate more efficient resource allocation.
  - Strengthen regulators’ powers over state-owned banks and insurance companies; align corporate governance with private institutions.
  - Continue to reduce the statutory liquidity ratio, enhance flexibility in priority sector lending, and adopt resolution legislation for banks and key NBFIs consistent with the Key Attributes.

### CBDC, AML/CFT, and supervisory matters
- CBDC pilots:
  - India continues CBDC pilots, expanding use cases (programmability, offline functionalities, distribution of CBDC wallets), adding standalone primary dealers to CBDC-wholesale ecosystem, and upgrading technical architecture.
  - As of March 2025, value of retail CBDC in circulation was INR10.2 billion, up from INR2.3 billion in 2024.
  - Cross-border payment applications are being explored but remain nascent.
- AML/CFT:
  - FATF assessed India’s regime in 2024 and found strengths (risk understanding/mitigation; beneficial ownership transparency) and shortcomings (AML/CFT supervision and application by obliged entities only moderately effective).
  - Authorities should address shortcomings: establish clear obligations for reporting entities for domestic politically exposed persons, strengthen targeted financial sanctions for terrorism financing, and enhance AML/CFT supervision of high-risk non-bank and non-financial businesses and professions.
  - India will report progress to FATF on a regular (rather than enhanced) basis.

### Authorities’ views (financial sector)
- Authorities consider systemic financial risks largely contained and banks sufficiently capitalized amid very low NPL ratios.
- Work on implementing FSAP recommendations has commenced; calibration of credit risk models for Pillar-2 and guidelines on expected credit losses are ongoing, though IFRS-9 timing remains undecided.
- Authorities view NBFC risks as contained and note most state-owned NBFCs are subject to the same prudential standards as private ones, with few exceptions to be addressed case-by-case.
- Authorities consider the recently introduced LCR framework for NBFCs comprehensive and tailored; currently see no need for additional liquidity indicators or regulations for NBFCs.
- Authorities emphasize priority sector lending as an important tool and the role of PSBs in credit intermediation leveraging digitalization.

### Structural reforms: activating growth engines
- A vigorous structural reform agenda can boost productivity, private investment, job creation, and sustainable potential growth.
- Short-term reforms include:
  - reducing trade restrictions;
  - implementing the new labor codes;
  - continuing the public investment push guided by a sound public investment management framework;
  - removing red tape;
  - providing strong policy frameworks to foster stable macroeconomic environment amid heightened uncertainties.
- Medium-term reforms include deeper action in:
  - agriculture, land, and the judicial system;
  - strengthening education, skills development, health, access to credit, and social safety nets;
  - advancing climate policies to support sustainable and resilient growth.
- Successful implementation requires cooperative efforts between Union and state governments.

*Source: IMF staff analysis as presented in the provided chapter content.*

### 41.      Lifting trade restrictions and deepening trade integration can bolster competitiveness

### 41.      Lifting trade restrictions and deepening trade integration can bolster competitiveness

### Trade liberalization and FDI
- Tariffs and non-tariff barriers, such as burdensome regulatory requirements, still pose significant impediments to trade.
- Reducing such barriers will:
  - expand domestic producers’ access to imported inputs,
  - promote healthy competition with imported final products,
  - boost domestic productivity.
- New bilateral and regional trade agreements can:
  - strengthen resilience against global trade policy uncertainty,
  - open market opportunities,
  - facilitate the flow of goods, services, and technology.
- Policy recommendations:
  - Pursue trade integration with key bilateral partners.
  - Consider joining trade blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
  - Continue to play an active role in strengthening WTO rules and the multilateral trading system.
  - Gradually relax capital inflow management while providing stable and predictable policy frameworks to attract FDI, which brings technology diffusion and improves factor allocation.
  - Revamp and renegotiate bilateral investment treaties (reference to the revamp announced in the FY2025/26 Union Budget to rebalance investor protection and regulation).

### Regional integration and resilience
- South Asia is much less integrated in terms of trade flows and FDI than regions such as ASEAN, reflecting high trade barriers and geopolitical tensions.
- India can lead on lowering trade barriers and strengthening regional partnerships.
- Energy-specific recommendations:
  - Promote investment in regional energy hubs,
  - Facilitate third-country power transmission,
  - Advance cross-border grid connection.

### Public investment, infrastructure, and efficiency
- Continuing the public investment push with emphasis on quality projects remains critical to meeting development needs.
- Enhancing physical public infrastructure, alongside India’s digital public infrastructure, could boost private sector productivity and job creation.
- Investment plan should be accompanied by strengthened public investment management to ensure quality and efficiency.
- Staff analysis suggests India could narrow half of its infrastructure efficiency gap from improved public investment management.

### Business environment, customs, and regulatory burdens
- Firms report longer customs delays in India compared to peers and senior management spending more time on regulatory compliance.
- Reducing bureaucratic inefficiencies, creating a stable policy framework, and enhancing the business environment are important to encourage investment, productivity, and job creation, and to facilitate external rebalancing.
- Empirical indicators referenced:
  - Days to clear imports from customs and exports through customs (figures shown in source charts).
  - Percent of firms using material inputs and/or supplies of foreign origin.

### Labor market flexibility and labor codes
- More flexibility in labor markets would help firms grow and become more productive.
- Rigid labor regulations and safety-related compliance thresholds discourage formalization and expansion, contributing to relatively small firm size.
- Labor codes passed in 2019 and 2020 aim to increase labor market flexibility and simplify regulations while maintaining workers’ protection; these codes are awaiting notification by state and Union governments.
- Multiple states have enacted important provisions, including:
  - raising thresholds for retrenchment without government approval,
  - applicability adjustments for the Factories Act and the Contract Labour Act,
  - allowing women to work night shifts.
- Full enactment of the codes is important to streamline the legal framework and standardize working conditions.
- Removing obstacles to female labor force participation is essential.

### Social safety nets and mobility
- India’s current safety net provides modest benefits to a broad population.
- Recommendation: provide more substantial benefits aimed at a smaller, targeted group to deliver more significant assistance to the most vulnerable.
- Digital public infrastructure can support targeting, but changes should be accompanied by adequate redressing mechanisms.
- The “One Nation, One Ration Card” program increases the need for a flexible safety net that includes inter-state portability to support migrant workers.

### Human capital, health, and nutrition
- Building human capital is crucial to harness India’s demographic dividend.
- Education and skills development need enhancement to equip individuals for productive employment.
- Health outcomes have improved, but:
  - the incidence of wasting and stunting remains elevated,
  - targeted interventions can improve nutritional outcomes for children and mitigate maternal and child mortality.

### Land access and allocation
- Widespread fragmentation of agricultural land leads to farms too small to operate efficiently, restricting expansion and redeployment of labor.
- Complex Union and state regulations and outdated land registries prevent optimal allocation.
- Progress in digitizing land records has been made, but lack of conclusive titling constrains effectiveness.
- Recommended reforms:
  - update outdated laws,
  - implement conclusive titling,
  - expand land banks with market-based allocation mechanisms.

### Insolvency resolution and firm dynamics
- India’s firm entry and exit rates are relatively low, with a large share of nonproductive firms.
- A well-functioning insolvency framework facilitates timely exit of unviable firms and reallocation of resources.
- Current recovery on average is only 33 percent of the original loan amount.
- Recent proposed amendments to the Insolvency and Bankruptcy Code (IBC) include:
  - enterprise group insolvency,
  - cross-border insolvency,
  - an out-of-court, creditor-initiated insolvency mechanism.
- Complementary actions needed:
  - strengthen judicial capacity with dedicated tribunal benches and funding,
  - operationalize the personal insolvency regime.

### R&D, innovation, and industrial policy
- India spends significantly less on R&D as a share of GDP than the G20 EM average, particularly by universities and private companies.
- More R&D spending and stronger university-industry linkages are needed to support innovation and productivity.
- Fiscal incentives for private R&D, such as grants and tax incentives, should be carefully designed and coordinated.
- Industrial policy observations:
  - The March 2025 Electronics Component Manufacturing Scheme (229 bn rupees or 0.1 percent of GDP over 6 years) provides subsidies tied to quantitative targets.
  - As of March 2025, authorities report that 215 billion rupees (0.07 percent of GDP) have been disbursed as incentives, and 1.2 million direct and indirect jobs have been created.
  - Aggregate execution rate of PLI schemes is 18 percent (budget estimate for FY2025/26; execution across schemes has been limited).
  - PLIs for large-scale electronics, pharmaceuticals, and drones have experienced above-average execution.
- Guidance: industrial policy should address market failures but is no substitute for horizontal structural reforms and should minimize fiscal and resource allocation costs.

### Climate vulnerability, adaptation, and energy transition
- India is highly vulnerable to climate change and frequently experiences extreme heat and precipitation-related natural disasters.
- Agricultural sector employs 42.4 percent of workers, and half of cultivated areas are rain-fed.
- Authorities’ estimate in 2023: cumulative adaptation costs through 2030 amount to 18 percent of 2024/25 GDP.
- Policy priorities for adaptation:
  - disaster preparedness,
  - infrastructure resilience,
  - effective water resource management,
  - support for climate-resilient agricultural practices.
- Energy transition:
  - 74 percent of electricity generation is from coal as of 2023.
  - Government programs and falling solar costs have accelerated renewable capacity additions, but grid-scale integration and storage bottlenecks remain.
  - Public support and derisking mechanisms (public-private risk-sharing) can encourage private investment in green energy while containing fiscal risks.
  - Revenue-generating emission trading schemes can mobilize resources and induce emission abatement.
- Emissions targets and outlook:
  - India is expected to meet its 2030 NDC goals under current policies, while additional policies are needed to achieve net zero emissions by 2070.
  - India’s 2030 NDCs (updated in 2022) include:
    - reducing emissions intensity by 45 percent by 2030 compared with 2005,
    - increasing the share of installed electricity capacity from non-fossil-fuel sources to 50 percent by 2030,
    - creating additional carbon sink of 2.5-3 billion tCO2e.
  - In July 2025, India reached the NDC target for installed non-fossil-fuel capacity.
  - Policy instruments should be tightened and expanded over time to provide incentives for sufficient abatement to steer towards the net-zero target.
  - Complementary measures and targeted social safety nets are needed to alleviate economic costs and support vulnerable households.

### Statistics, data improvements, and authorities’ views
- Enhanced quality, availability, and timeliness of macroeconomic and financial statistics would support policy formulation.
- Ongoing work includes:
  - national accounts benchmark revision to implement methodological upgrades (update base year, improve volume estimates, incorporate additional data sources).
  - update of CPI weights and items basket.
- Recommendations:
  - conduct regular benchmark revisions of national accounts, prices, and other key statistics according to international best practices.
  - prioritize conducting the population census (last completed in 2011/12).
  - improve consolidated general government fiscal accounts, expand NBFC data, and increase timeliness and granularity of systemic financial linkages data.
- Authorities emphasized ongoing structural reforms to foster inclusive growth, deregulation, digitalization, and incentives for state-level reforms.
- Authorities view PLIs as key drivers of industrial growth and balanced regional development, and highlighted large climate finance needs and concerns about multilateral climate finance availability.
- Authorities expect recent IBC amendments to significantly expedite the bankruptcy resolution process.
- Authorities reported significant progress on national accounts and CPI methodology updates, with rebased series expected to be launched in February 2026.

### Staff appraisal and outlook
- Despite external headwinds and elevated uncertainty, India’s economy remains resilient, supported by favorable domestic conditions.
- Growth is expected to remain firm this year, supported in part by the GST reduction.
- The imposition of the 50 percent U.S. tariffs in August will weigh on the outlook, but the magnitude is expected to remain manageable given relatively limited exposure to merchandise exports.
- Headline inflation has significantly declined, primarily on lower food prices, and is expected to remain subdued in the period ahead.
- India’s external position is moderately stronger than that implied by medium-term fundamentals and desirable policies.
- Economic outlook is subject to high uncertainty, with upside risks stemming from a potential reversal of the 50-percent tariffs.

*Source: INTERNATIONAL MONETARY FUND*

### 59.      The envisaged near-term fiscal consolidation remains appropriate, though a

### The envisaged near-term fiscal consolidation remains appropriate, though a

### Fiscal policy near term
- The envisaged near-term fiscal consolidation remains appropriate, though a prolonged tariff shock would justify a pause next year.
- The simplification of the GST is welcome as a major step in reducing tax-structure complexity, though the rate reduction may make it harder to raise rates again in the future if needed for revenue-based fiscal consolidation over the medium term.
- The fiscal consolidation and sustained level of capital expenditure planned in the FY2025/26 Budget remain appropriate but may require strong recurrent spending discipline given the effective PIT and GST rate cuts.
- Targeted, transparent, and time-bound support to industries heavily affected by tariffs is warranted to mitigate the distributional impact of the tariffs.
- Pausing fiscal consolidation in FY2026/27—implying a neutral fiscal stance—would be appropriate if the tariffs persist.

### Medium-term fiscal framework and state finances
- A more ambitious medium-term fiscal consolidation, at both the Union and state levels, is warranted to rebuild buffers and create additional space for growth-enhancing expenditure.
- Given India’s developmental needs, further revenue-enhancing measures and streamlining of current spending are appropriate.
- Following the GDP rebasing in early 2026, the medium-term debt-to-GDP target should be reviewed with a view to making it broader and more ambitious.
- Including state government debt in the target would bring important borrowing entities into the adjustment framework.
- Specifying a medium-term fiscal deficit path would help clarify the government’s debt reduction intentions over time.
- Build on strengthened fiscal credibility by:
  - Establishing an independent fiscal body.
  - Strengthening fiscal statistics, particularly at the state level.
- Enhance fiscal sustainability at the state level by:
  - Strengthening incentives through a performance-based devolution formula.
  - Enhancing state-level revenue mobilization and spending discipline.
  - Promoting greater differentiation in state development loan spreads.

### Monetary policy and exchange rate
- Exceptionally high uncertainty calls for agile monetary policy with an easing bias, while exchange rate flexibility can help absorb shocks.
- A negative output gap in FY2026/27, potentially emerging from the impact of prolonged tariffs, would provide room for further monetary policy easing amid a benign inflation outlook.
- The need for policy easing would be considerably reduced if the tariffs were to be resolved swiftly.
- The current flexible inflation targeting framework, including the 4-percent target with ±2 percent band on headline inflation (rather than core inflation), has served India well.
- There remains room for additional exchange rate flexibility, with interventions limited to periods of destabilizing risk premia, considering India’s relatively low FX mismatch, well-anchored inflation expectations, and generally deep FX market.

### Financial sector stability and reforms
- Financial sector stability risks appear to remain well contained, providing a favorable backdrop for financial sector reforms to address remaining vulnerabilities.
- Rising financial interconnectedness warrants enhancing the toolkit for analyzing systemic risks.
- Efforts to address potential vulnerabilities in NBFCs arising from concentration risks are welcome.
- In line with the 2024 FSAP recommendations, strengthen financial stability by:
  - Expanding borrower-based macroprudential norms.
  - Improving the loss absorption capacity of selected entities.
  - Enhancing the crisis and credit risk management frameworks.

### Structural reforms for advanced-economy aspiration
- India’s ambition of becoming an advanced economy requires holistic structural reforms.
- India needs to boost all growth engines to become a more open, dynamic, and innovative economy with better factor allocation across sectors and firms.
- Wide-ranging structural reforms can raise productivity, reinvigorate private investment, and help create sufficient high-quality jobs.
- Priorities include:
  - Deepening trade integration to bolster competitiveness, attract FDI, and boost productivity.
  - Sustaining public investment efforts and strengthening the business environment to improve resource allocation.
  - Stepping up investment in R&D and fostering innovation to support productivity-driven development.

### Climate policies
- Advancing climate policies is critical to supporting sustainable and resilient growth.
- Well-designed adaptation and mitigation policies, combined with greater access to external concessional financing and technological transfer, are vital for India to address climate vulnerabilities and achieve the net zero emissions target by 2070.
- Adaptation policies should continue to focus on measures that strengthen macroeconomic resilience, such as disaster preparedness, infrastructure resilience, effective water resource management, and support for climate-resilient agricultural practices.
- The release of emission intensity target rules of the Carbon Credit Trading Scheme is welcome, and the targets should be tightened over time to provide sufficient incentives for abatement.

### Data and statistics
- Enhancing the quality, availability, and timeliness of macroeconomic and financial statistics would support policy formulation.
- India’s data are broadly adequate for surveillance, with room for improvement in some areas.
- Significant efforts underway to improve data quality, particularly in the national accounts, are welcome, as they will enhance data transparency and support policy making.

*Source: IMF staff analysis excerpt.*

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

### India — Recent Macroeconomic, Financial, Fiscal, and External Developments

### Macroeconomic Developments
- India remains "the fastest-growing major economy."
- Real GDP (at market prices) — Growth (percent change):
  - 2021/22: 9.7
  - 2022/23: 7.6
  - 2023/24: 9.2
  - 2024/25: 6.5
  - 2025/26: 6.6
  - 2026/27: 6.2
- Potential GDP growth (percent): 2024/25–2030/31 largely at 6.4–6.5; 2024/25 reported 6.5.
- Output gap (percent of potential GDP): 2023/24: 0.1; 2024/25: 0.0; 2025/26: 0.1; 2026/27: -0.2.
- Contributions to real GDP growth: domestic demand and, recently, net exports; private consumption, public consumption, gross fixed capital formation, change in stocks, net exports, statistical discrepancy shown in figure (calendar year format).
- Investment: Gross fixed capital formation growth led by general government capital expenditure and housing; private corporate investment less dynamic. New private sector projects announced — number and cost series show sharp year-on-year swings.

### Labor Market
- Headline indicators broadly stable in 2024.
- Labor force participation rate and unemployment rate: series shown (aged 15 and above).
- Employment by status (cumulative change since 2018): Own-account Worker & Employer; Unpaid Family Worker; Regular Wage Worker; Casual Worker; Unemployed.
- Employment by sector (cumulative change since 2018): Agriculture declined in 2024; Manufacturing; Construction and Others; Services.
- Formal employment (percent of total employment, primary status, aged 15 and above):
  - 2018–2024 series with 2024 at 11.5 (chart showing 8.5–11.5 range).
- Real hourly wages (2017/18 = 100): rural and urban indices rising.
- Youth unemployment (aged 15–29, in percent) by education level: "remains high for the most educated but has declined significantly."

### External Sector
- Current account balance (percent of GDP, calendar-quarter series):
  - Contained in recent quarters; components: trade balance, services, income & transfers.
- Merchandise and services exports (USD billion) series; services exports remained strong; merchandise exports picked up.
- Financial account: muted due to FPI outflows and subdued net FDI; net inward FDI shows recovery as gross inflows picked up and repatriation/disinvestment edged down.
- Inward FDI (USD billion):
  - FDI: Gross Inflow, FDI: Repatriation/Disinvestment (-), FDI: Net Inflow series presented.
- Total external debt (percent of GDP) — comparison to peers (WEO Oct 2025): India shown as relatively low.
- Estimated reserve adequacy (official reserves as percent of IMF country-specific metric) — 2025 estimates show India within recommended adequacy range.

### Financial Market Developments
- Rupee experienced more variation in 2025; INR/USD and implied volatility series shown (Mar-23 to Sep-25).
- Sovereign spread over U.S. Treasuries fluctuated at a low level amid broad USD depreciation.
- Government bond yields moved lower, particularly in the front end, following monetary policy easing; domestic yield curve snapshots for 1/1/2025 and 11/3/2025 vs 1/1/2024 presented.
- Equity derivatives trading volume declined sharply amid SEBI’s tighter regulations; exchange traded options volume by country charted.
- Stock market indices (Jan 2023=100) show correction in 2024Q4-2025Q1 before recovering; SENSEX, MSCI series shown.
- Domestic credit spreads (basis points) series; credit spreads have recently declined though levels remain elevated.

### Inflation and Monetary Developments
- Inflation (CPI):
  - Consumer prices (period average): 2021/22: 5.5; 2022/23: 6.7; 2023/24: 5.4; 2024/25: 4.6; 2025/26: 2.8; 2026/27: 4.0 (from Table 1 and Table 6).
- Shares of CPI basket items above the tolerance band have declined significantly.
- Food prices eased significantly, largely reflecting deflation in vegetable prices; CPI food & beverages contributions charted (cereals, milk, vegetables, pulses, others).
- Inflation expectations:
  - Household 1-year ahead and Consensus 1-year and 5-year ahead series presented; expectations remain well anchored.
- Interest rates and liquidity:
  - Real policy rate has been declining with monetary policy easing.
  - RBI net liquidity provision: liquidity in surplus since late March 2025; repo policy rate and standing facilities series shown.
- Real interest rate, policy rate, inflation 1-year ahead series presented.

### Fiscal Sector Developments
- Fiscal consolidation continues; central government and state government balances series (percent of GDP):
  - Government balance (incl. subsidy-related bond issuance) series from 2017/18 to 2025/26* (IMF staff estimates).
- Government tax revenue (percent of GDP) — central and state series shown.
- Central government: rising reliance on direct taxes; central government tax revenue (percent of GDP) components:
  - Direct and Indirect breakdown series; Income tax, GST, Excise tax, Customs duties shown in Table 4.
- Central government recurrent expenditure: restraint evident; government recurrent expenditure (percent of GDP) series for central and state governments.
- Central government subsidies (percent of GDP) and composition (food, fertilizer, petroleum) show moderation; subsidy-related bond issuance noted.
- Interest payments:
  - "Interest payments remain elevated at over 5 percent of GDP." Table 1 shows general government debt and interest payments.
- Central government overall balance (percent of GDP) from Table 4:
  - 2021/22: -6.7; 2022/23: -6.6; 2023/24: -5.5; 2024/25: -4.9; 2025/26: -4.5; 2026/27: -4.5.
- General government overall balance (percent of GDP) from Table 1 and Table 5:
  - 2021/22: -9.4; 2022/23: -9.0; 2023/24: -8.1; 2024/25: -7.9; 2025/26: -7.1; 2026/27: -7.2.
- Central government debt (percent of GDP) from Table 6 trajectory:
  - 2021/22: 59.2; 2022/23: 58.3; 2023/24: 57.8; 2024/25: 56.3; 2025/26: 56.2; 2026/27: 55.4.

### Nonfinancial Corporate Sector
- Corporate profitability improved, particularly for large and medium-sized enterprises; PBIT to asset median and percentile series shown.
- Share of nonfinancial corporates at risk (ICR < 1) has remained stable at 8 percent.
- Interest Coverage Ratios (ICR) except micro enterprises have trended higher; firm-size breakdown (Micro, Small, Medium, Large) series presented.
- Corporate leverage declined; debt-to-asset ratios — median, p25, p75 series show three quarters of firms with debt-to-asset below 0.5; downward trend across firm sizes, particularly micro firms.

### Banking and NBFC Sector
- Capital adequacy:
  - Risk-weighted CAR for scheduled commercial banks: 2020/21: 16.3; 2021/22: 16.8; 2022/23: 17.2; 2023/24: 16.8; 2024/25: 17.4 (Table 7).
  - Public sector banks, private sector banks, and foreign banks CAR series presented.
- Asset quality:
  - Net nonperforming assets (percent of outstanding net advances) — all banks:
    - 2020/21: 2.4; 2021/22: 1.7; 2022/23: 0.9; 2023/24: 0.6; 2024/25: 0.5.
  - Gross nonperforming assets (percent of outstanding advances): 2020/21: 7.3; 2021/22: 5.8; 2022/23: 3.9; 2023/24: 2.7; 2024/25: 2.2.
- Return on assets (percent): 2024/25: 1.4.
- Concentration risks:
  - Top 1 large credit exposure by type of banks (percent of Common Equity Tier1) — PSBs have moderated within Basel III large exposure limit (25 percent of CET1); foreign banks exposure rose.
  - Concentration risks high for state-owned IFCs; state-owned NBFCs exempted from large exposure limits on a case-by-case basis.
- Sectoral credit risks: housing loans and other retail loans (2022/2023) — private banks and PSBs exposures and new NPA shares charted.
- NBFCs:
  - Total assets (percent of GDP) series: 2020/21–2024/25 with 2024/25 at 20.7 (Table 7).
  - NBFC CAR and GNPA series: CAR ~25.0–27.5; GNPA declining to 3.0 in 2024/25; net NPA at 1.0 in 2024/25.

### Climate and Energy Developments
- India is the third largest emitter globally; per capita emissions are low.
- Climate vulnerability and readiness:
  - India faces relatively high vulnerability and average readiness to adapt. ND-GAIN vulnerability and IMF-adapted readiness scores charted (2022).
- Hazards: India particularly vulnerable to floods, storms, and extreme temperatures; past droughts and floods in 2002 and 2015 affected more than 350 million inhabitants.
- Energy mix and trade:
  - India is a net exporter of petroleum products and net importer of coal, natural gas, and crude oil.
  - Wind and solar are a small but growing share of the energy mix (IEA World Energy Balances data for 2002, 2012, 2022).
- Emissions and NDC:
  - India contributes around 8 percent of global GHG emissions.
  - Emissions projected by the Climate Policy Assessment Tool (CPAT) align with the NDC target; "India can achieve its NDC targets without additional mitigation efforts, in contrast to key peer countries."

### Key Indicators and Projections (Selected from Tables)
- Nominal GDP (2023/24): 3,638 (billions of U.S. dollars).
- GDP per capita (IMF staff est.): 2,530 (U.S. dollars).
- Poverty rate $3 a day (2021 PPP): 5.3 (percent of population).
- Undernourished: 13.7 (percent).
- Population (2023/24): Total 1.44 (billions); Urban population 36.4 (percent of total).
- Life expectancy at birth: 72.0 (years).
- Gini index: 25.5.
- Prices (consumer prices, period average) from Table 1:
  - 2021/22: 5.5; 2022/23: 6.7; 2023/24: 5.4; 2024/25: 4.6; 2025/26: 2.8; 2026/27: 4.0.
- Saving and investment (percent of GDP) from Table 1:
  - Gross saving: 2023/24: 32.6; 2024/25: 32.3; 2025/26: 31.5; 2026/27: 30.9.
  - Gross investment: 2023/24: 33.4; 2024/25: 32.9; 2025/26: 32.5; 2026/27: 32.4.
- Balance of payments (Table 2, current account balance, USD billions):
  - 2021/22: -38.7; 2022/23: -67.0; 2023/24: -26.0; 2024/25: -23.3; 2025/26: -41.4; 2026/27: -63.5.
- Foreign exchange reserves (end-period, USD billions):
  - 2021/22: 607.3; 2022/23: 578.4; 2023/24: 646.4; 2024/25: 668.3; 2025/26: 709.6; 2026/27: 733.4.
- External debt (end-period, percent of GDP):
  - 2021/22: 19.5; 2022/23: 18.6; 2023/24: 18.4; 2024/25: 18.8; 2025/26: 19.2; 2026/27: 19.0.
- Reserve money and monetary aggregates (selected):
  - Broad money (M3) growth (twelve-month percent change): 2023/24: 11.6; 2024/25: 9.4.
  - Bank credit to the private sector (Table 6, end-period y/y percent change): 2023/24: 15.5; 2024/25: 11.8; 2025/26: 11.8; 2026/27: 10.7.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025003-source-pdf.pdf*

### Annex I. Uptake of Previous IMF Advice

### Annex I. Uptake of Previous IMF Advice

### Overall takeaway
- Policies have largely been aligned with staff recommendations, though challenges remain.
- Fiscal and monetary policies have been broadly consistent with staff advice.
- Trade and exchange rate policies have been more aligned with Fund advice than in previous years.
- Challenges remain in some structural reforms.

### Monetary and financial sector policies
- The RBI has maintained its strong commitment to align inflation with the target and effectively manage price stability.
- Communications regarding the monetary policy stance have continued to guide market expectations.
- There has been some progress on levelling the regulatory playing field between state-owned and privately-owned NBFCs.
- Recent proposals to adopt an Expected Credit Loss framework for provisioning and a Basel III standardized approach for credit risk are welcome.
- Other priorities, including passing a bank resolution law, have lagged.
- There remains scope to further reduce the public sector footprint in the financial sector.

### Fiscal policy and consolidation
- Fiscal consolidation planned for FY2025/26 is broadly in line with staff advice.
- The general government fiscal deficit declined slightly in FY2024/25.
- The pace of fiscal consolidation planned for FY2025/26 is well aligned with last year’s recommendations.
- Continued focus on infrastructure is welcome, but the PIT reduction will erode the already-low income-tax base in India.
- The simplification of the GST reform is aligned with recommendations, but the resulting decline in the effective rate can add mild fiscal pressure.
- The authorities’ aim of reducing central government debt as a percentage of GDP is helpful.
- More ambitious medium-term consolidation and additional reforms are needed for a complete medium-term fiscal framework in line with staff’s advice.

### External trade and exchange rate policies
- Authorities have lowered and simplified a wide range of tariffs and relaxed food-related export restrictions.
- Some measures have been extended or introduced despite overall liberalization.
- Active negotiations of bilateral trade agreements are welcome.
- The rupee’s exchange rate has exhibited increasing two-way movements in recent months.
- Significant (though generally declining) FXI has continued in periods not marked by destabilizing risk premia, potentially impeding the exchange rate’s role as an absorber of external shocks.

### Structural reforms
- Recent initiatives to enhance skills and use technology to strengthen learning are aligned with staff advice.
- Sub-national governments have been provided with financial incentives to update and digitize land registers, which can support well-functioning land markets, despite limited progress in broader land reforms.
- The rollout of the CCTS with emission intensity targets for obligated entities is welcome.
- There has been limited progress on agricultural, product, and labor market reforms.

*Source: Annex I. Uptake of Previous IMF Advice (from the supplied content unit).*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Domestic Risks
- Faster Conclusion of Trade Negotiations.
  - Likelihood: Medium
  - Expected Impact: Faster conclusion of trade agreements with key partners to lower bilateral trade barriers and deepen economic integration will attenuate trade policy uncertainty, boost business and employment opportunities, facilitate efficient factor allocation, and strengthen technology diffusion.
  - Policy Response:
    - Complement the trade agreements with horizontal reforms to remove red tape, liberalize factor markets, and improve business climate.
    - Continue to enhance physical and digital infrastructure to facilitate trade and foreign investment.

- Stronger Progress on Structural Reforms.
  - Likelihood: Medium
  - Expected Impact: Faster implementation of structural reform domestically could boost employment and private investment, raising growth.
  - Policy Response:
    - Fiscal policy should continue to focus on rebuilding buffers and reducing public debt.
    - A faster consolidation and a tighter monetary policy could be warranted if the output gap is significantly positive with rising inflation.
    - Macroprudential policies should be tightened if credit growth accelerates.
    - Advance social safety net and human capital reforms to ensure inclusive growth.

- Adverse Shock to Household Confidence or Wealth
  - Likelihood: Medium
  - Expected Impact: A sharp decline in household confidence or net wealth, potentially induced by heightened uncertainty, weakening stock market performance, or tightening of credit standards, could slow down private consumption and economic activity.
  - Policy Response:
    - To encourage stronger private consumption, advance structural reforms to ensure sustainable and job-rich growth.
    - Should weaker growth materialize, consider a slower pace of fiscal consolidation by letting automatic stabilizers operate, and easing monetary policy if headline inflation continues to align with the target.

- Materialization of Fiscal Risks.
  - Likelihood: Medium
  - Expected Impact: Sharp increase in commodity prices and/or the realization of contingent liabilities weakens the fiscal position and could lead to higher financing costs, with broader implications for financial conditions and the financial system.
  - Policy Response:
    - Enhance fiscal policy space through a credible medium-term fiscal consolidation strategy anchored on stronger revenue mobilization and increased expenditure efficiency.
    - Reduce the interconnectedness between the sovereign and banks’ balance sheets.
    - Strengthen the financial health of state-owned enterprises.
    - Should contingent liabilities materialize, absorb these onto the government budget using long-dated securities to smooth the impact on debt repayments.

- Climate Change and Extreme Weather Events.
  - Likelihood: Medium
  - Expected Impact: Rising temperatures, increased rainfall variability, and intensified extreme weather events damage infrastructure, increase inflationary pressures, cause water and food shortages, worsen health outcomes, and reduce economic growth.
  - Policy Response:
    - Invest in infrastructure that is resilient to and mitigates the impact of climate events; prepare disaster management plans; accelerate the green energy transition; strengthen social safety net and public health; and promote climate-resilient and market-based agriculture.
    - Ensure adequate protection of the vulnerable.

### External Risks
- Escalating Trade Measures and Prolonged Uncertainty.
  - Likelihood: High
  - Expected Impact: Rising trade barriers and prolonged policy uncertainty could reduce trade, investment, and growth.
  - Policy Response:
    - Expand trade networks and deepen trade integration through trade agreements with bilateral and regional partners.
    - Reduce trade restrictions to facilitate GVC integration.
    - Provide stable and predictable policy frameworks to attract FDI, including through new bilateral investment treaties.
    - Allow exchange rate flexibility to absorb the shocks.
    - Adjust monetary policy in line with economic developments.

- Commodity Price Volatility.
  - Likelihood: High
  - Expected Impact: Shifts in supply and demand—driven by geopolitical tensions and conflicts, OPEC+ actions, or the green transition—may fuel commodity price swings, intensifying external and fiscal pressures.
  - Policy Response:
    - Diversifying supply chains, accelerating the shift to renewable sources of energy, and better targeting subsidies would help mitigate these risks.
    - Allowing greater exchange rate flexibility would also help absorb such shocks.
    - In an upside scenario, relax price controls and increase excise taxes.
    - In a downside scenario, provide transfers to protect the most vulnerable.

- Financial Market Volatility and Correction.
  - Likelihood: High
  - Expected Impact: Stretched asset valuations, easy financial conditions, and subdued volatility in key markets could be significantly affected by a sudden and disruptive shift in investor sentiment or policy stance, triggering market corrections, exchange rate turbulence, spikes in sovereign bond yields, and capital flow volatility. Elevated leverage among Non-Bank Financial Intermediaries further amplifies these risks. Rapid growth of unregulated crypto markets could add to these vulnerabilities.
  - Policy Response:
    - Enhance the credit risk management framework for banks and liquidity regulations and oversight for NBFCs; broaden policy options for providing systemic liquidity support and ELA in a crisis; and maintain exchange rate flexibility to absorb external shocks.
    - In case of a significant impact on India’s economy, use available fiscal/monetary policy space to support economic activity and the vulnerable.
    - If the FX market becomes shallow, leading to destabilizing premia, FX interventions can be used as a complementary tool.

- Geopolitical Tensions.
  - Likelihood: High
  - Expected Impact: Intensification of conflicts, coupled with the weakening of multilateralism, may trigger commodity price volatility, increase migration pressures, reignite inflation, and weigh on growth by undermining confidence, investment, tourism, trade, and supply chains.
  - Policy Response:
    - Accelerate structural reforms; diversify and secure supply of critical commodities; play a stabilizing role in the region by promoting mutually beneficial cooperation; avoid introducing further trade restrictions.
    - In case of a significant impact on India’s economy, use available fiscal/monetary policy space to support economic activity and the vulnerable.

- Cyberthreats.
  - Likelihood: High
  - Expected Impact: Cyberattacks on physical or digital infrastructure, technical failures, or misuse of AI technologies could trigger financial and economic instability.
  - Policy Response:
    - Further improve the cybersecurity infrastructure and ensure adequate funding in critical sectors like banking, energy, telecom, and transportation.
    - Conduct regular cyber resilience stress tests.

### Risk Assessment Framework Note
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path.
- The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline:
  - “low” is meant to indicate a probability below 10 percent,
  - “medium” a probability between 10 and 30 percent,
  - and “high” a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

*Source: Fund staff (Annex IV. Risk Assessment Matrix).*

### 3.      IMF capacity development activities are ongoing to assist in the national accounts and

### 3.      IMF capacity development activities are ongoing to assist in the national accounts and CPI updates

### Ongoing capacity development and immediate support
- IMF activities have assisted MOSPI in:
  - training on the use of the supply and use table framework for the compilation of the base year estimates for national accounts;
  - development of seasonal adjustment estimates and dissemination practices;
  - support for the IPI update.
- A series of other training activities is ongoing, with further assistance planned in the national accounts and CPI areas.
- Going forward, regular benchmark revisions of national account, price, and other key statistics should be conducted according to international best practices.

### Data adequacy assessment — national accounts and prices (staff rationale and issues)
- Overall sectoral rating for national accounts: "C".
- Main methodological and coverage weaknesses identified for national accounts:
  - outdated base year: 2011/12;
  - use of wholesale price indices as data sources for deflators due to the lack of producer prices indices;
  - excessive use of single deflation, which may introduce cyclical biases;
  - at times sizable discrepancies between production and expenditure approaches, indicating need to enhance coverage of the expenditure approach data and the informal sector;
  - lack of seasonally adjusted data and room for improvement in other statistical techniques used in the quarterly national accounts compilation.
- Granularity issues for national accounts:
  - need for further breakdown of Gross Fixed Capital Formation by institutional sector (published with a significant lag);
  - need for further disaggregation of the quarterly production and expenditure approach estimates for more detailed analysis.
- Prices (CPI):
  - CPI is available at adequate frequency and timeliness.
  - Coverage rating reflects outdated CPI base year, items basket, and weights: 2011/12 (implying the CPI basket likely fails to accurately represent current spending habits).

### Other sectoral assessments and data weaknesses
- Government finance statistics:
  - Granularity: broadly adequate.
  - Coverage and timeliness: can be improved.
  - Consolidated central and state government fiscal data have not been published since mid-2019 (covering outturns for FY2015-16).
  - Consolidated general government data, which would include local government and extrabudgetary funds, are not compiled.
  - RBI publishes a limited set of consolidated fiscal aggregates with a lag of more than one year.
  - Monthly data on fiscal operations for the central government and individual states are published on a timely basis; consolidated fiscal accounts across all states are available with a long lag.
- External sector statistics:
  - Coverage, frequency and timeliness: adequate.
  - Granularity and consistency: room for improvement.
  - International reserves information does not include pledged or encumbered assets and foreign exchange swaps.
  - Additional granularity of data on exports and imports of services would be useful.
- Monetary and financial statistics:
  - Broadly adequate for surveillance, with scope for improvement in coverage and timeliness.
  - Limited data provided on NBFCs, households, and systemwide financial interconnectedness.
  - Data reported to the IMF IFS database lack some granularity in terms of financial instruments and counterparts.
  - Reported Financial Soundness Indicators (FSI) data use outdated reporting forms that lack granularity and could be upgraded based on FSI 2019 Guidelines.
  - Banking sector data are available with a lag of about three quarters.

### Changes since the last Article IV consultation (timeliness and data releases)
- General statement: Data weaknesses have remained broadly unchanged since the last Article IV consultation, though plans toward upgrading real sector statistics are advancing.
- Periodic Labour Force Survey:
  - Sample design revamped from January 2025, increasing frequency of key labor market indicators at the country level to monthly estimates and extending quarterly estimates to rural areas.
  - All microdata for the Periodic Labour Force Survey have been published biannually (noting elsewhere that microdata publication frequency is biannual).
- Industrial Production Index (IPI):
  - With release of the March 2025 data (in April 2025), the timeliness of the quick estimate of the industrial production index improved from six weeks to 28 days after the reference month.
- Balance of Payments:
  - Timeliness improved from around 90 to 60 days after the reference quarter with the release of the April-June 2025/26 data (in September 2025).
- Reserve Bank of India (RBI) fiscal transparency:
  - RBI has taken incremental steps toward fiscal data transparency of local governments through publications of biennial reports, with consolidated fiscal data of the Municipal Corporations (large urban local bodies) and Panchayati Raj Institutions (rural local bodies).

### Corrective actions, rebasing, and development priorities
- Planned publication date for updated national accounts and CPI series: early 2026.
- National accounts rebasing project components:
  - collection of key data sources for the benchmark revision and update of the base year;
  - methodological improvements in the volume estimates including:
    - increasing the compilation detail;
    - minimizing the use of single deflation;
    - increasing the number of activities using volume extrapolation or, where possible, double deflation;
  - regular use of unincorporated businesses data to better capture dynamics in the informal sector;
  - assessment of additional data sources and use of the supply and use framework to reduce discrepancies.
- CPI update:
  - Update of the CPI base year, weights, and item basket is in progress, based on the results of the 2023-24 Household Consumption and Expenditure Survey (noting elsewhere reference to 2022-23 HCES in alternate paragraphs).
- Priorities for capacity development:
  - support in the compilation of the updated national accounts, CPI, and industrial and services production indices series;
  - peer-learning in producer price index compilation.

### Data standards and dissemination
- India subscribes to the Special Data Dissemination Standard (SDDS) since December 1996 and publishes data on its National Summary Data Page.
- Table of Common Indicators Required for Surveillance (as of September 30, 2025) — selected timing and timeliness entries preserved exactly where noted in text:
  - Exchange Rates: 09/30/25 (Date of Latest), 09/30/25 (Date Received), Frequency of Observation: D, Frequency of Reporting: D, Expected Timeliness: D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest: 09/19/25; Date Received: 09/26/25; Frequency of Observation: W; Frequency of Reporting: W; Expected Frequency: M; Expected Timeliness: 1W; India: 1M.
  - Reserve/Base Money: Date of Latest: 09/26/25; Date Received: 09/30/25; Frequency of Observation: W; Frequency of Reporting: W; Expected Frequency: M; Expected Timeliness: 2W; India: 1W.
  - Broad Money: Date of Latest: 09/05/25; Date Received: 09/17/25; Frequency of Observation: F; Frequency of Reporting: F; Expected Frequency: M; Expected Timeliness: 1M; India: 2W.
  - Consumer Price Index: August 2025 (Data), Date Received: 09/12/25; Frequency of Observation: M; Frequency of Reporting: M; Expected Timeliness: 1M; India: 1M.
  - Revenue, Expenditure, Balance and Composition of Financing — General Government: 2022/23 (Data); Date Received: 12/19/24; Frequency: A; Expected Timeliness: 2Q; India: 9M.
  - External Current Account Balance: Apr-Jun 2025; Date Received: 09/01/25; Frequency: Q; Expected Timeliness: 1Q; India: 2M.
  - Exports and Imports of Goods and Services: August 2025; Date Received: 09/15/25; Frequency: M; Expected Timeliness: 8W; India: NLT 45D.
  - GDP/GNP: Apr-Jun 2025; Date Received: 08/29/25; Frequency: Q; Expected Timeliness: 1Q; India: NLT 2M.
  - Gross External Debt: Apr-Jun 2025; Date Received: 09/30/25; Frequency: Q; Expected Timeliness: 1Q; India: 3M.
  - International Investment Position: Apr-Jun 2025; Date Received: 09/30/25; Frequency: Q; Expected Timeliness: 1Q.
- Note in Table 1: "Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions." and other explanatory footnotes preserved in source.

### FSAP Key Recommendations (selected, with timing)
- Systemic Risk Monitoring, Analysis, and Coordination, including Climate:
  - Ease data sharing and collect more granular data of households, sectoral financial accounts, liquidity indicators of NBFC, and exposures to climate change risks. (RBI, SEBI, MoF) Timing: MT
  - Improve/establish stress test tools for banks and NBFCs and sectoral and systemwide liquidity stress tests for banks, NBFCs, and mutual funds. (RBI, SEBI) Timing: ST
- Financial Sector Oversight — System-wide oversight and macroprudential policy:
  - Designate financial stability as the primary mandate of the FSDC and/or the FSDC-Subcommittee. (FSDC) Timing: ST
  - Develop a centralized risk dashboard and assess systemwide risks periodically to manage inter-sectoral contagion and the uneven impact of climate change through FSDC. (RBI, SEBI, MoF, IRDAI) Timing: MT
  - Expand the use of borrower-based measures to all lenders and all household loans. Expand the existing DSTI limit for microfinance loans to all loans and refine the calibration in the future. (RBI) Timing: ST
  - Start building the (positive neutral) CCyBs. (RBI) Timing: ST
- Common themes for regulation and supervision:
  - Amend legislation to clearly prioritize financial stability and investor protection objectives over developmental objectives of the key regulators. (RBI, IRDAI, SEBI, MoF) Timing: MT
  - Strengthen powers and programs for supervising financial conglomerates and insurance groups. (RBI, IRDAI, SEBI, MoF) Timing: MT
  - Amend legislation to limit/redesignate the MoF’s power to intervene in regulatory and supervisory decisions of the RBI and IRDAI and to align corporate governance requirements of state-owned banks and insurers with those for private ones. (RBI, IRDAI, SEBI, MoF) Timing: MT
- Cybersecurity:
  - Further enhance cyber mapping of the cyber and financial systems and undertake cross-sectoral and market-wide crisis simulation exercises and stress tests. (MoF, RBI, SEBI) Timing: ST
- Banks:
  - Enforce bank-specific Pillar-2 capital add-ons, which are currently set at zero for all banks. (RBI) Timing: ST
  - Enhance the credit risk management framework by adopting IFRS 9 with prudential backstops. (RBI) Timing: ST
- Insurers:
  - Complete the transition to a risk-based solvency regime and supervisory approach. (IRDAI) Timing: ST
- Non-bank Financial Companies:
  - Align the regulations for state-owned and private-sector-owned NBFCs. (RBI) Timing: ST
  - Enhance liquidity regulations and oversight of liquidity regulations for NBFCs. (RBI) Timing: MT
- Securities:
  - Incorporate risks-based analysis of emerging risk and develop an integrated approach to monitoring conduct risks and internal capacity to undertake systemic mutual fund stress tests. (SEBI) Timing: ST
- Crisis Management and Resolution:
  - Finalize the FSDR (resolution) bill in line with the Key Attributes and implement it. (MoF, regulators) Timing: MT
  - Reform the resolution framework for insurers to include requirements for (orderly) voluntary exit. (IRDAI) Timing: ST
- Systemic Liquidity and Emergency and Systemic Liquidity Assistance/Support:
  - Continue reducing statutory liquidity ratio (SLR). (RBI) Timing: MT
  - Set ex-ante guidance to broaden policy options to provide systemic liquidity support and ELA in a crisis, including being operationally ready to expand eligible collaterals with adequate risk controls. (RBI) Timing: MT
- Financial System Development:
  - Continue enhancing the flexibility of priority sector lending (PSL). (RBI) Timing: MT
  - Improve the distressed credit restructuring framework by enhancing the out-of-court enforcement process and the Insolvency and Bankruptcy Code. (RBI, MoF) Timing: ST
  - Introduce covered bond law and create securitization platforms with standardized features. (MoF, RBI) Timing: MT

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

### Annex IX. Boosting Productivity and Innovation in India

### Annex IX. Boosting Productivity and Innovation in India

### Birds‑Eye View: The Case for Higher Productivity Through Sector Reallocation
- Between 2000 and 2019, India’s total factor productivity (TFP) growth averaged 1.4 percent.
- TFP growth has been robust in services but flat in manufacturing.
- As of FY2022/23, the output of an additional worker in services was more than four times that of a worker in agriculture (conditional on comparable education levels).
- Over 40 percent of workers are employed in agriculture, highlighting scope for substantial output gains from reallocating labor toward manufacturing and services.
- Structural constraints slowing labor reallocation include weak property rights on agricultural land, fragmented and limited social protection for migrant workers, lack of transport infrastructure, and limited job creation in manufacturing and services.

### Sectoral TFP Dynamics and Marginal Product of Labor
- Sectoral TFP change is decomposed into:
  - within‑industry component (changes in industry TFP alone),
  - across‑industry reallocation (changes in value‑added shares),
  - residual interaction term (changes in both industry TFP and weights).
- During 2007–2022:
  - services industries experienced strong TFP growth and moderate production reallocation toward high‑TFP industries;
  - manufacturing industries experienced minimal TFP growth and only modest reallocation toward more productive industries.
- Marginal product of labor (measured using a constant‑returns‑to‑scale Cobb‑Douglas specification and labor adjusted by education) shows a large and widening gap between agriculture and the rest of the economy.

### Firm Size Distribution: Reducing Factor Misallocation Across Firms in Manufacturing
- Nearly three quarters of manufacturing establishments in India employ fewer than five paid workers.
- For comparison: 38 percent of manufacturing establishments in the United States employ fewer than five paid workers.
- Less than 2 percent of Indian establishments have more than 100 paid workers; in the United States, 9 percent of establishments have more than 100 paid workers.
- The smallest firms in India are less than 20 percent as productive as large companies; in the U.S., this ratio is about 45 percent.
- Small establishments in India do not appear to be disproportionately young, suggesting barriers to firm growth rather than birth of many new small firms.

### Business Dynamism: Facilitating Entry and Exit of Firms
- Firm entry and exit rates in India are estimated at less than 1 percent annually (2018–22), far below the 8–13 percent annual rates typically observed in economies like the U.S., European countries, Republic of Korea and Chile.
- Among continuously operating firms, 15 percent qualify as zombie firms (defined as companies older than 10 years with an interest coverage ratio (ICR) of less than 1 for at least two consecutive years).
  - Zombie firms tend to have fewer employees, higher debt‑to‑asset ratios, and lower cash and equity.
- Aggregate productivity growth during 2018–2022 was driven primarily by resource reallocation from less productive firms to more productive ones; within‑firm productivity improvements were small.
- Inactive (zombie) firms showed declining productivity, subtracting from aggregate TFP growth.
- Low entry rates may reflect high regulatory compliance burdens discouraging formal sector entry; weak insolvency resolution and limited exit mechanisms slow reallocation (corporate resolution times exceed double the statutory limit of 330 days).
- Policy imperative: promote easier entry, faster exit, and strengthen insolvency and bankruptcy procedures to accelerate reallocation.

### Research and Development: Fostering Innovation
- India’s R&D expenditure represented 0.6 percent of GDP in 2020.
  - G20 emerging market average: 0.9 percent of GDP.
  - Advanced economies average: 2.2 percent of GDP.
- India has fewer than 300 researchers per million inhabitants.
  - China: over 1,800 researchers per million.
  - Emerging markets average: around 1,000 researchers per million.
  - Advanced economies average: over 5,000 researchers per million.
- Composition of GERD (Gross Domestic Expenditure on R&D):
  - About 50 percent of R&D spending is executed by the government in India (compared to about 10 percent on average in advanced economies).
  - Higher education institutions account for only 10 percent of total R&D spending in India.
- University‑industry collaboration in India received a Global Innovation Index survey score of 3.54 (data for 2023), its lowest since 2013 and below the global median.

### Private Sector R&D, Firm Innovation, and External Integration
- Only 4.3 percent of Indian firms report having spent resources on R&D (World Bank Enterprise Survey, 2022).
  - Emerging markets average: 17 percent.
  - Low‑income countries average: 13 percent.
- Innovation incidence (three‑year window):
  - 5.3 percent of Indian firms launched a new product.
  - 3.3 percent introduced a new process.
  - Emerging markets averages: 27 percent (new product) and 16.8 percent (new process).
- Use of foreign‑licensed technology: 5.4 percent of firms in India (about one‑third the average rate across emerging markets).
- India’s stock of inward FDI amounts to 15 percent of GDP; middle income developing economies average 24.6 percent of GDP.
- R&D activity correlates positively with firm size and exporting behavior; larger and exporting firms more likely to conduct R&D.

### Patenting and Administrative Changes
- India ranks sixth globally in annual patent applications; per capita patenting has grown but remains low relative to advanced economies.
- Between 2013/14 and 2023/24:
  - patent applications doubled;
  - patents granted rose from about 4,000 to over 100,000.
- Increased staffing at India’s patent office has boosted processing capacity and cleared application backlogs.

### Policy Measures, Programs, and Fiscal Support
- Recent policy shifts and programs:
  - Income tax weighted deduction on R&D expenditure reduced from 200 percent in FY2010/11 to 100 percent in FY2021/22, with a shift to more targeted policies.
  - Patent Box Regime: concessional 10 percent tax rate on income earned from patents developed and registered in India.
  - Customs duties on import of capital equipment for R&D reduced in Union Budget FY2022/23.
  - Research, Development and Innovation (RDI) Scheme: allocation worth 0.3 percent of GDP over 6 years to spur private‑sector investment in strategic and high‑growth sectors through long‑term, low‑cost funding.
  - The RDI scheme is estimated to cost 0.01 percent of GDP per year.
  - Prime Minister’s Research Fellowship Scheme supported 3,688 scholars to date; the aim is to reach 10,000 scholarships over the next 5 years.
  - VAIBHAV Fellowship to foster collaboration with Indian diaspora scientists.
  - Startup India (launched 2016) offers tax exemptions, seed funding, incubation, industry‑academia opportunities, and technical assistance.
  - Atal Innovation Mission provides Atal Tinkering Labs, Atal Incubation Centres, and innovation challenges.
  - State‑level initiatives include Kerala Startup Mission, Telangana’s T‑Hub, Startup Karnataka, and Tamil Nadu’s Startup and Innovation Mission.
- Policy guidance:
  - Targeted fiscal incentives can help boost innovation at the technological frontier: R&D tax incentives tend to work better for mature firms, while grants may be more suitable for younger firms and sectors with high social returns.
  - Complementary reforms are important to foster technology adoption and diffusion.

### Key Findings and Policy Priorities (synthesized from analysis)
- Key findings:
  - TFP growth averaged 1.4 percent (2000–2019), with strong services TFP and stalled manufacturing TFP.
  - Large productivity gains are possible by reallocating labor from agriculture (over 40 percent of employment) to manufacturing and services.
  - Manufacturing is characterized by a high share of very small, low‑productivity establishments and a large productivity gap between small and large firms.
  - Firm dynamism is subdued: entry/exit rates <1 percent; 15 percent of continuers are zombies.
  - R&D expenditure is low (0.6 percent of GDP), with limited private sector and higher education participation; only 4.3 percent of firms report R&D spending.
  - Patenting activity has accelerated, with patents granted rising from about 4,000 to over 100,000 between 2013/14 and 2023/24.
- Policy priorities:
  - Land and agricultural reforms to facilitate the transition from agriculture to manufacturing and services.
  - Facilitate firm growth by removing obstacles to scaling up: reduce regulatory compliance burdens, simplify product market regulation, and reform labor regulation where burdens are constraining firm expansion.
  - Strengthen business dynamism: lower barriers to entry, enable faster exit, and improve insolvency resolution (including more effective corporate and personal insolvency regimes).
  - Increase integration into the global economy: remove trade barriers and facilitate FDI to enhance technology diffusion and export‑led scaling.
  - Strengthen India’s innovative capacity: increase and reorient R&D spending, boost higher education participation in R&D, and improve university‑industry collaboration.
  - Expand access to finance for companies eager to innovate, including long‑term, low‑cost funding targeted to private‑sector R&D and scale‑up finance for growing firms.

*Prepared by Cristian Alonso, Fang Li, Nujin Suphaphiphat, Ni Wang (all APD) and Jinhyuk Yoo (MCM).*

### 13.      Digital access in India has increased significantly over the past decade, but there is

### 13.      Digital access in India has increased significantly over the past decade, but there is scope to do more (Figure 8).

### Digital access and disparities
- Fixed-line broadband development is relatively limited: a small number of subscriptions in relation to the population and low usage per subscription.
- Mobile-broadband internet traffic per subscription in India is relatively high compared with other economies and partially offsets lower fixed-line use; mobile subscriptions have remained below the EM average.
- Locational, gender, and age disparities:
  - Rural internet subscriptions are markedly below urban ones (Internet Subscriptions per 100 inhabitants, Oct–Dec 2024: Rural vs Urban vs Total — chart shown).
  - Adults who have ever used the internet (In percent, by age group, 2019-2021): notable gaps by age and gender (chart shows Male/Female by age cohorts 15-19, 20-24, 25-29, 30-34, 35-39, 40-44, 45-49).
- Cost of a fixed-broadband basket (Median, 2024):
  - USD: 5.6 (India)
  - Percent of Income per Capita: 2.8 (India)
  - India’s cost in USD is lower compared with all income groups; in terms of income per capita, it is similar to upper middle-income group.
- Digital innovation indicators:
  - India shows relative underperformance in top-level domains as a percentage of the population in the Global Innovation Index.

### AI adoption and preparedness
- AI adoption and start-up activity:
  - Nearly 60 percent of companies report they have actively deployed AI (IBM Global AI Adoption Index, 2023).
  - Stanford AI Index (2024) ranks India among the top ten countries globally in the number of newly funded AI companies.
  - Start-up activity concentrated in digitally mature sectors: services (financial services, healthcare, telecom, retail, transport and logistics).
- Reported barriers to AI adoption (In percent; ranked charts):
  - Top barriers for firms in India: limited AI skills, expertise or knowledge; lack of tools/platforms; integration complexity (chart compares India, Global, and Average of Selected EMs).
- India: AI Preparedness (IMF staff calculations, AIPI components):
  - Components shown: Digital Infrastructure; Innovation and Economic Integration; Human Capital and Labor Market Policies; Regulation and Ethics. (Chart indicates scope for improvement in human capital and labor market policies.)
- IMF staff estimates on productivity effects:
  - AI adoption could raise total factor productivity (TFP) in emerging markets Asia (including India) by 0.3 to 3 percentage points—depending on sectors and scenarios over a decade (Cerutti et al, 2025).

### Labor market exposure and skills policy implications
- Sectoral exposure:
  - AI exposure concentrated in services and manufacturing; agriculture has low exposure.
- Within workforce:
  - AI exposure with high complementarity increases sharply with education level; individuals with tertiary education are more likely to benefit from AI-enabled productivity gains (Pizzinelli et al, 2023).
- Policy implications:
  - Need to invest in skills upgrading and diffusion of digital skills across the broader population.
  - Job transition programs and adequate social protection for those at risk of displacement are critical.

### Role of the financial sector in raising productivity and fostering innovation
- Financial sector overview:
  - Bank and non-bank credit remain primary funding sources for non-financial corporations (NFCs); share relative to GDP stabilized at around 50 percent after a decline over the past decade.
  - Indian stock market is the fourth largest globally; market capitalization currently exceeding 120 percent of GDP (chart).
- PE/VC activity:
  - Private equity/venture capital investments surged to $43 billion in 2024, equivalent to 1.1 percent of GDP.
  - Average deal size around $30 million, indicating prevalence of smaller VC deals.
- MSME finance and credit access:
  - Despite growth in MSME bank lending, only 11 percent of Indian firms reported having bank loans (World Bank Enterprise Survey, 2022).
  - Over-collateralization averaging 185 percent of loan amounts (World Bank Enterprise Survey, 2022).
  - Bank credit to MSMEs has grown faster than total bank credit (chart: Bank Credit to MSMEs, year-on-year percent).
- Corporate bond market and institutional investor behavior:
  - Corporate bond ratings distribution (FY2023-24 for India): AAA (86 percent), AA (10 percent), A1-BBB (3 percent), non-investment grade (0.4 percent).
  - Insurers and pension funds have invested in “alternative investments” well below regulatory limits (Life insurers allowed up to 15% in other investments; pension funds up to 5% in alternative assets).
  - Reluctance of institutional investors to invest in riskier yet potentially more productive assets limits financing to lower-rated firms.
- Recommendations to deepen finance for productive firms:
  - Provide incentives for portfolio managers to seek best risk-adjusted returns.
  - Promote market development of robust risk-sharing and credit enhancement products (e.g., covered bonds) to enable lower-rated companies to access capital markets.

### Access to credit, reform payoffs, and allocation efficiency
- Credit allocation and public sector footprint:
  - Low-productivity firms with high dependence on public sector banks (PSBs) receive disproportionate credit; when PSBs represent a large share of new credit, such firms obtain credit growth similar to that of medium-productivity firms with low PSB dependence (George et al., 2022).
  - Continuing to reduce the public sector footprint in the financial system could improve resource allocation.
- Impact of expanded access to credit:
  - Evidence from 2006 PSL eligibility expansion (George et al., forthcoming):
    - Firms with improved access to credit experienced greater growth in sales and innovation, especially when fewer structural constraints existed.
    - Increase in firm size (Percent, increase in sales): No Barriers: 100 percent; firms constrained by 5 barriers experienced only a third as much growth.
    - Increase in firm innovation (Percentage points, increase in probability of introducing a new product): larger for less constrained firms (chart shows No Barriers vs 3 Barriers vs 5 Barriers).
- Structural constraints that dampen payoffs from credit:
  - High market concentration and small market size in output market.
  - Inefficient land markets.
  - Rigid labor market regulations.
  - High frequency of electricity shortages.
  - Availability of good roads.
  - Courts congestion in the firm’s state.
  - Poor literacy and numeracy in the firm’s district.
  - Limited access to imported inputs.
  - Firm location in a rural area.
- State-level business reforms:
  - Business Reform Action Plan (BRAP) implementation raises state-average manufacturing TFP.
  - Preferred specification: an additional 1 percent of BRAP reforms implemented results in a 0.4 percent increase in TFP.
  - Trade openness (lagged exports) and education attainment (middle school enrollment with a long lag) are positively associated with TFP (not statistically significant in this specification).
  - Methodology notes: neighboring states’ average reform intensity used as an instrument; state-specific average TFP derived from ASI and Orbis using production functions estimated at 2-digit industry level.

_Italic: IMF staff calculations and IMF chapter content as provided in the source PDF._

### 21.      Innovation can have significant payoffs for TFP growth. We consider the Global

### Innovation can have significant payoffs for TFP growth

### Innovation and TFP: empirical findings
- A 1-point increase in GII overall score correlates with a 7.8 basis-point rise in TFP growth.
- A one point increase in GII sub-indices is associated with:
  - GII business sophistication: 4.6 basis-point increase in TFP growth.
  - GII knowledge and technology outputs: 3.3 basis-point increase in TFP growth.
  - GII creative outputs: 4.4 basis-point increase in TFP growth.
- India already ranks at or above the 90th percentile across emerging markets for:
  - the overall index,
  - the knowledge and technology sub-index,
  - the market sophistication sub-index.
- Scenario estimates:
  - Raising India's business sophistication to the 90th percentile would be associated with higher TFP growth by 39.6 basis points.
  - Improving creative outputs to the 90th percentile would add 18.9 basis points.

### Key regression statistics (Table 3)
- GII Overall Score: 0.078*** (0.024)
- GII Business Sophistication Score: 0.046*** (0.017)
- GII Knowledge and Technology Outputs Score: 0.033** (0.015)
- GII Creative Outputs Score: 0.044*** (0.017)
- N = 106
- R-sq values by specification: 0.201, 0.166, 0.114, 0.154
- adj. R-sq values by specification: 0.170, 0.133, 0.079, 0.120
- Notes: controls for log GDP per capita, log GDP in USD, and share of agriculture in GDP. TFP average growth from 2009 to 2019. Standard errors in parentheses. Significance levels: * p<0.10  ** p<0.05  *** p<0.01

### Conclusion and policy recommendations (productivity and innovation)
- Let Firms Grow
  - India’s manufacturing sector is dominated by small firms with low productivity.
  - Policy levers: easing labor regulations, simplifying product market rules, providing stable policy frameworks, reducing compliance burdens.
- Encourage Entry and Exit
  - Business dynamism and entry/exit rates are far below peers; persistence of zombie firms linked to forbearance lending, inefficient insolvency resolution, and weak exit mechanisms.
  - Strengthen Insolvency and Bankruptcy Code (IBC) implementation, operationalize the personal insolvency regime, reduce delays in resolution, and complement with financial sector reforms to improve credit allocation.
- Facilitate Allocation of Labor and Land to the Most Productive Uses
  - With over 40 percent of the workforce still in agriculture, agricultural reforms are critical to facilitate labor mobility.
  - Reforms needed to support availability of land for industrial purposes (Annex X).
- Incentivize Through Greater Exposure to International Trade and Foreign Investment
  - Remove trade barriers and pursue trade agreements; promote FDI for knowledge, technology, and export market access.
- Improve Access to Capital
  - Despite a large financial sector, access for MSMEs remains constrained.
  - Recent measures: abolition of the angel tax and equalization of capital gains treatment for unlisted securities.
  - Recommendations: reduce public sector footprint in the financial system, promote blended finance structures (e.g., waterfall funds) for PE/VC, expand digital lending infrastructure, and support minibonds, MSME securitization, and factoring.
- Boost R&D and Technology Adoption
  - R&D intensity is low with limited private sector participation.
  - Government initiatives: RDI Scheme, Prime Minister’s Research Fellowship, Atal Innovation Mission.
  - Complementary measures: stronger university-industry linkages, reforms to encourage technology adoption among smaller firms, target policies at adoption of existing technologies, progress in digital and physical infrastructure, education, and training.
  - Fiscal incentives for private R&D (grants and tax incentives) should be carefully designed and coordinated (IMF, 2024).
- Bridge the Digital Divide
  - Mobile broadband subscriptions have risen sharply but disparities persist across rural-urban, gender, and age lines.
  - Further investments needed in broadband infrastructure, digital literacy, and affordable access.
- Harness AI Technology Responsibly
  - AI offers productivity gains via automation, optimization, and innovation.
  - Deployment must be guided by a robust policy framework addressing risks such as labor displacement to ensure inclusive and equitable growth.

### Annex X — Land access for manufacturing: constraints and reform priorities
- Access to land is a prominent constraint to productivity and investment:
  - 7.4 percent of firms in India identify access to land as the primary obstacle for doing business (World Bank, 2022).
  - This compares with a South Asian average of 5.2 percent and a lower middle-income country average of 3.5 percent.
  - Land acquisition issues account for 7.1 percent of investment projects that become inactive (temporarily suspended or permanently canceled).
- Key market failures and institutional issues
  - Limited availability of reliable land records due to inaccuracies and outdated entries in the Record of Rights (RoR).
  - Land ownership is presumptive rather than conclusive; purchasers face high ownership risk.
  - Restrictive land use classifications (residential, commercial, industrial, agricultural) limit repurposing and stall urbanization and industrial expansion.
  - Restrictions on purchase of agricultural land (who can buy, maximum amounts) and restrictive building regulations (ground coverage, setbacks, parking, floor area ratios) constrain factory development.
  - Continuous fragmentation of agricultural land increases negotiation complexity and procurement costs.
- Land acquisition process and state variation
  - Land acquisition governed by the Land Acquisition, Rehabilitation and Resettlement Act (LARR Act), 2013, with requirements for social impact assessments (SIAs), prior consent of majority landowners, and fair compensation and rehabilitation.
  - Many states have relaxed provisions over time; industrially-advanced states (Gujarat, Karnataka, Tamil Nadu, Maharashtra, Telangana) have had relative success using project-specific state laws.
  - Large projects can still be delayed by approvals required under environmental regulation, forest law, and laws for scheduled areas.
- Innovative and digital approaches
  - Pilot models like Andhra Pradesh’s voluntary land acquisition (“profit-sharing”/negotiated agreement) offer options: premium-paid transfers (5–25 percent above market value) overseen by negotiation committees, though challenges remain.
  - Digital India Land Records Modernization Program: 95 percent of land records across 626 thousand villages computerized; 68 percent digitization of cadastral maps.
  - Presumptive titling limits digital records from serving as definitive proof of ownership; absence of a title insurance ecosystem increases financial risk.
  - Some cities are experimenting with blockchain for definitive titles, but comprehensive implementation would take a long time and address only part of the problem.
- Public land pools and geographic concentration
  - India Industrial Land Bank portal catalogs industrial parks and clusters; integrates an Industrial Park Rating System across 45 performance metrics.
  - Telangana accounts for approximately 25 percent of the industrial land available in the country.
  - The top 6 states (including Telangana, Maharashtra, Tamil Nadu, Gujarat, Rajasthan, Andhra Pradesh) account for 77 percent of reported industrial land available for allocation.
- Central government support and conclusive titling initiative
  - Union government provided a 50-year interest-free capex loan scheme to states: Rs. 50 billion were allocated in FY2024/25 to states that advanced urban and rural land governance reforms.
  - NITI Aayog circulated a Model Bill on Conclusive Land Titling in 2020, envisioning state-level land authorities to certify conclusive ownership after a challenge period, with disputes handled by dedicated tribunals.
  - Uptake of the model act has been limited to date.

*Source: IMF staff calculations and analysis from the provided chapter content.*

### 9.      Policy recommendations. Reforms will be essential to facilitate access to land for

### 9. Policy recommendations. Reforms will be essential to facilitate access to land for productive purposes, supporting India’s growth ambitions and the creation of quality jobs for the growing working-age population.

### Land reform priorities and findings
- Reform priorities include:
  - implementing the Land Title Act in order to advance towards conclusive land titles and state-guaranteed land ownership;
  - continuing to leverage special economic zones and industrial parks to expedite access to land for productive uses;
  - making further progress in digitalization and quality of land records (World Bank, 2025).
- Burdensome land regulations should be reconsidered and rationalized to reflect current economic and social realities, as emphasized in the Economic Survey (MoF, 2025).
- States can evaluate and learn from each other’s reforms, including ongoing experimentation with novel cooperative mechanisms for land acquisition and pooling, while ensuring appropriate safeguards.

### Policy recommendations on land (explicit)
- Implement the Land Title Act to advance conclusive land titles and state-guaranteed land ownership.
- Leverage special economic zones and industrial parks to expedite access to land for productive uses.
- Accelerate digitalization and improve the quality of land records.
- Reconsider and rationalize burdensome land regulations to reflect current economic and social realities.
- Encourage inter-state evaluation and learning of reform experiments, including voluntary land pooling and cooperative acquisition mechanisms, with appropriate safeguards.

*Source: IMF staff summary of Section 9, "Policy recommendations," and accompanying annexes in the provided content.* 

### Annex XI. India’s Insolvency Framework – performance challenges and need for reform (key findings)
- The Insolvency and Bankruptcy Code (IBC) enacted in 2016 replaced a patchwork of laws with a comprehensive insolvency framework, but performance metrics have deteriorated, threatening effectiveness.
- Resolution times and recovery rates have worsened significantly:
  - Average time taken for closure of the Corporate Insolvency Resolution Process (CIRP) doubled from 324 days in early implementation to 724 days as of June 2025, substantially exceeding the statutory 330-day limit.
  - For successful corporate resolutions, financial creditors' recovery rates declined from 43 percent in March 2019 to 33 percent in June 2025.
  - Pre-admission delays worsened: operational creditors faced average waits of 650 days in 2022 compared to 450 days in 2019.
- Capacity constraints and legal deficiencies:
  - National Company Law Tribunals (NCLTs) have only 30 courts and 16 additional benches; there is a persistent shortage of qualified judges.
  - Over 55 percent of cases remain pending after two years.
  - Critical legislative gaps include inadequate treatment of operational creditors, absence of group insolvency and cross-border insolvency provisions, insufficient regulation of executory contracts and post-petition finance, lack of connection between informal restructuring and formal insolvency proceedings, and a personal insolvency regime that has not been made operational.
- Regulatory measures alone cannot address statutory defects; the Insolvency and Bankruptcy Board of India (IBBI) has adopted more than 90 amendments to the Insolvency Regulations since 2016, with the latest amendments introduced in May-July 2025, but statutory reforms are required.

### Annex XI. Recommended insolvency reforms (explicit)
- Legislative interventions required:
  - substantial NCLT capacity expansion;
  - comprehensive revision of the treatment of operational creditors;
  - provisions for enterprise group insolvency and cross-border insolvency;
  - operationalization of the personal insolvency regime;
  - technical amendments to facilitate enterprise rescue and liquidation.
- Procedural and technological improvements:
  - greater use of digital technologies in courts;
  - greater use of Information Utilities (entities maintaining financial information databases) to address procedural bottlenecks.

### IBC Amendment Bill — main changes and limitations
- Major changes in the Bill:
  - Establishes a new creditor-initiated out-of-court insolvency mechanism for certain types of corporate debtors. Only certain financial creditors may initiate the process, which must be completed within 150 days, with a possible 45-day extension.
  - Provides a new chapter on “Group Insolvency,” following common principles including typical coordination measures, but does not prescribe substantial consolidation of companies in a corporate group.
  - Authorizes the Government to prescribe rules for cross-border insolvency proceedings under the Code; rules expected to conform to the UNCITRAL Model Law on cross-border insolvency.
  - Renders admission to insolvency processes mandatory should default be proven; requires NCLTs to admit or reject applications within 14 days.
- Other salutary changes:
  - Empowers the committee of creditors (CoC) to supervise liquidation, choose or replace the liquidator by resolution, and to resolve the corporate debtor directly as an alternative to liquidation.
  - Mandates that approved resolution plans are binding and final; acknowledges the clean-slate principle that once a resolution plan is approved, claims are settled and then extinguished.
  - Mandates liquidation be completed within 180 days from the date liquidation commences, with a possible extension of 90 days.
  - Authorizes the Government to provide an electronic portal for insolvency processes.
  - Clarifies that a creditor will be a secured creditor to the extent of the value of its security when claiming secured status.
  - Clarifies that avoidance actions can continue after corporate resolution and do not interfere with adoption of the plan.
  - Ensures dissenting financial creditors in corporate resolution plans receive liquidation value or what they would have received under the plan according to the creditors’ ranking.
- Gaps remaining in the Bill:
  - No provision for participation of operational creditors or rules for executory contracts; operational creditors still lack the right to vote on a resolution plan or other governance rights.
  - No rules provided for executory contracts, which would help restructure business operations rather than sell them.
  - The personal insolvency regime remains in abeyance.

### Annex XI. India: status of ongoing CIRPs (statistic snapshot)
- Status of ongoing CIRPs (As of end-June 2025) — chart categories shown:
  - ≤ 90 days
  - > 90 days ≤ 180 days
  - > 180 days ≤ 270 days
  - > 270 days
- Pie-chart percentage labels visible in source:
  - 78%
  - 6%
  - 7%
  - 9%

*Source: IMF staff summary of Annex XI, "India’s Insolvency Framework – Performance Challenges and Need for Reform," and Section 9, "Policy recommendations," in the provided content.*

### 4.3  per  cent  in  October.  Excluding  gold  and  silver,  core  inflation  continued  to  remain

### 1indea2025003-source-pdf - 4.3  per  cent  in  October.  Excluding  gold  and  silver,  core  inflation  continued  to  remain

### Inflation and Monetary Policy
- Headline inflation: "4.3  per  cent  in  October."
- Excluding gold and silver, core inflation "continued  to  remain below 4 per cent."
- Inflation outlook: "likely  to  remain  under  control  in  the  near  term," supported by a "good monsoon season and indirect tax relief."
- Monetary policy projections and actions:
  - RBI MPC revised average headline inflation for 2025-26 from "3.7  percent  in  June" to "3.1  percent  in  August," and "further  to 2.6 percent in October."
  - Forecasts for "Q4:2025-26 and Q1:2026-27" revised downwards and "are broadly aligned with the target."
  - Core inflation for "this year and Q1:2026-27 is also expected to remain contained."
  - Policy rate actions: MPC cut the policy rate "by a cumulative 100 bps since February 2025."
  - Policy repo rate maintained at "5.5 percent" in the October meeting with a "neutral stance."
  - Additional RBI measures: injected "large amounts of durable liquidity" and "reduced risk weights on bank loans to NBFCs and MFIs" to enhance transmission.
  - MPC noted policy space has "further opened up" but remained prudent given unfolding trade-related uncertainties and lagged effects of recent measures.

### Fiscal Situation
- Fiscal consolidation path aims: detailed roadmap for the next six years to calibrate fiscal deficits from "2026-27 onwards" and steer central government debt toward "around 50±1  percent  of  GDP  by  March 2031."
- Four-pronged growth-support strategy:
  - "counter-cyclical  fiscal  policy"
  - "improving  quality  of  expenditure  by  maintaining  capital expenditure"
  - "transparency and pro-active disclosure"
  - "setting realistic fiscal targets and attaining them"
- State-level fiscal reforms:
  - States have enacted fiscal responsibility legislations.
  - Government places caps on state fiscal deficit targets to determine borrowing ceilings.
  - Off-budget borrowings are being factored in when fixing annual state borrowing ceilings.
- Tax reforms and objectives:
  - Ongoing reforms aim to "simplify compliance, reduce tax rates, and leverage technology."
  - Recent measures include "GST reform, capital gains tax reform, reduction in the number of customs duty slabs, and notification of the Income Tax Act, passed in August 2025."
  - GST overhaul built on three pillars: "structural reforms, rate rationalization and ease of living."
- Indicators reflecting reform effects:
  - In "September 2025, e-way bill generation... reached a new record level."
  - Retail vehicle sales during the 42-day festive period: passenger vehicles expanded by "23.0 percent" and two and three-wheelers by "12.1 percent" year-on-year.
  - Authorities regard staff assessment of a "cumulative 0.2 percent boost to growth due to GST reforms" as conservative.
  - Personal Income Tax (PIT) cuts expected to support consumption.

### External Sector
- Exports: growth of "5.9 per cent YoY in H1: 2025-26," reaching "US$ 419.2 billion."
- Current Account Deficit (CAD): "0.2 percent  of  GDP" in Q1:2025-26 compared to "0.9 percent  of  GDP" last year.
- FX reserves: "US$ 689.7 billion as of October 31, 2025," covering "over 8 months of goods and services imports" and "approximately 92.3 per cent of India’s total external debt as at end-June  2025."
- FDI flows April-August 2025:
  - Gross FDI inflows "US$ 43.8 billion" (previous year "US$ 37.0 billion").
  - Net FDI inflows "US$ 10.1 billion" (previous year "US$ 4.6 billion").
- Exchange rate dynamics:
  - INR traded with an appreciating bias during April and early-May 2025, then depreciated in June-September 2025.
  - Factors cited: "an increase in US tariffs, a widening trade deficit and FPI outflows."
  - RBI exchange rate policy focused on "maintaining orderliness and stability" and FX interventions aim to "smoothen excessive volatility rather than targeting any specific exchange rate level or band."
  - "Exchange rate flexibility continues to be the first line of defense."

### Financial Sector
- System-level parameters for SCBs: capital adequacy, liquidity, asset quality and profitability "continue to remain healthy."
- NBFCs: system-level parameters "are sound, with adequate capital and improved GNPA ratios."
- Financial inclusion and digital infrastructure:
  - Bank account ownership rose to "89  percent in 2024-25," from "53 percent a decade earlier."
  - India hosts "over 10,000 FinTech companies" with cumulative investments "exceeding US$ 40 billion over the past decade."
  - UPI processed "more than 650 million transactions a day in September 2025."
  - ULI introduced to catalyze "efficient, data-driven, and inclusive credit delivery" and enable alternative credit models for "new-to credit segments."
- Credit flows:
  - Bank credit growth "lower than last year" but "continues to be healthy."
  - Total flow of resources from non-bank sources "more than offset the decline in non-food bank credit" during the current year.

### Structural Reforms, Industry, and Trade
- Reform agenda in Union Budget 2025-26: "Reforms as the fuel" with transformative reforms across six domains: "taxation, power sector, urban development, mining, financial sector and regulatory reforms."
- Labor reforms: most states/UTs have "pre-published their draft rules under the new labor codes."
- Production Linked Incentive (PLI) schemes:
  - Implemented across "14 pilot sectors"; particularly successful in "pharmaceuticals and mobile-phone manufacturing."
- Export support measures:
  - (i) Export Promotion Mission with an outlay of "US$ 2.8 billion for the period 2025-26 to 2030-31" targeting MSMEs, first-time exporters, and labour-intensive sectors.
  - (ii) Credit Guarantee Scheme for Exporters extending additional credit facilities "upto US$ 2.3 billion" to eligible exporters, including MSMEs.
  - (iii) Relaxation of FEMA regulation on realization and repatriation of export proceeds and easing debt repayment and export credit burdens.
- Trade agreements: recent agreements include "India-UK CEPA 2025, India-EFTA TEPA 2024, India-Australia ECTA 2022, India-UAE CEPA 2022, and the India-Mauritius CEPA 2021." Negotiations with the EU, Australia, and New Zealand are underway; India has agreements with some CPTPP countries "viz., Australia, Japan, Malaysia, and Singapore." The "India-ASEAN FTA" cited as an example of regional integration.

### Research, Health, Education, and Climate Action
- Research and innovation:
  - RDI Scheme with a corpus of "US$ 12 billion over the next 5 years" to provide long-term financing/refinancing at low or nil interest rates.
  - India Semiconductor Mission (ISM) launched to strengthen electronics manufacturing.
- Education and health:
  - Youth literacy "is near 97 percent."
  - National Education Policy 2020 aims to expand access to quality education.
  - Health initiatives: "Ayushman Bharat and eSanjeevani" expanded affordable care; investments have led to "lower dropout and maternal mortality rates."
- Climate and energy:
  - By 2020, emissions intensity reduced "by 36 percent from 2005 levels."
  - Non-fossil sources accounted for "over 50 percent of installed power generation capacity by mid-2025."
  - India achieved the COP26 Panchamrit goal of "50 percent of installed electric power capacity from non-fossil fuel sources by 2030" five years early.
  - On "July 29, 2025," renewables met "51.5  per  cent  of  the country’s total electricity demand of 203 GW."
- Climate finance:
  - Draft climate finance taxonomy to guide investments across "power, mobility, buildings, and hard-to-abate sectors."
  - Emphasis on a reformed international financial system to "reduce the cost of capital and enhance risk-sharing."

### Data Adequacy
- Staff view: India’s official statistics "are broadly adequate for surveillance" despite some shortcomings.
- Planned statistical updates:
  - DAA ratings to be reassessed once updated national accounts series are published in "February 2026."
  - Double deflation coverage is being expanded; an expert group constituted to work on a Producer Price Index (PPI).
  - Balance of payments statistics beginning "Q1:2025-26" released with a lag of "two months" instead of the earlier "one-quarter" lag.
  - Several efforts underway including "rebased and updated national accounts and CPI data by early next year."

### Conclusion: Macroeconomic Assessment and Outlook
- Key assessments:
  - GDP "has been growing at a fast pace, underpinned by domestic drivers."
  - Inflation "has stayed lower than target, providing room for monetary easing."
  - Government "has steadfastly maintained the fiscal consolidation path" while implementing significant tax reforms.
  - RBI delivered "a frontloaded policy rate cut and liquidity easing measures" and adopted a "neutral stance" to support growth while keeping inflation aligned to the target.
  - Easing financial and credit conditions support economic activity.
  - External sector characterized by a "low current account deficit underpinned by robust services exports and remittances receipts."
  - "Sustained price and financial stability, strong balance sheets of banks and corporates and prudent and credible policies" have bolstered macro fundamentals and buffers.
- Long-run aspiration: "India is firmly placed on the path towards becoming 'Viksit Bharat', i.e. 'Developed India', by 2047."

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

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025003-source-pdf.pdf_