## India—Assessment Letter for World Bank

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### Macroeconomic overview
- Growth remains strong, supported by domestic demand.
- GDP growth has been stronger than expected, but is expected to moderate to 8¾ percent in 2007/08, from a high of 9½ percent last fiscal year.
- Headline inflation (WPI), at around 3 percent, is below the RBI’s near-term projections, although CPI inflation is higher.
- Overall assessment: prospects for India’s growth and macroeconomic stability remain good; higher growth path possible with accelerated reforms.

### External position and reserves
- The rupee has appreciated by 10 percent in real effective terms y/y through September.
- Export growth remains strong at about 19 percent y/y.
- The external current account deficit is expected to widen to about 2 percent of GDP in 2007/08.
- The deficit is comfortably financed by private inflows.
- Reserves exceed $260 billion (over 10 times short-term external debt).
- External debt remains low (about 17 percent of GDP, as of end-2006/07).

### Monetary policy and capital flows
- Immediate macroeconomic policy challenge: managing the effects of rapid capital inflows generating rupee appreciation and excess liquidity.
- Authorities’ responses:
  - Intervention in the foreign exchange market.
  - Sterilization operations.
  - Tightened controls on inflows while loosening those on outflows.
  - Withdrawal of monetary accommodation, most recently by increasing reserve requirements.
- With WPI inflation remaining low, monetary policy could remain on hold for now, but rapid monetary growth warrants vigilance for inflationary pressures.
- Financial markets largely recovered from summer credit-market turbulence; the Sensex stock price index ranges near record highs.

### Fiscal policy, public debt, and subsidies
- General government debt remains very high—nearly 80 percent of GDP—limiting room for priority spending.
- In 2007/08, staff expects a further decline in the on-budget general government deficit, to 5.7 percent of GDP (compared with a projection of 6¼ percent in the staff report), on the back of buoyant revenues and improved state-level finances.
- Off-budget subsidies for food, fuel and fertilizer are projected to amount to about 1.0 percent of GDP this fiscal year, which will slow consolidation.
- Upside risks exist to fuel subsidies if oil prices range higher (retail fuel prices are administered).
- Medium-term needs: comprehensive revenue and expenditure reforms, including streamlining tax exemptions and better targeting of subsidies.

### Structural reforms and financial sector development
- Greater progress in structural reforms is needed to:
  - Tackle supply constraints.
  - Create jobs and further reduce poverty.
  - Prepare the financial sector for a more open capital account.
- Priority investments: health, education and infrastructure.
- Trade policy: tariffs could be further reduced to enhance competition and reduce the cost of imported inputs, building on recent years’ trend.
- Financial market development: steps to develop corporate bond and derivatives markets would facilitate investment (including infrastructure) and enable better risk management as the capital account opens further.

### Overall recommendations and implications
- Continue vigilance on inflationary pressures given rapid monetary growth.
- Maintain appropriate macroeconomic policy stance while managing capital inflows through a mix of FX intervention, sterilization, and capital flow measures.
- Reduce high general government debt to create fiscal space for social and infrastructure spending.
- Implement comprehensive revenue and expenditure reforms (streamline tax exemptions; better-target subsidies).
- Accelerate structural reforms and financial market development to sustain higher growth and prepare for further capital account opening.

*IMF staff assessment, November 20, 2007.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_112007.pdf_