## _cr0586 ## Source details **Canonical URL:** [_cr0586](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0586.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0586.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0586.pdf.json) --- ### Overview and key messages - The Indian economy rebounded to more than 8 percent growth in 2003/04, supported by a strong monsoon. - Staff projects growth will remain robust, at 6.4 percent this year (2004/05), despite uneven monsoons and high oil prices. - To achieve sustainable growth above 8 percent, the report emphasizes: fiscal consolidation, enhanced infrastructure, and further structural reforms. - The Fiscal Responsibility and Budget Management Act (FRBMA) provides a solid framework for fiscal sustainability; stronger state-level action is required since states account for half of the general government deficit. - Reconciling the Common Minimum Program (CMP) with fiscal adjustment will be difficult; large increases in infrastructure and social spending are likely to be implemented only over the long term and subject to fiscal constraints. - Acceleration of structural reforms—liberalizing trade and labor laws, increasing FDI, and removing impediments to investment—is key to raising growth and employment. - The financial sector has strengthened considerably; further opening to private and foreign investors and strengthened risk-based supervision would help support higher growth. - Recent monetary tightening by the RBI was appropriate given rising inflation risks; greater exchange rate flexibility would help absorb capital inflows, fight inflation, and facilitate adjustment. ### Recent developments and outlook - 2003/04: Growth rebounded to more than 8 percent, the highest in a decade. - 2004/05: Staff expects growth of 6.4 percent; GDP grew 7½ percent in the first quarter, driven by services and industry. - Trade and external balances: - Trade deficit widened to 2.6 percent of GDP in the fiscal year to September, driven by higher oil prices and strong investment demand. - Services income, tourism receipts, and remittances remained strong; current account projected to end 2004/05 in a small surplus. - Capital flows, reserves, exchange rate: - Reserves rose to US$113 billion during 2003/04 and to US$131 billion at the start of December 2004. - Large portfolio inflows, remittances, and FDI supported reserve accumulation; external bond issuances by corporates and banks increased. - RBI allowed increased two-way flexibility; the rupee appreciated about 3 percent since May. - Bombay stock exchange index rose 25 percent in June-November, reaching an all-time high. - Inflation and monetary conditions: - WPI inflation accelerated to close to 9 percent in August year-on-year, then declined to around 7½ percent more recently. - CPI inflation for industrial workers and staff’s estimate of core inflation have accelerated. - Partial sterilization of capital inflows increased banking system liquidity and credit surged. - Inflation expected to remain around 7 percent at end-2004/05. ### Fiscal developments and the FRBMA - Central government: - Overall central deficit fell to 5.1 percent of GDP in 2003/04, almost 1 percent of GDP lower than the previous year. - Current deficit declined to 3.5 percent of GDP from 4.4 percent of GDP. - Tax revenues exceeded expectations due to buoyant corporate tax receipts; spending fell short of budget. - States: - States’ overall deficit deteriorated to an estimated 5.1 percent of GDP in 2003/04, nearly 1 percent of GDP worse than the previous year. - Interest and pension payments absorb about 70 percent of states’ tax revenue; subsidies—particularly to the power sector—have increased. - States’ debt has risen to 30 percent of GDP. - General government deficit remained broadly stable at 9.7 percent in 2003/04 (offsetting central improvement). - FRBMA and policy implications: - FRBMA commits the central government to current balance by 2008/09 with minimum annual reductions of 0.5 percentage points of GDP in the current deficit and 0.3 percentage points of GDP in the overall deficit. - Staff strongly supported rapid implementation of the FRBMA Roadmap, emphasizing front-loaded tax reform and improvement in expenditure quality. - Staff cautioned against using foreign exchange reserves to finance infrastructure spending. ### The Common Minimum Program (CMP) and fiscal implications - CMP commitments and estimated costs: - Major increase in infrastructure—meeting infrastructure needs estimated to cost an additional 3-4 percent of GDP per year. - Universal access to basic education and health through a gradual doubling of expenditure to 6 percent of GDP and 2–3 percent of GDP, respectively. - Guarantee of 100 days of minimum wage employment for one person in each poor household at an estimated net cost of 1 percent of GDP (two-thirds borne by the central government). - Authorities expect to fund higher spending (around 10 percent of GDP) by better targeting subsidies, broadening the tax base, increased tax compliance, improved tax administration, and an earmarked surcharge on taxes for education; state-level VAT to be introduced. - CMP implementation steps taken: - Budget introduced a 2 percent education surcharge, a tax on securities transactions, and broadened the service tax base. - FDI caps on civil aviation increased. - States expected to introduce VAT by April 2005. - Staff view: - Full achievement of CMP commitments only over the longer term and subject to fiscal constraints; prioritization and experimental approaches (e.g., employment guarantee in poorest regions) advised. - Private sector participation and improved regulatory frameworks critical for infrastructure financing. - Proposal to use US$15 billion of reserves over 3 years (0.6 percent of GDP per year) was discussed; staff raised concerns about credibility of FRBMA, central bank independence, inflationary consequences, and whether financing is the main constraint to infrastructure investment. ### Medium-term outlook and risk scenarios - Baseline staff scenario: - Growth of 6–6½ percent as economic reforms continue and investment recovery takes hold. - With declining world oil prices (as projected in the WEO), inflation would fall to around 4 percent and the current account continue in surplus. - Upside scenario: - Faster implementation of reforms (broader-than-planned tax reform and faster state adjustment) could accelerate growth significantly. - Downside risks: - Domestic policy slippages, especially failure to bring deficits under control, could push up interest rates and hold back investment. - Higher-than-expected world interest rates could slow or reverse inflows and necessitate domestic rate rises. - Higher oil prices would slow growth and increase inflation. ### How can the necessary fiscal adjustment be achieved? (staff recommendations) - Emphasize front-loaded tax reform as the bulk of adjustment: - Replace state-level cascading sales tax and central VAT on manufacturing with a national GST; remove most exemptions; improve tax administration (Kelkar report roadmap). - Practical sequencing agreed by authorities: - Launch state VAT on goods by April 2005. - Extend central VAT to more services. - Continue preparing for a national GST. - Improve spending quality: - Improve efficiency of social spending and subsidy programs and restrain the government wage bill; Planning Commission to present recommendations. - Rationalize subsidies (food, fertilizers, power) to reduce outlays and improve targeting. - State-level fiscal discipline measures: - Ensure state VAT introduction by 2005 deadline. - Enhance sustainability of states’ pension systems via defined-contribution schemes and parametric changes. - Progress on power sector reforms to restore financial sustainability of state electricity companies and reduce subsidies and contingent liabilities. - Center-state relations proposals for Twelfth Finance Commission: - Use center’s approval of states’ borrowing to harden budget constraints and define/enforce all-inclusive borrowing limits. - Tie debt write-offs or swaps to policy performance. - Construct a state finance database to strengthen monitoring. ### Debt sustainability scenarios and shock vulnerability (Box 2) - Baseline “some reform” scenario: - Central meets FRBMA targets; states do not adjust. - States’ primary deficit remains unchanged (2¾ percent of GDP). - Outcome: general government deficit declines to 6¾ percent of GDP in 2009/10; debt stabilizes at around 82¾ percent of GDP; growth averages around 6¼ percent annually. - Alternative “high reform” scenario: - States adjust; faster implementation of revenue reforms; states’ primary deficit improves by 1 percent of GDP (including VAT by April 2005 and expenditure reforms). - Outcome: general government deficit falls to 5¼ percent of GDP by 2009/10; debt declines to 75 percent of GDP; growth rises to 8 percent over the projection period. - Shock vulnerability: - Baseline most vulnerable to a growth shock: a two-standard-deviation, two-year shock to GDP growth increases debt by 14½ percentage points by 2009/10 and does not stabilize thereafter. - A one-time shock of 10 percent of GDP (size of govt guarantees) would increase debt-to-GDP substantially, though it would decline once the shock subsides. ### Structural reforms, trade, and business climate - Trade liberalization: - Authorities aim to double India’s share in world trade and reduce tariffs to ASEAN levels by 2009. - Peak customs rate reduced from 30 percent to 20 percent; average tariff reached 22 percent in 2004. - India rated an 8 in the Fund’s trade restrictiveness index in 2003 (10 is most restrictive); reliance on nontariff barriers noted. - Staff encouraged taking advantage of favorable external position to reduce tariff and nontariff barriers and speed tariff reduction without undermining fiscal consolidation. - Business climate and labor market: - Labor market rigidities remain a major constraint; estimated need to create 110 million new jobs over the next decade to keep unemployment from rising. - Key bottlenecks: lack of infrastructure, regulatory burden, labor market inflexibility, credit and bankruptcy frameworks, and tax structure. - Authorities reduced list of activities subject to Contract Labor Law and propose SEZs as pilots for flexible labor markets. - Agriculture: - Almost two thirds of the population depends on agriculture; majority of the poor live in rural areas. - Authorities focus on rural infrastructure and priority credit to agriculture; staff recommended more fundamental reforms (crop procurement and price support, reduce fertilizer/water/power subsidies, eliminate interstate barriers). ### Financial sector progress and recommended reforms - Banking soundness: - Gross NPAs declined to 7.2 percent in 2003/04 from 8.8 percent in 2002/03. - Capital adequacy ratios are well above the 9 percent minimum. - Regulatory and supervisory actions: - Loan classification norms tightened: substandard when more than 90 days overdue (from 180 days) starting March 2004; doubtful if overdue more than a year (from 18 months) starting March 2005, with phased provisioning to March 2008. - Prompt corrective action (PCA) framework introduced in 2003. - RBI oversight extended to urban cooperative banks operating across state borders; staff encouraged broadening reforms to all UCBs. - Risk management and deepening credit: - RBI raised the risk-weight on consumer and housing loans in October; consumer credit net NPAs about 1½ percent of loan portfolio. - Banks required to hold 25 percent of deposits in government securities; banks held government securities well in excess (above 40 percent of assets) when interest rates declined. - RBI encouraged banks to build investment fluctuation reserves (IFR) of 5 percent by March 2006. - Staff recommendations: accelerate provisioning norms, strengthen risk management, speed loan recovery procedures (amend SARFAESI), review priority lending burden, and enhance competition by further opening to private and foreign investors (raise FDI cap and eliminate 10 percent voting limit). ### Monetary policy, inflation, exchange rate policy - Inflation drivers and risks: - Inflation mainly supply-driven (international oil and commodity prices, weak monsoon), but buoyant domestic demand raises risk of second-round effects. - Credit surge and partial sterilization increased liquidity. - Policy response: - Recent tightening judged appropriate: reserve requirements increased by 50 basis points to 5 percent in early October; reverse repo rate raised by 25 basis points to 4.75 percent on October 26. - RBI announced it would conduct monetary policy mainly through secondary market operations with government securities. - Staff suggested reviewing operational framework for consistency among instruments and linking administered savings rates more closely to market government bond rates. - Exchange rate: - RBI intends to maintain exchange rate flexibility with intervention limited to smoothing volatility; staff endorsed increased flexibility to absorb inflows and ease sterilization burden. ### Oil prices: burden-sharing, pass-through, and policy - Authorities adopted a burden-sharing approach to higher international oil prices; about 60 percent of the rise in import prices passed through to domestic retail prices so far this year. - Price band mechanism for retail petroleum products: - Adjusts prices automatically every two weeks when import prices vary within a +/-10 percent range relative to historical rolling average; was allowed to work only 3 times since introduction last July. - Fiscal and quasi-fiscal costs: - Fiscal cost of tax-reduction measures limited to about 0.1 percent of GDP so far. - Oil companies bore estimated loss of 0.6 percent of GDP in profits in the first half of the year due to lack of pass-through. - Staff estimates of an additional US$10 per barrel oil price rise (long term, assuming full pass-through and no policy responses): - WPI: + 2.6 percentage points - Growth: - 1.0 percentage point - Current account surplus: - 0.6 percentage points - Policy recommendations: - Allow the automatic price band mechanism to operate fully to pass through oil price fluctuations to consumers. - Shift petroleum taxation to a specific basis because ad valorem excises amplify shock costs for consumers and complicate fiscal planning; FRBMA Roadmap also recommends moving to specific taxation. ### Statistical and data issues - India subscribes to the SDDS (subscribed 12/27/1996; metadata posted 10/30/1997) and is in observance while availing flexibility for timeliness on certain series. - National accounts: - CSO rebased annual national accounts and began publishing quarterly data in 1999; quarterly expenditure-based aggregates to be disseminated starting in 2007. - Price statistics: - CPIs based on weights at least fifteen years old; CSO initiated CPI base-year revision. - WPI published weekly with lag of two weeks and subject to large revisions. - Balance of payments: - Quarterly BOP released with a lag of three months; trade data have valuation, timing, and coverage issues. - Monetary and fiscal statistics: - RBI monetary statistics broadly conform to MFSM but mission recommended fuller sectorization and monthly accrual of interest. - Ministry of Finance posts selected monthly central government fiscal data; no monthly state fiscal data; state-level timeliness and coverage need improvement. - Core Statistical Indicators (as of 11/22/04) provide dates of latest observations and frequency for key series (exchange rates, reserves, reserve/base money, broad money, WPI, exports/imports, GDP, external debt, etc.). ### Key summary indicators and selected figures (highlights) - Nominal GDP (2003/04): US$604 billion. - Population (2003/04): 1.07 billion. - GDP per capita (2003/04): US$565. - Real GDP growth (y/y percent change): 4.4 (2000/01); 5.8 (2001/02); 4.0 (2002/03); 8.2 (2003/04); 6.4 (2004/05 Prov./Proj.). - Central government overall deficit (percent of GDP): 5.1 (2003/04). - General government deficit (percent of GDP): 9.7 (2003/04). - General government debt (percent of GDP): 82.4 (2003/04 estimate). - Gross official reserves (US$ bn, end-period): 113.0 (2003/04); 136.8; 130.7 (Dec. 3, 2004); reserves reached US$129 billion by mid-January 2005. - Exports (US$ billions): 64.7 (2003/04); 81.4 (2004/05). - Imports (US$ billions): 80.2 (2003/04); 105.0 (2004/05). - WPI inflation (period average): series include 5.4 (2003/04); 6.9; 8.7; monthly entries show 7.3; 7.5; 7.3; 7.0. - Broad money growth (y/y percent change): 16.6; 15.7; 14.4; 14.2; 13.7 (series entries). - Credit to commercial sector (in billions of rupees, end-period): 8,990; 10,179; 10,849; 11,017; 11,731; 11,938; 12,114 (series entries). - Banking sector soundness indicators: - Gross NPAs: 7.2 percent in 2003/04. - CRAR (risk-weighted capital adequacy ratio): 12.7; 12.9; 13.7; 13.4 (periods cover 1999/00–Q2 2004/05). - Oil import exposure: - About 75 percent of oil needs are imported. - Oil imports represent about 20 percent of total goods and services imports. - Average import price up US$10 per barrel (about 35 percent) in the last year to an average US$38 in 2004. *Source: Executive Summary and selected excerpts, IMF staff report (content unit: _cr0586).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview and key messages - The Indian economy rebounded to more than 8 percent growth in 2003/04, supported by a strong monsoon. - Staff projects growth will remain robust, at 6.4 percent this year (2004/05), despite uneven monsoons and high oil prices. - To meet the government’s objective of accelerating growth to more than 8 percent on a sustainable basis, the report emphasizes the need for: fiscal consolidation, enhanced infrastructure, and further structural reforms. - The Fiscal Responsibility and Budget Management Act (FRBMA) provides a solid framework for achieving fiscal sustainability, but stronger state-level action is required since states account for half of the general government deficit. - Reconciling the government’s ambitious social agenda (the Common Minimum Program, CMP) with fiscal adjustment will be difficult; large increases in infrastructure and social spending are expected to be implemented only over the long term and subject to fiscal constraints. - Acceleration of structural reforms—liberalizing trade and labor laws, increasing FDI, and further removing impediments to investment—is key to raising growth and employment. - The financial sector has strengthened considerably; further opening to private and foreign investors and strengthened risk-based supervision would help the sector support higher growth. - Recent monetary tightening by the RBI was appropriate given rising inflation risks; greater exchange rate flexibility would help absorb capital inflows, fight inflation, and facilitate adjustment. ### Recent developments and outlook - 2003/04: Growth rebounded to more than 8 percent, the highest in a decade and among the highest in the world. - 2004/05: Staff expects growth of 6.4 percent, within the RBI’s 6–6½ percent forecast. GDP grew 7½ percent in the first quarter, driven by services and industry. - Trade and external balances: - The trade deficit widened to 2.6 percent of GDP in the fiscal year to September, driven by higher oil prices and strong investment demand. - Services income, tourism receipts, and remittances remained strong and the current account was projected to end 2004/05 in a small surplus. - Capital flows, reserves, and exchange rate: - Reserves rose to US$113 billion during 2003/04. - International reserves increased further during 2004/05, reaching US$131 billion at the start of December. - Large portfolio inflows, remittances, and foreign direct investment supported reserve accumulation; external bond issuances by corporates and banks increased. - The RBI allowed increased two-way flexibility in the exchange rate; the rupee appreciated about 3 percent since May. - The rupee has depreciated slightly in real effective terms in line with other regional currencies. - The Bombay stock exchange index rose 25 percent in June-November, reaching an all-time high. - Inflation and monetary conditions: - WPI inflation accelerated to close to 9 percent in August year-on-year, before declining to around 7½ percent more recently on lower food prices. - CPI inflation for industrial workers and staff’s estimate of core inflation have accelerated. - Partial sterilization of large capital inflows increased banking system liquidity and credit surged. - Inflation was expected to remain around 7 percent at end-2004/05 as domestic demand stays strong and more of the rise in international oil prices passes through. ### Fiscal developments and the FRBMA - Central government: - For the first time since the mid-1990s, the central government overall deficit came in below target in 2003/04. - The overall central deficit fell to 5.1 percent of GDP in 2003/04, almost 1 percent of GDP lower than the previous year. - The current deficit declined to 3.5 percent of GDP from 4.4 percent of GDP. - Tax revenues exceeded expectations due to buoyant corporate tax receipts; spending fell short of budget. - States: - States’ overall deficit deteriorated to an estimated 5.1 percent of GDP in 2003/04, nearly 1 percent of GDP worse than the previous year. - States face pressure from interest and pension payments, which absorb about 70 percent of states’ tax revenue, and subsidies—particularly to the power sector—have increased. - States’ debt has risen to 30 percent of GDP. - The deterioration in state finances offset the central improvement; staff estimates the general government deficit remained broadly stable at 9.7 percent last year. - FRBMA and policy implications: - The FRBMA provides a solid framework for fiscal sustainability. Staff strongly supported rapid implementation of the government’s FRBMA Roadmap, emphasizing front-loaded tax reform and improvement in expenditure quality. - States are not covered by FRBMA and need strengthening; the center could more effectively use incentive mechanisms to push states to reform. - Staff cautioned against plans to utilize foreign exchange reserves to finance infrastructure spending. ### The Common Minimum Program (CMP) and fiscal implications - CMP objectives and medium-term measures: - The CMP commits to “economic reforms with a human face” and places promotion of investment at the center of a strategy to achieve sustained growth of 7–8 percent per year over the next decade. - Major CMP commitments include: - A major increase in infrastructure, in particular for rural areas; meeting infrastructure needs are estimated to cost an additional 3-4 percent of GDP per year. - Universal access to basic education and health, through a gradual doubling of expenditure to 6 percent of GDP and 2–3 percent of GDP, respectively. - A guarantee of 100 days of minimum wage employment for one person in each poor household, at an estimated net cost of 1 percent of GDP (two-thirds of which borne by the central government). - The government expects to fund higher spending (around 10 percent of GDP) by better targeting of subsidies, broadening the tax base, increased tax compliance, improved tax administration, and an earmarked surcharge on taxes for education; the government also committed to introducing a state-level VAT. - CMP implementation steps already taken: - The budget introduced a 2 percent education surcharge, a tax on securities transactions, and broadened the base of the service tax. - FDI caps on civil aviation were increased. - States are expected to introduce the VAT by April 2005. ### Structural reforms and growth constraints - Progress since July 2003 consultation: - Adoption of FRBMA; central government embarked on defined-contribution pension reform. - Trade tariffs were lowered and the capital account liberalized further; FDI cap on aviation raised. - Privatization advanced with sale of minority stakes in six state-owned companies. - The list of small industries subject to protection and size restrictions continued to be narrowed. - Financial sector initiatives: improved corporate governance and gradual migration to regulatory best practices. - Staff recommendations: - Accelerate reforms to remove constraints to growth, including further liberalization of trade and labor laws and faster removal of other key constraints. - Increase private sector participation in infrastructure by improving the business climate; pursue measures to attract FDI and liberalize small-scale industry. ### Financial sector - The financial sector has strengthened considerably and can play a larger role in supporting growth. - Staff encouraged further opening to private and foreign investors, and continued strengthening of risk-based supervision. ### Inflation, monetary policy, and exchange rate policy - Inflation drivers and risks: - Inflation mainly reflects supply-driven price rises (international oil and commodity prices, weak monsoon), but buoyant domestic demand raises the possibility of second-round effects. - Credit surge and partial sterilization of inflows have increased domestic liquidity. - Policy response: - The recent tightening of monetary policy was judged appropriate. - The RBI has allowed increased exchange rate flexibility in response to large capital inflows; further increasing exchange rate flexibility would be helpful if inflows remain strong to fight inflation and facilitate economic adjustment. ### Oil prices and burden-sharing - The authorities’ burden-sharing approach to higher oil prices is understandable but may not be sustainable. - With higher oil prices likely to remain for some time, additional pass-through to domestic prices would be desirable to help restore fiscal and external balances. ### Consultation focus and policy priorities - The consultation centered on how the authorities will: - Implement the needed fiscal adjustment consistent with the CMP commitments. - Push India to a higher growth path through fiscal consolidation, infrastructure investment, and structural reforms. - Strengthen the financial sector to better support growth and poverty reduction. - Respond to rising inflation pressures and sustained higher oil prices. *Source: Executive Summary, IMF staff report (content unit: _cr0586 - Executive Summary).* ### 13. The medium-term outlook hinges crucially on the ability of the government to ### 13. The medium-term outlook hinges crucially on the ability of the government to ### Medium-term outlook and risks - Baseline staff scenario: growth of 6–6½ percent—somewhat above last decade’s average—as economic reforms continue and the nascent recovery in investment takes hold. - With declining world oil prices (as projected in the WEO), inflation would gradually fall to around 4 percent and the current account continue in surplus. - Upside scenario: Faster implementation of reforms (for example, a broader-than-planned tax reform and faster adjustment by state governments) could accelerate growth significantly. - Downside risks: - Domestic policy slippages—especially failure to bring the deficit under control—could push up interest rates and hold back investment. - Higher-than-expected world interest rates could slow or reverse inflows to India and necessitate domestic rate rises. - Higher oil prices would slow economic growth and increase inflationary pressures. ### A. How Can the Necessary Fiscal Adjustment be Achieved? - FRBMA commitments and targets: - The FRBMA commits the central government to current balance by 2008/09. - Implementing rules mandate minimum annual reductions of 0.5 percentage points of GDP in the current deficit and 0.3 percentage points of GDP in the overall deficit. - The government’s Medium-Term Fiscal Policy Statement sets more ambitious three-year deficit targets with the view of achieving balance by the targeted date. - Staff assessment of FRBMA outcomes: - If the center meets FRBMA but states do not adjust, debt ratio would stabilize at about 82 percent of GDP by 2009/10 and the general government deficit would remain high, at 7 percent of GDP. - Public debt profile: largely domestic, rupee-denominated, and long-term; comfortable reserves limit external vulnerability. - Vulnerability: the debt path under the baseline is vulnerable to an adverse shock to growth; bringing states into the adjustment effort matters—under an alternative scenario where states consolidate, public debt would decline to 75 percent of GDP and additional space would be freed up for high priority spending. - 2004/05 budget and near-term execution: - 2004/05 budget viewed as interim; tax base broadened with inclusion of 13 new taxable services, while some new tax exemptions were introduced. - Mechanisms to improve compliance introduced, notably a centralized taxpayers’ information network. - Given overperformance last year relative to budget estimates, the adjustment required to meet this year’s target is 0.1 percent of GDP. - Staff projects a 0.2 percent of GDP revenue shortfall for the year, the result of cuts in oil excises and steel taxes. - The accumulated current deficit exceeded 45 percent of the full-year budget estimate for 2004/05; authorities argued late budget approval delayed revenue measures. - Fiscal adjustment instruments and recommendations: - Front-loaded tax reform is seen as the bulk of adjustment: replace state-level cascading sales tax and central VAT on manufacturing with a national GST; remove most exemptions; improve tax administration (Kelkar report roadmap). - Staff supported quick implementation to generate an expansionary fiscal adjustment: broader base allowing lower rates to enhance tax productivity. - Practical sequencing agreed by authorities: - Launch state VAT on goods by April 2005. - Extend central VAT to more services. - Continue preparing for a national GST as a broader-based and more efficient eventual system. - Improve spending quality: Roadmap recommends improving efficiency of social spending and subsidy programs and restraining the government wage bill; Planning Commission to present recommendations. - Rationalization of subsidies (food, fertilizers, power) to reduce outlays and improve targeting. - State-level fiscal discipline—staff encouraged authorities to: - Ensure that state VAT on goods is introduced by the 2005 deadline. - Enhance sustainability of states’ pension systems through defined-contribution schemes and parametric changes. - Make progress on power sector reforms to restore financial sustainability of state electricity companies and reduce subsidies and contingent liabilities. - Center-state relations—staff suggestions for Twelfth Finance Commission considerations: - Use center’s approval of states’ borrowing to harden budget constraints; define and enforce all-inclusive borrowing limits for states. - Debt write-offs or swaps with the center tied to policy performance to reduce states’ debt burden. - Construct a state finance database to strengthen monitoring capacity. ### Box 2 (Debt sustainability scenarios and shocks) — key projections and findings - Baseline “some reform” scenario assumptions: - Central government meets FRBMA deficit targets; states do not adjust. - Tax reforms implemented more gradually than FRBMA Roadmap, producing lower revenue projections. - Offsetting measures: reduce subsidies, wages, other non-interest current expenditures, reorient spending toward public investment. - States’ primary deficit remains unchanged (2¾ percent of GDP). - Outcome: general government deficit declines to 6¾ percent of GDP in 2009/10; debt stabilizes at around 82¾ percent of GDP with growth averaging around 6¼ percent annually. - Positive growth-interest differential of about 3 percentage points on average helps stabilize the debt-to-GDP ratio. - Alternative “high reform” scenario: - States adjust; faster implementation of all revenue reforms in the FRBMA roadmap. - States’ primary deficit improves by 1 percent of GDP, including introduction of the VAT by April 2005 and expenditure reforms (power sector, wage and pension, subsidy reforms); states aided by higher grants and shared revenues. - Outcome: general government deficit falls to 5¼ percent of GDP by 2009/10; debt would decline to 75 percent of GDP. - Growth rises to 8 percent over the projection period as public spending is re-oriented toward more productive uses and the interest rate falls. - Shock vulnerability: - Baseline scenario most vulnerable to a growth shock: a two-standard-deviation, two-year shock to GDP growth increases debt by 14½ percentage points by 2009/10, which does not stabilize even after the shock subsides. - A one-time shock of 10 percent of GDP (the size of government guarantees) would increase the debt-to-GDP ratio substantially, though the ratio would decline once the shock subsides. ### B. How Will the CMP be Reconciled with the Need for Fiscal Adjustment? - CMP fiscal challenge: - Anticipated increased outlays for infrastructure and social programs estimated to cost up to 10 percent of GDP over the medium term. - Authorities expect to fund higher spending by better targeting subsidies, broadening the tax base, and maintaining their surcharge on taxes earmarked for education; CMP does not specify a full envelope of compensating revenue measures. - Implementation stance: - Visible action on CMP goals necessary now, but full achievement only over the longer term and subject to fiscal constraints. - Guaranteed employment program initially experimental in poorest regions; prioritization considered key. - Health and education spending would rise, but must be made more effective before full increases are justified. - As bulk of new spending (schooling, healthcare, rural infrastructure) is under state purview, states must intensify reform efforts. - Private sector and infrastructure financing: - Authorities count on private sector participation to remedy infrastructure gap; priority on creating a regulatory framework: transparent policy regime, independent regulators, and simple rules to enhance PPP prospects and reduce demand for large guarantees. - Proposal to use reserves: - Debate on using reserves: proposal to use US$15 billion of reserves over 3 years (0.6 percent of GDP per year) for infrastructure spending through the budget; FRBMA deficit targets would be adjusted upward for that period. - Staff concerns with using reserves: - Would damage credibility of FRBMA. - Transfer of RBI reserves may compromise perceived central bank independence. - A return to monetizing the deficit would reverse progress in lowering inflation and interest rates. - Since imports represent a small part of infrastructure spending, using reserves would either inject additional liquidity into an economy facing inflation challenges or require additional spending to finance the domestic portion. - Question whether lack of financing is the main impediment to infrastructure investment—private sector representatives indicated interest if business climate is improved. - Staff suggested priority be placed on addressing business climate and regulatory issues and encouraged the RBI to manage a portion of its reserves more actively while keeping risks within acceptable parameters and levels to improve returns and increase government revenue. ### C. How Far Do Planned Structural Reforms Go? - Reform priorities and constraints: - Progress in addressing structural rigidities is key to raising growth; authorities emphasize agriculture development, further trade and capital liberalization, and improving the investment climate. - Other reforms (labor market liberalization and privatization) lack consensus and are not advanced now. - Agriculture reform as critical for growth and poverty reduction: - Almost two thirds of the population depends on agriculture for income; the majority of the poor live in rural areas. - Authorities focus on rural infrastructure and increased priority credit to agriculture to remedy long-term fall in productivity. - Staff welcomed priority but noted: - Rural infrastructure requires significant resources, especially from states. - Efforts to induce banks to lend more to agriculture could exacerbate risks—NPAs appear to be higher in priority lending. - Staff recommended more fundamental reforms to unleash agricultural potential: - Changes in crop procurement and price support systems to improve incentives to diversify and export. - Reducing fiscal burden of inefficient fertilizer, water, and power subsidies to free resources for infrastructure. - Eliminate remaining interstate barriers to agricultural trade to expand market opportunities. *Source: IMF staff report text provided in the content unit.* ### 30. The authorities aim at doubling India’s share in world trade and are committed ### 30. The authorities aim at doubling India’s share in world trade and are committed ### Trade liberalization: progress, objectives, and staff recommendations - Authorities aim at doubling India’s share in world trade and are committed to reducing tariffs to ASEAN levels by 2009. - Recent changes: - Peak custom rate reduced from 30 percent to 20 percent. - The average tariff reached 22 percent in 2004. - Staff assessment and recommendations: - India’s trade regime remains restrictive; considerable scope for trade liberalization remains. - Staff encouraged the authorities to take advantage of the favorable external position to reduce both tariff and nontariff barriers. - With tax reform in the works, staff noted the pace of tariff reduction could be increased without undermining efforts at fiscal consolidation. - Benefits from liberalization would be magnified by improvements in infrastructure, especially ports, and cuts in red tape; authorities were working on simplifying customs clearance. - Staff encouraged a focus on multilateral liberalization to mitigate potential adverse effects of regional integration, such as trade diversion. - Regional and preferential arrangements mentioned by authorities: - India has reached a Free Trade Agreement with other South Asia countries (SAFTA). - Negotiating FTAs with Thailand, ASEAN, and Singapore. - Signed a preferential trade agreement with Mercosur. - Authorities view these agreements as fully consistent with multilateral liberalization because they build regional ties and lay groundwork for wider cooperation. - Staff and authorities' views on global negotiations: - Completion of the Doha round seen by authorities as having potentially important benefits for India, with staff arguing that rolling back agricultural supports in industrial countries would be key. - Authorities expect to benefit from the elimination of textile quotas (quota-constrained), but agreed with staff that the extent of gain would depend on progress in structural reform. ### Trade restrictiveness and non-tariff measures - India rated an 8 in the Fund’s trade restrictiveness index in 2003 (10 is most restrictive). - While tariffs have been reduced and quantitative restrictions largely eliminated in 2001, India has increasingly relied on nontariff barriers, including technical standards and regulations, sanitary rules, local content schemes and quotas. - India initiated 15 percent of all anti-dumping cases during 1995–2004. ### Capital account liberalization: cautious approach and measures implemented - Staff supported the authorities’ cautious approach to liberalizing the capital account, with authorities viewing fiscal consolidation and further strengthening of the financial sector as preconditions for fully opening to capital flows. - Measures implemented: - Corporates’ access to international capital markets eased: RBI approval required only for external loans above US$500 million (from US$50 million) as long as minimum maturity requirements are met. - The ceiling on foreign investors’ holdings of government bonds was raised. - Limits on capital outflows for residents were relaxed. - Staff recommendation: - Address fiscal and financial sector vulnerabilities limiting further opening. ### Business climate, labor market rigidities, and structural bottlenecks - Staff welcomed attention to improving India’s business climate but noted labor market rigidities remain one of the greatest challenges of doing business in India and deter job creation in the formal sector—important given India’s rising labor force. - Authorities’ stance: - Acknowledge labor rigidities are a problem but seek cautious advancement given the absence of an adequate social safety net and need to coordinate closely with states. - Government reduced the list of activities subject to Contract Labor Law. - Proposing to use Special Economic Zones to introduce more flexible labor markets on a “pilot” basis. - Labor and employment context: - With India’s youthful demographics, it is estimated that 110 million new jobs need to be created over the next decade just to keep the unemployment rate from rising. - Key bottlenecks identified that would make India a better place to do business: - Lack of Infrastructure: enabling legal environment, establishing regulators, improving regulatory burden; 2003 Electricity Act and new investment code cited as helpful. - Regulatory burden: need to streamline entry and operation regulations at all levels; customs clearance improved to an average of 7 days (relative to China’s 10 days) but it still takes 84 days to start a business in India compared to 46 days in China. - Labor market flexibility: remove legal restrictions on layoffs and contract work; experiences in Andhra Pradesh and Karnataka show progress is possible within existing legal framework. - Credit: improving bankruptcy and loan recovery frameworks to ease credit constraints, especially for small enterprises. - Tax reform: a uniform state-level VAT and lower trade tariffs to promote export competitiveness. - Industrial policy: eliminate protections and investment ceilings on small industry; privatization and liberalization of FDI could improve efficiency and attract investment. - Sector-specific note: - Textile sector reforms (labor laws and lifting remaining small firm protections) needed to maximize potential from the phase-out of Multi Fiber Agreement quotas in 2005. ### Financial sector: progress, vulnerabilities, and further reforms - Banking system soundness and supervision progress: - Gross nonperforming assets (NPAs) declined to 7.2 percent in 2003/04 from 8.8 percent in 2002/03, despite tightening of loan classification norms. - Capital adequacy ratios are now well above the 9 percent minimum. - Specific reforms taken: - RBI tightened loans classification norms in line with international best practice. - Note: banks and urban cooperative banks (UCBs) must classify a loan as substandard when it is more than 90 days overdue (instead of 180 days previously) starting in March 2004, and as doubtful if overdue for more than a year (18 months previously) starting in March 2005. Banks allowed to phase in additional provisioning to meet the latter change until March 2008. - Staff suggested accelerating implementation of provisioning norms since banks have up to 2009 to meet provisioning standards on NPAs. - To strengthen governance in UCBs, government extended RBI oversight to boards of UCBs that operate across state borders and gave RBI power to grant licenses to such UCBs that want to undertake banking activities; staff encouraged broadening these reforms to all UCBs. - A prompt corrective action (PCA) framework was introduced in 2003 to guide supervisory intervention once early signs of distress are identified. - RBI addressing NPAs in remaining Development Finance Institutions (DFIs) by merging them with public sector banks; staff stressed ensuring new entities operate under commercial principles. - Consumer and retail credit: - RBI raised the risk-weight on consumer and housing loans in October. - Consumer credit is low by international standards; net NPAs on retail credit remain small, at about 1½ percent of loans portfolio. - Rapid expansion of these loans may challenge risk assessment and management at some banks. - Interest rate risk and reserves: - Banks required to hold 25 percent of deposits in government securities as reserves. - With declining interest rates until recently, banks held government securities well in excess of these requirements, to above 40 percent of assets. - RBI encouraged banks to build investment fluctuation reserves (IFR); banks have up to March 2006 to build IFR of 5 percent of portfolios that are marked-to-market. - As a one-time measure to reduce exposure to interest risk, RBI allowed banks to shift securities to the held-to-maturity category after immediately providing for possible losses. - Staff recommendations on risk management and further reforms: - Continue close monitoring of risk management practices of individual banks; provide incentives and tools for appropriate market risk management. - Encourage asset-liability management techniques, use of interest rate derivatives, and provisioning to manage interest risks. - Push banks to accelerate setting aside capital to cover market risks (due to be completed only by 2006); caution that a uniform IFR penalizes sound banks unnecessarily and may be insufficient for weaker banks. - Further actions to deepen bank credit (currently 35 percent of GDP): - Speed loan recovery procedures; authorities plan to amend SARFAESI to eliminate frivolous appeals by debtors. - Review burden on banks of priority lending schemes, particularly to agriculture. - Enhance competition by further opening to private and foreign investors, including raising the FDI cap in private banks and eliminating the 10 percent limit on voting rights in a bank. ### Monetary policy, inflation, exchange rate flexibility, and RBI operational framework - Inflation context and RBI policy stance: - RBI faces the challenge of balancing the risk of slowing the nascent investment recovery and preventing supply-side inflation from generating second-round effects. - Staff and authorities agreed inflation has thus far been mainly a supply-side phenomenon. - Factors pointing to potential for second-round effects: buoyant demand, rapid credit expansion, a still comfortable liquidity, and the fact that the full impact of oil prices has yet to be absorbed in domestic prices. - Staff suggested economic activity would likely not be unduly compressed by a modest hike in interest rates and that timely action would avoid the potential need for more aggressive action later. - Recent RBI actions: - Increase in reserve requirements by 50 basis points to 5 percent in early October. - RBI raised the reverse repo rate by 25 basis points to 4.75 percent at its mid-year policy meeting on October 26. - Enhancing monetary policy effectiveness: - Need to review the policy operating framework to ensure consistency among instruments—policy interest rates, primary and secondary market sales of government securities, and reserve requirements—to provide a clear signal of policy stance and strengthen monetary transmission. - RBI noted a trade-off between flexibility from multiple tools and clarity of policy signal from a single instrument. - RBI announced at its mid-year policy review it would conduct monetary policy mainly through secondary market operations with government securities. - Staff suggested additional measures, including linking administered savings interest rates more closely to market-determined government bond rates to limit dampening impact on policy transmission to aggregate demand, and developing more meaningful and timely measures of consumer inflation and inflation expectations. - Exchange rate policy: - RBI intends to maintain exchange rate flexibility, allowing increasing flexibility in the exchange rate with intervention limited to smoothing volatility. - Staff agreed and noted continued capital inflows point to desirability of more exchange rate flexibility to enhance the role of the exchange rate as a shock absorber, help in higher inflation environment, and ease sterilization burden; it would also encourage market players to hedge exchange rate risk. ### Resilience to higher oil prices and oil import exposure - Oil consumption and import dependence: - India’s demand for oil has more than tripled during the past 20 years. - Large elasticity of oil demand to growth of around 0.8–1. - About 75 percent of oil needs are imported. - Oil imports represent about 20 percent of total goods and services imports. - Price change noted: - The average import price for India is up US$10 per barrel (about 35 percent) in the last year to an average US$38 in 2004. *IMF staff report content.* ### 42. The authorities have adopted a burden-sharing approach to bearing the costs of ### _cr0586 - 42. The authorities have adopted a burden-sharing approach to bearing the costs of ### Oil price burden-sharing and pass-through - Authorities adopted a burden-sharing approach to sharp increases in international oil prices. - About 60 percent of the rise in import prices has been passed through to domestic retail prices so far this year. - The price band mechanism for retail petroleum products: - Allows oil firms to adjust prices automatically every two weeks when import prices vary within a +/-10 percent range relative their historical rolling average. - Was allowed to work only 3 times since it was introduced last July. - Government measures to contain inflationary pressures included lowering selected ad valorem excises and import duties on several occasions. - In November, the authorities increased domestic retail prices by 5–10 percent for select petroleum products. ### Fiscal and quasi-fiscal costs - The fiscal cost of tax-reduction measures is so far limited to about 0.1 percent of GDP, since the tax rate reduction is partially offset by a higher base value of imports. - Oil companies have borne an estimated loss of 0.6 percent of GDP in profits in the first half of the year due to the lack of pass-through. - Staff and authorities agreed further lowering petroleum taxes would be difficult to sustain given India’s fiscal position; increased quasi-fiscal costs on state enterprises would become increasingly problematic. ### Staff estimates of an additional US$10 per barrel oil price rise (long term, assuming full pass-through and no policy responses) - WPI: + 2.6 percentage points - Growth: - 1.0 percentage point - Current account surplus: - 0.6 percentage points - Note: These estimates reflect the net effect of a reduction in incomes and oil demand in India as a result of the price increase, and of lower exports from a slowdown in global growth. The Fund’s MULTIMOD simulations predict a 0.25 percentage point fall in world demand in this context. ### Analysis of pass-through vs. protection - Passing on price increases to consumers would, in the longer run, minimize potential costs to the economy of permanent price changes by: - Reducing distortions from suppressed domestic prices. - Providing incentives for increased efficiency in energy use. - India has reduced the oil intensity of GDP by one-fifth since the start of the 1990s, aided by diversification toward coal and gas. - The poor could be at least partially protected by targeted subsidies. ### Policy recommendations - Allow the automatic price band mechanism to operate fully to pass through oil price fluctuations to consumers. - Shift petroleum taxation to a specific basis because: - Ad valorem excises amplify the cost of oil price shocks for consumers. - Ad valorem excises complicate fiscal planning. - The FRBMA Roadmap also recommends moving to specific taxation; a ministerial committee was reviewing excise taxes and its conclusions were expected soon. ### Broader staff appraisal highlights (relevant policy context) - The recent tightening of monetary policy was appropriate: - RBI’s 25 basis point increase in the repo rate signaled commitment to price stability and stabilized inflation expectations. - Credit is expanding rapidly; RBI needs to continue monitoring inflation closely and take prompt action as needed. - Staff endorses the RBI’s two-way flexibility in exchange rate management; increased exchange rate flexibility could help if capital inflows remain strong and upward pressure on the rupee continues. - Using RBI reserves to finance infrastructure is discouraged because it could compromise RBI independence and add to inflation pressures. - Continued reforms recommended across fiscal framework, taxation, state finances, infrastructure financing, agriculture, external liberalization, and financial sector supervision. *Source: IMF staff report content unit _cr0586 (provided excerpt).* ### 61. It is proposed that the next Article IV consultation take place on the standard ### _cr0586 - 61. It is proposed that the next Article IV consultation take place on the standard ### Growth - Growth remains robust despite below-average rainfall and a likely slowdown in agriculture growth. - Real GDP Growth (annual percentage change): charts cover 1999/00–2004/05 (visuals described). - Agriculture Growth (annual percentage change): charts cover 1999/00–2004/05 (visuals described). - Business Confidence Index (May 1994=100): series for 2000–2004 (visuals described). - Industrial Output by Use (12-month percent change, 3-month moving average): capital goods and consumer goods series (visuals described). - Automobile Production (In thousands, 3-month moving average): passenger and commercial vehicles series (visuals described). - Industrial Production (12-month percent change, 3-month moving average): series for 2000–2004 (visuals described). - Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; NCAER; and IMF staff projections. ### External Sector - The trade deficit is widening on high oil prices and strong capital goods imports. - Trade Deficit and Imports (U S $ billion; four-quarter percent change): charts for petroleum imports and capital goods imports (visuals described). - Competitiveness and Exports: Share of global exports (left scale) and REER (right scale), percent (2000Q1=100) (visuals described). - Goods and Services Trade (12-month percent change; 3-month moving average): exports of goods and exports of services series (visuals described). - Current Account Balance (In billions of U.S. dollars): projected to remain in surplus this year. - Capital Flows (In billions of U.S. dollars): Debt, Portfolio, FDI series show recovery. - International Reserves (In billions of U.S. dollars): reserves remain comfortable. - Sources: Data provided by the Indian authorities; and CEIC Data Company Ltd. - Note: Exports data labeled as "1/ Customs data; based on U.S. dollar values." ### Money and Inflation - High commodity prices have triggered a run-up in inflation. - Inflation Indicators (12-month percent change): WPI, Core WPI (trimmed means), CPI - industrial workers (visuals described). - To avoid second-round effects, the central bank has raised its repo policy rate. - Interest Rates (Percent per annum): Repo rate and Real lending rate (prime lending rate deflated by the WPI). - Non-food Credit Growth (12-month percent change): credit has been growing rapidly. - Broad Money Growth (12-month percent change): expansion in money has decelerated. - Excess Liquidity (In billions of rupee): repurchase operations and market stabilization bonds series (Nov-02 to Nov-04). - Yield Curve (Percent per annum): 1D, 3M, 1Y, 5Y, 10Y — May 2004 and December 2004 series. - Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; and IMF staff projections. ### Fiscal Trends - The public sector has run sizable deficits; central government is making efforts to adjust. - General Government Deficit (In percent of GDP): series and projections for 1997/98–2004/05 and projections to 2009/10 under Baseline and High growth scenarios (visuals described). - Central Government Deficit (In percent of GDP): current and overall deficit components, series 1997/98–2004/05 (visuals described). - State Government Deficit (In percent of GDP): states’ fiscal situation is worsening; current and overall deficit series (visuals described). - General Government Debt (In percent of GDP): domestic and external components; debt ratio is increasing. - The Fiscal Responsibility Act is expected to engineer consolidation, but large public debt will remain a burden. - Sources: Data provided by the Indian authorities; and staff projections. - Note: "1/ Excluding privatization receipts." ### Millennium Development Goals (selected indicators) - Population below $1 per day (in percent): 34.7 (year shown in table; series 1990–2002). - Poverty gap at $1 per day (in percent): 8.2. - Percentage share of income or consumption held by poorest 20 percent: 8.9. - Prevalence of child malnutrition (in percent of children under 5): 63.9; 53.2; 46.7 (series). - Population below minimum level of dietary energy consumption (in percent): 25.0; 21.0; 21.0. - Net primary enrollment ratio (in percent of relevant age group): 83.3. - Percentage of cohort reaching grade 5 (in percent): 58.6; 59.0. - Youth literacy rate (in percent of ages 15-24): 64.3; 68.5; 72.6. - Ratio of girls to boys in primary and secondary education (in percent): 70.0; 75.0; 78.6. - Under 5 mortality rate (per 1,000): 123.0; 104.0; 94.0; 90.0. - Infant mortality rate (per 1,000 live births): 84.0; 74.0; 68.0; 65.0. - Immunization, measles (in percent of children under 12 months): 56.0; 72.0; 56.0; 67.0. - Maternal mortality ratio (modeled estimate, per 100,000 live births): 540.0. - Births attended by skilled health staff (in percent of total): 34.2; 42.5. - Prevalence of HIV, female (in percent of ages 15-24): 0.7. - Contraceptive prevalence rate (in percent of women ages 15-49): 44.9; 40.7; 51.8. - Incidence of tuberculosis (per 100,000 people): 178.0; 167.8. - Tuberculosis cases detected under DOTS (in percent): 1.0; 23.0; 31.1. - Forest area (in percent of total land area): 21.4; 21.6. - Access to an improved water source (in percent of population): 68.0; 84.0. - Access to improved sanitation (in percent of population): 16.0; 28.0. - Fixed line and mobile telephones (per 1,000 people): 6.0; 13.0; 43.8; 51.9. - Personal computers (per 1,000 people): 0.3; 1.3; 5.8; 7.2. - Population (in billions): 0.85; 0.93; 1.04; 1.06. - Gross national income (in billions of U.S. dollars): 330.6; 349.6; 477.9; 494.8. - GNI per capita (in U.S. dollars): 390.0; 380.0; 460.0; 470.0. - Source: World Development Indicators database, April 2004. - Note: "1/ In some cases the data are for earlier or later years than those stated." ### Summary Indicators (Table 2 highlights) - Nominal GDP (2003/04): US$604 billion. - Population (2003/04): 1.07 billion. - GDP per capita (2003/04): US$565. - Quota: SDR 4,158.2 million. - Growth (y/y percent change): Real GDP (at factor cost) series includes 4.4, 5.8, 4.0, 8.2, 6.4 for 2000/01–2004/05 (Prov./Proj. columns). - Industrial production: series includes 5.0, 2.7, 5.8, 7.0, ...10.1. - Wholesale prices (y/y percent change, period average): 7.2; 3.6; 3.4; 5.4; 6.9; 8.7; 7.3; 7.5; 7.3; 7.0 (monthly Aug–Dec entries shown). - Consumer prices - industrial workers: 3.8; 4.3; 4.0; 3.9; 4.7; 4.6; 4.8; 4.6 (monthly entries). - Gross saving (percent of GDP): 23.7; 23.5; 24.2; 26.3; 25.7. - Gross investment (percent of GDP): 24.4; 23.1; 23.3; 24.6; 25.3. - Central government deficit (percent of GDP): 5.7; 6.3; 6.0; 5.1; 5.0. - General government deficit (percent of GDP): 10.0; 10.1; 9.6; 9.7; 9.3. - General government debt (percent of GDP): 72.9; 77.3; 81.6; 81.3; 82.4. - Broad money growth (y/y percent change, end-period): values include 16.8; 14.1; 14.7; 16.6; 15.7; 14.4; 14.2; 13.7. - Credit to commercial sector (y/y percent change, end-period): 15.8; 11.8; 14.8; 13.2; ...26.7. - 91-day treasury bill yield (percent, end-period): 8.7; 6.1; 5.9; 4.2; 4.6; 4.9; 5.3; 5.2; 5.1. - 10-year government bond yield (percent, end-period): 10.4; 7.4; 6.1; 5.1; 6.2; 6.2; 6.9; 7.2; 6.7. - Stock market (y/y percent change, end-period): -27.9; -3.7; -12.1; 83.4; ...8.7. - Exports (US$ billions): 45.5; 44.7; 53.8; 64.7; 81.4; monthly Aug–Dec entries listed. - Imports (US$ billions): 57.9; 56.3; 64.5; 80.2; 105.0; monthly entries listed. - Current account balance (US$ billions): -2.7; 3.4; 6.3; 10.6; 2.5; ... (in percent of GDP) -0.6; 0.7; 1.2; 1.7; 0.4. - Foreign direct investment, net: 3.3; 4.7; 3.2; 3.4; 5.3. - Gross reserves (US$ bn. end-period): 42.9; 54.7; 76.1; 113.0; 136.8; 118.2; 119.6; 121.3; 128.2; 130.7. - (In months of imports): 7.3; 8.0; 9.3; 10.5; 10.9; 12.2; 12.3; 12.5; 13.1; 13.4. - External debt (percent of GDP, end-period): 22.6; 21.1; 20.2; 17.6; 16.0. - Exchange rate (rupee/US$, end-period): 46.6; 48.8; 47.5; 43.6; ...44.0. ### Balance of Payments (Table 3 highlights) - Current account balance (fiscal year basis): 3.4; 6.3; 10.6; 2.5 for 2001/02–2004/05 (Prov./Proj./quarterly breakdowns included). - Merchandise trade balance (US$ billions): -11.6; -10.7; -15.5; -23.6 (2001/02–2004/05). - Merchandise exports (US$ billions): 44.7; 53.8; 64.7; 81.4 (annual) and quarterly entries (2004/05 Q1–Q4) listed. - Merchandise imports (US$ billions): 56.3; 64.5; 80.2; 105.0 and quarterly entries listed; oil imports and non-oil breakdowns provided. - Non-factor services balance and receipts/payments: receipts 17.1; 20.8; 24.9; 33.5 (annual) with software services receipts noted (7.6; 9.6; 12.2 ...). - Income, net: -4.2; -3.4; -4.0; -4.6. - Transfers, net: 15.9; 16.8; 23.4; 21.2. - Capital account balance: 8.6; 10.8; 20.5; 20.4. - Direct investment, net: 4.7; 3.2; 3.4; 5.3. - Portfolio investment, net: 2.6; 2.0; 0.9; 11.4; 9.9 (quarterly detail provided). - Overall balance: 11.8; 17.0; 31.4; 22.9 (annual). - Foreign exchange reserves (US$ bn end-period): 54.7; 76.1; 113.0; 136.8; 83.2; 92.3; 103.2; 113.0; 119.5. - In months of next year's imports (goods & services): 8.0; 9.3; 10.5; 10.9; 9.4; 9.7; 10.9; 11.9; 12.6. - Sources: CEIC; staff estimates and projections. ### Reserve Money and Monetary Survey (Table 4 highlights) - Reserve money (In billions of rupees; end-period): 2,806; 3,033; 3,380; 3,691; 4,365; 4,299; 4,234; 4,424; 4,556; 4,549. - Net domestic assets of RBI (In billions of rupees): series including 1,147; 1,061; 740; 108; -479; -1,152; -1,133; -1,026; -109; -1,133. - Net foreign assets of RBI (In billions of rupees): 1,659; 1,972; 2,640; 3,582; 4,844; 5,450; 5,367; 5,450; 565; 656; 6581. - Broad money (M3) (In billions of rupees; end-period): 11,242; 13,132; 14,984; 17,180; 20,031; 21,059; 20,968; 21,367; 21,402; 21,515; 15 (series). - Currency with public and deposits series provided. - Domestic credit and credit to commercial sector series: Credit to commercial sector: 5,866; 6,792; 7,596; 8,990; 10,179; 10,849; 11,017; 11,731; 11,938; 12,114. - Twelve-month percent change: Broad money (M3): 14.6; 16.8; 14.1; 14.7; 16.6; 15.7; 14.4; 14.2; 13.7; 13.1. - Sources: Reserve Bank of India; and staff estimates. - Note: "2/ Starting in May 2002, figures include ICICI, formerly a large development finance institution, which merged with ICICI Bank Ltd. to form a new commercial bank." ### Central Government Operations (Tables 5 & 6 highlights) - Total revenue and grants (In billions of rupees): series include 1,905; 2,041; 2,143; 2,449; 2,763; 2,764; 3,230; 3,110. - Net tax revenue and gross tax revenue series are provided with components (corporate tax, income tax, excise taxes, customs duties) and states' share. - Total expenditure and net lending: 2,969; 3,250; 3,587; 3,931; 4,229; 4,184; 4,644; 4,644. - Current expenditure and interest payments: interest payments series 902; 993; 1,075; 1,178; 1,246; 1,243; 1,295; 1,295. - Capital expenditure and net lending series provided. - Overall balance (In billions of rupees): -1,064; -1,209; -1,445; -1,482; -1,466; -1,420; -1,414; -1,534. - Financing: total financing equal to deficits listed with external and domestic components; market borrowing and small savings specified. - Ratios to GDP: total revenue and grants 9.8; 9.7; 9.4; 9.9; 10.0; 10.0; 10.3; 10.1 (percent of GDP). - Total expenditure and net lending 15.3; 15.4; 15.7; 15.9; 15.3; 15.1; 14.9; 15.0. - General government balance -9.9; -10.0; -8.7; -10.1; -9.3; -9.6; -9.7; -9.3 (percent of GDP). - Memorandum items include military expenditure 2.4; 2.4; 2.4; 2.3; 2.2; 2.1; 2.5; 2.5 and primary balance series. ### Forecast Summary and Projections (Table 7) - Growth projections: Real GDP (at factor cost) projected around 6.6; 6.3; 6.2; 6.2 for 2004/05 onward (table shows 2000/01–2009/10 series). - Wholesale prices projected: 5.5; 4.7; 4.0; 4.0; 4.0 (series). - Central government deficit projections: 4.5; 4.0; 3.5; 3.0; 2.5; 2.0; 1.5 (series in table). - General government deficit projections: 9.3; 9.1; 8.4; 7.8; 7.3; 6.8 (series). - Gross saving and investment forecasts: Gross saving around 25.9–27.5 percent of GDP; gross investment around 25.3–26.9 percent of GDP. ### Public Sector Debt Sustainability (Table 8) - Public sector debt (percent of GDP): 69.1 (1999) increasing through series to 82.4 (2004) and projected 83.0; 83.3; 83.4; 82.9; 82.1 (2005–2009 projections). - Foreign-currency denominated share of public sector debt: 10.7; 9.9; 9.4; 8.5; 7.2; 6.6; 6.4; 6.1; 6.0; 5.7; 5.7. - Change in public sector debt: series include 2.2; 2.2; 4.8; 4.1; 1.1; 1.0; 0.6; 0.3; 0.1; -0.5; -0.8. - Identified debt-creating flows and components: Primary deficit, revenue and grants, primary (noninterest) expenditure, automatic debt dynamics contributions detailed (historical and projections). - Debt-stabilizing primary balance reported as -2.3 (percent of GDP). - Alternative scenarios (A1, A2, A3) and bound tests (B1–B6) with projected public sector debt paths under stresses are tabulated (specific debt percent trajectories provided for each scenario). - Key macro-fiscal assumptions: Real GDP growth, average nominal interest rate on public debt, average real interest rate, inflation (GDP deflator), growth of real primary spending, primary deficit (series of values across years) are tabulated. ### Indicators of External Vulnerability (Table 9) - General government debt (percent of GDP) series and estimate for 2004/05: 74.2 (1991/92–95 avg), then 65.2; 66.7; 67.1; 69.4; 72.9; 77.3; 81.6; 81.3; 82.4 (Estimate). - Broad money (percent change, 12-month basis) and private sector credit series (Nov-04 values: Broad money 13.7; Private sector credit 26.7). - 91 day T-bill yield (percent; end period) Nov-04: 5.2. - Exports (percent change, 12-month basis in US$) Nov-04: 25.9. - Imports (percent change, 12-month basis in US$) Nov-04: 43.1. - Current account balance (percent of GDP) Nov-04 estimate: 0.4. - Capital and financial account balance (percent of GDP) Nov-04 estimate: 2.9. - Foreign currency reserves (billions of US$) Dec. 3, 2004: 130.7. - Official reserves in months of imports (Estimate) Nov-04: 10.9. - Ratio of foreign currency reserves to broad money (percent) Nov-04: 24.5. - Total external debt (percent of GDP) Nov-04 estimate: 16.0. - Total short-term external debt to reserves (percent) Nov-04 estimate: 15.9. - Exchange rate (per US$, period average) to Nov-04: 45.5. - REER (change in percent; end period) Nov-04: -0.8. - Financial market indicators: Stock market index (end period) Dec. 17, 2004: 6,346. - External debt and debt-service indicators, and other vulnerability ratios provided in the table. ### External Debt Sustainability Framework (Table 10) - External debt (percent of GDP): 22.4 (1999) declining to projected 11.4 (2009). - Change in external debt series: -1.0; -0.6; -0.8; -0.2; -2.0; -2.3; -1.7; -1.0; -1.0; -0.8; -0.6. - Identified external debt-creating flows and components (current account deficit excluding interest, deficit in goods & services, exports, imports, net nondebt capital inflows, automatic debt dynamics) provided for 1999–2009 projections. - External debt-to-exports ratio (percent): 190.6; 167.5; 159.9; 146.3; 131.6; 103.7; 86.7; 73.9; 62.7; 54.1; 47.2. - Gross external financing need (in billions of U.S. dollars): 14.7; 16.6; 9.5; 6.2; 11.8; 10.1; 17.2; 14.4; 13.0; 12.2; 10.8. - Key macro assumptions: Nominal GDP (US$) series 436.8; 460.8; 473.8; 496.8; 577.8; 679.1; 755.2; 818.3; 885.5; 961.7; 1,042.2; 1,129.3; Real GDP growth and exchange rate appreciation series included. ### Financial System Soundness (Table 11) - Risk-weighted capital adequacy ratio (CRAR): 11.1; 11.4; 12.0; 12.7; 12.9; 13.7; 13.4 (periods cover 1999/00–Q2 2004/05). - Public sector banks CRAR: 10.7; 11.2; 11.8; 12.6; 13.2; 13.5; 13.2. - Domestic private banks CRAR: 12.9; 11.8; 12.5; 12.1; 12.2; 14.0. - Net nonperforming loans (percent of outstanding net loans): 6.8; 6.2; 5.5; 4.4; 2.9; 2.8; 2.5. - Gross nonperforming loans (percent of outstanding loans): 12.7; 11.4; 10.4; 8.8; 7.2; 7.4; 6.6. - Net profit (+)/loss (-) of commercial banks (percent of total assets): 0.7; 0.5; 0.8; 1.0; 1.0; 1.2; 1.1. - Loan/deposit ratio: 53.6; 53.1; 53.4; 56.9; 55.9; 56.7. - Investment in government securities/deposit ratio: 38.0; 38.5; 39.5; 42.7; 45.0; 46.6. - Note: "1/ Loan classification and provisioning standards do not meet international standards. Banks will be required to classify loans that have been in the substandard category for 12 months (compared with the present 18 months) as doubtful, effective March 2005." ### India—Fund Relations (Annex I) - Membership Status: Joined 12/27/45; Article VIII. - Quota: SDR 4,158.20 (100.00 percent). - Fund holdings of currency: 3,271.12 (78.67 percent); Reserve position in Fund: 887.09 (21.33 percent). - SDR Department net cumulative allocation: 681.17 (100.00 percent); Holdings: 3.56 (0.52 percent). - Outstanding Purchases and Loans: None. - Financial Arrangements: Stand-By arrangements listed with approval dates 10/31/1991 and 01/18/1991 and amounts SDR 1,656.00 and SDR 551.92 (both fully drawn). - Projected Obligations to Fund (SDR million): Charges/Interest forthcoming 2004–2008: 3.38; 14.01; 14.01; 14.01; 14.05. - Exchange Rate Arrangement: Since March 1, 1993, the rupee has floated; classified as managed floating. India accepted obligations of Article VIII on August 20, 1994. Current restrictions on certain current-account payments and transfers are listed (nontransferability under Indo-Russia debt agreement; unsettled bilateral payments agreements with three Eastern European countries; restriction on remittances for overseas TV advertising by nonexporters and exporters without adequate track record; restriction on transfer of amortization payments on loans by nonresident relatives). The Executive Board did not grant approval of these measures at the time of last Article IV consultation. - Article IV Consultation: previous discussions held in March 2003; staff report discussed by Executive Board on July 18, 2003. - FSAP Participation and ROSCs: Data model of the ROSC (IMF Country Report 04/96) issued April 2004; FSSA/FSAP report issued January 2001; a fiscal transparency ROSC issued February 2001. - Technical Assistance: Listed TA deliveries by department and dates (e.g., MAE Government securities market 2/94; FAD Public expenditure management 8/95; FAD State level fiscal database and debt register 11/04; FAD Pilot Study on Public Private Partnerships 12/04). - Outreach and Other Activities: Conferences and seminars listed with dates (e.g., OAP/APD/NCAER Conference 11/03; FAD Conference 1/04; APD/FAD Seminar 1/04; APD Training 3/04). - Resident Representative: Resident representative’s office opened November 1991. Senior Resident Representative: Mr. Michael Wattleworth. ### Relations with the World Bank Group (Annex II) - The Bank Group’s Country Strategy (CAS) for India discussed August 26, 2004 covering FY05-08. - Overall lending upper bound for IBRD: US$2.15 billion per year on average for the four years of the CAS; IDA limits for India set by IDA Deputies. - World Bank Group financial operations (1998/99–2003/04): Commitments and disbursements tabled. - Commitments (total): 1,588; 699; 2,450; 2,830; 2,092; 1,328 (1998/99–2003/04). - IBRD commitments: 591; 190; 1,495; 1,904; 951; 698. - IDA commitments: 996; 509; 955; 926; 1,141; 630. - Disbursements (total): 1,443; 1,468; 1,761; 1,997; 1,533; 1,816. - Debt outstanding and disbursed (US$ millions): 26,575; 26,746; 25,968; 26,466; 26,243; 27,019. - Source: World Bank. ### Relations with the Asian Development Bank (Annex III) - AsDB operations began in 1986. Cumulative public sector loan commitments totaled $12.9 billion as of December 31, 2003 for 72 loans; plus 13 private sector loans total loan commitments $13.2 billion. - AsDB financial operations (calendar year aggregates and totals 1986–2003): total commitments 12,911; private equity 112; disbursements 6,924. - AsDB Country Strategy and Program for 2003–2006 approved April 30, 2003; update for 2005–07 proposes shift to poorer states and northeast, and increased agriculture, water resource management and rural development assistance. ### Statistical Issues (Annex IV) - Annex IV included but detailed statistical note content not reproduced beyond heading. *Source: Data and text as provided in the content unit.* ### 1. India has an elaborate system for compiling economic and financial statistics and ### 1. India has an elaborate system for compiling economic and financial statistics and ### Overview - India produces a vast quantity of data covering virtually all sectors of the economy. - India subscribed to the SDDS on December 27, 1996 and started posting its metadata on the Dissemination Standards Bulletin Board on October 30, 1997. - India is currently in observance of the SDDS, but avails of the flexibility options for timeliness of data on general government operations and on the periodicity and timeliness of labor market data. - Authorities plan further improvements in timeliness, periodicity, and coverage across a number of statistical areas. ### Data compilation issues identified (August 2001 Report of the National Statistical Commission) - Revision of statistical and data reporting methods to keep pace with the shift to a more market-oriented economy following the elimination of industrial licensing. - Need for the Central Statistical Organization (CSO) to initiate procedures to make its interaction with other agencies in the decentralized statistical system more proactive and effective. - CSO has started this initiative with the proposed establishment of the National Statistical Commission as a first step. ### Data module of the ROSC (IMF Country Report 04/96) — structure and purpose - Consists of three elements: - Assessment of India’s data dissemination practices against the SDDS requirements. - Assessment of the quality of six datasets based on the Data Quality Assessment Framework (DQAF) developed by STA. - List of prioritized recommendations to improve national accounts, price, fiscal, monetary, and balance of payments statistics. - The data ROSC mission identified issues related to periodicity, coverage, and quality in several statistical series. ### National accounts - CSO rebased annual national accounts statistics and began publishing quarterly data in 1999. - Quarterly data are available only from 1996Q2 and relate only to production-based data. - Information on major expenditure categories is available with considerable delay (at least ten months after the end of the fiscal year). - CSO plans to: - Disseminate quarterly expenditure-based aggregates starting in 2007. - Reduce the lag in the currentness of the annual expenditure-based estimates to three months. - Concern: Estimates of value added in constant prices for public administration and defense may be biased upwards because they are based on the government’s wage bill (with arrears counted in the year that they are paid) deflated by the Wholesale Price Index (WPI). ### Industrial production index (IPI) - In May 2000, CSO released a completely revised time series for IPI using the new WPI (base year 1993/94) series as a deflator. - Government contracted CMIE to increase the number of respondents and products in the sample, as recommended by the data ROSC. ### Price statistics - Consumer Price Indices (CPIs) are based on weights that are at least fifteen years old and do not fully capture current price developments. - CSO has initiated steps to revise the base year of the CPI. - Currently there are four CPIs based on the consumption baskets of: - industrial workers, - urban and nonmanual employees, - agricultural laborers, - rural laborers. - Publication lags: - CPIs published with a lag of about one month. - WPI published weekly with a lag of two weeks and subject to large revisions, especially in periods of rising inflation. - New WPI series published in 2000 with updated weights, new categories, and base year 1993/94. - Concerns: representativeness may be undermined by price collection from a relatively small sample of products and infrequent updating of weights. - Government seeking World Bank technical assistance to construct a producer price index based only on output prices, excluding intermediate costs. ### Balance of payments - Quarterly balance of payments data improved in timeliness; now released with a lag of three months. - Trade data have quality, valuation, timing, and coverage problems. - Data on trade prices, volumes, and composition are not regularly available on a timely basis. - From January 2001, external debt statistics available on a quarterly basis with a one quarter lag. - Estimates of short-term external debt are presented on an original maturity basis; short-term maturity attribution on a residual maturity basis is only available annually (and excludes residual maturity of medium- and long-term nonresident Indian accounts). - International investment position (IIP) statistics cover sectors prescribed in the Balance of Payments Manual Fifth Edition and annual data are disseminated within six months of the reference period. ### Monetary and financial statistics - RBI website and RBI Bulletin publish a wide array of monetary and financial statistics: interest rates, exchange rates, foreign reserves, the monetary survey, and results of government securities auctions. - Frequency and quality of data dissemination have improved substantially in recent years. - Some crucial data (e.g., RBI’s forward liabilities and intervention data) are still published with lags of two to three months. - India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS in December 2001. - Up-to-date information on variables such as total foreign reserves, foreign currency assets, gold, and SDRs are available on a weekly basis via a weekly statistical supplement on the RBI website. - The ROSC data module mission of May 2002 found RBI monetary statistics broadly conform to the Monetary and Financial Statistics Manual (MFSM) but identified deviations: - Resident sector data do not provide sufficient information on sectoral distribution of domestic credit; current sectorization subdivides resident nonbank sector into (i) central government, (ii) state government, and (iii) the commercial sector (including other financial corporations, public and other nonfinancial corporations, and other resident sectors). - Commercial banks add accrued interest to credit and deposit positions on a quarterly basis only. - Mission recommendations: adopt the full range of sectors prescribed in the MFSM and include accrued interest on a monthly basis instead of reflecting it only on a quarterly basis. ### Fiscal operations - Ministry of Finance posts selected monthly fiscal data and quarterly debt data of the central government on its website. - No monthly data on fiscal performance at the state level are available; annual data are available only with an eight to ten month lag. - Consolidated information is unavailable on local government operations. - Data on functional and economic classification of expenditures are available with considerable lag. - Typical presentation of fiscal accounts uses classifications (developmental/nondevelopmental and plan/nonplan) that obscure the economic nature and impact of fiscal actions. - Reporting for the Government Finance Statistics Yearbook has been current (latest year published is 2003), but coverage of the data is limited to the central government. ### India — Core Statistical Indicators (As of November 22, 2004) — key metadata (selected) - Date of latest observation: - Exchange Rates: 11/22/04 - International Reserves: 11/12/04 - Reserve/Base Money: 11/12/04 - Central Bank Balance Sheet: 11/12/04 - Broad Money: 10/29/04 - 91-day T-bill Interest Rates: 11/22/04 - Wholesale Price Index: 11/19/04 - Exports/Imports: Oct 2004 - Current Account Balance: 2004 Q2 - Central Government Balance: Sept 2004 - GDP: 2004 Q2 - External Debt: Dec 2003 - Date received: - Exchange Rates: 11/22/04 - International Reserves: 11/22/04 - Reserve/Base Money: 11/22/04 - Central Bank Balance Sheet: 11/22/04 - Broad Money: 11/12/04 - 91-day T-bill Interest Rates: 11/22/04 - Wholesale Price Index: 11/06/04 - Exports/Imports: 11/18/04 - Current Account Balance: Sept 2004 - Central Government Balance: Oct 2004 - GDP: Sept 2004 - External Debt: Jun 2004 - Frequency of data: D-daily, W-weekly, M-monthly, Q-quarterly (as indicated per series in the table). - Source of data: C-commercial data, N-official publication. - Mode of reporting: F-facsimile, W-website, O-other. - Confidentiality: Unrestricted for all listed series. - Frequency of publication shown per series (daily, weekly, monthly, quarterly) as in the table. ### Statement by the IMF Staff Representative (January 24, 2005) — The Impact of the Tsunami - Some of India’s poorest regions were affected by the earthquake and tsunamis of December 26. - Macroeconomic impact projected to be not very large; most affected regions are not heavily industrialized. - Possible effects on tourism and agricultural output; damage yet to be ascertained. - Preliminary government estimate of potential public costs: about ½ percent of GDP. - Government announced a first package totaling Rs. 23 billion (about US$500 million, less than 0.1 percent of GDP) to rebuild fisheries and houses. - Authorities indicated fiscal targets for the year will not be affected. - The 2005/06 budget, due in March, will present plans for reconstruction efforts in the next fiscal year. ### Statement by the IMF Staff Representative — Other Recent Developments and Key Economic Indicators - Recent developments broadly consistent with staff’s growth forecast for 2004/05. - Second quarter growth reached 6.6 percent, slowing from 7.1 percent the previous quarter, but slightly above staff’s projection. - Industrial output rose by 7.9 percent year-on-year in November, slowing from 10.1 percent the previous month. - Inflation: - WPI inflation declined for five consecutive weeks and stands at 5.8 percent, below staff’s projection for end-2004/05 of 6.4 percent. - CPI inflation declined in November to 4.2 percent. - External sector: - Trade deficit rose to US$12.3 billion (1.9 percent of annual GDP) from US$3.8 billion in the same period last year. - Merchandise exports increased by 10 percent in the second quarter; merchandise imports rose by 54 percent, led by oil imports. - Current account registered a deficit of US$6.4 billion in the second quarter. - Capital inflows helped maintain reserves approximately unchanged at about US$120 billion. - Preliminary data: trade deficit stood at US$20 billion for April-December versus US$12 billion over the same period last year. - Reserves increased to US$129 billion in the first week of January, reflecting strong capital inflows. - Budgetary developments: - In the fiscal year to November, the overall central government deficit was contained to 2.4 percent of GDP (about half the annual target). - The current deficit reached 2.4 percent of GDP (97 percent of the annual target). - Recent policy measures: - Government lifted, for new joint ventures, the requirement that foreign firms seek approval of their partners before setting up enterprises in related fields. - Lower house of parliament passed planned amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to enable banks and financial institutions to more easily recover bad loans. - Government issued an ordinance to set up the new pension regulator. *IMF staff statement and ROSC data module findings as presented in the source document (as of dates and figures above).* ### 9. The Indian authorities informed the staff that all but one of the restrictions ### IMF Executive Board Concludes 2004 Article IV Consultation with India (Public Information Notice No. 05/12, February 3, 2005) ### Background and Growth Outlook - India rebounded to growth of 8½ percent in 2003/04; staff projects growth of 6½ percent in 2004/05 and growth in the range of 6½ percent in 2005/06 (recovery in agriculture on normal monsoons). - Growth drivers: new investment cycle, strong credit growth, dynamism of industry and services. - Risks noted: high world oil prices and a disappointing monsoon (temporary effect on food prices). ### Inflation and Monetary Policy - WPI inflation: accelerated to 8.7 percent in August (year-on-year), then decelerated to 5½–6 percent more recently. - Projection: WPI Inflation projected to end 2004/05 around 6½ percent, declining to an average of 5½ percent in 2005/06. - RBI actions: - Issued Market Stabilization Bonds starting April to sterilize capital inflows. - Raised banks’ reserve requirements by 50 basis points in October 2004. - Increased the reverse repo rate by 25 basis points in October 2004. - Encouraged banks to build investment fluctuation reserves to protect against interest rate risk on government securities. - Directors’ view: monetary policy generally appropriate; RBI’s reverse repo increase signals commitment to price stability. RBI should continue to monitor inflation developments carefully. ### External Sector and Reserves - 2003/04 current account surplus: 1.7 percent of GDP. - Trade: widening trade deficit (2.6 percent of GDP in the fiscal year to end-December). - Reserves: reached US$129 billion by mid-January (table notes end-of-period reserve figure as 129.4 and "As of January 31, 2005"). - Capital flows: rising portfolio inflows and pickup in FDI; capital account developments driven by renewed optimism post-election. - Exchange rate: policy increasingly flexible; RBI intervened to smooth volatility and sold dollars post-election to limit depreciation; rupee-dollar recovered in recent months. - Directors: welcomed increased exchange rate flexibility; encouraged continued flexibility to reduce inflationary pressures and facilitate adjustment if inflows remain strong. ### Fiscal Policy and Public Finances - Central government deficit (IMF definition) in 2003/04: 5.1 percent of GDP (below target for first time since mid-1990s). - General government deficit in 2003/04: estimated 9.7 percent of GDP (offsetting central improvement due to state overruns). - 2004/05 central government budget envisages overall deficit (IMF definition) of 4.5 percent of GDP; general government deficit for 2004/05 projected at 9.3 percent of GDP. - FRBMA: viewed as a good framework; roadmap aims to eliminate the current deficit by 2008/09 with emphasis on frontloaded tax reform and improved spending quality. - Directors’ fiscal recommendations (summary): - Introduce the state value-added tax (VAT) as planned on April 1. - Broaden personal and corporate income tax bases and strengthen tax administration. - Target subsidies appropriately. - Move toward a national goods and services tax over time. - Meet fiscal targets in the first year of FRBMA to establish credibility. - Vigilance regarding central- and state-government contingent liabilities. - Central government to use leverage (including approval of state borrowings) to encourage state reforms. - Directors cautioned against using foreign exchange reserves to finance infrastructure spending because of potential risks to central bank independence and inflation, and advised any increase in infrastructure spending be within FRBMA limits. ### Structural Reforms and Infrastructure - Directors welcomed government’s ambitious reform agenda—emphasis on job creation and rural poverty reduction—and urged rapid progress across reforms. - Infrastructure: support for closing infrastructure gap, with caution on financing via reserves; encouraged private sector participation contingent on improved investment climate and stronger regulatory framework for public-private partnerships. - Trade liberalization: Directors welcomed tariff reductions and commitment to further reductions to ASEAN levels over the medium term; urged more rapid tariff reductions and lowering administrative barriers. - Agriculture: Directors highlighted need for agricultural reform to support growth and poverty reduction, including reforming price supports, guaranteed procurement, and subsidies on fertilizer and power. ### Financial Sector Issues and Recommendations - Progress noted: decline in nonperforming loans despite tighter loan classification norms; capital adequacy ratios well above the 9 percent minimum. - Risks and recommended actions: - Monitor rise in private sector lending closely; RBI increased risk weights on consumer and housing loans. - Strengthen risk-based prudential requirements and supervise risk management practices, especially large bank holdings of government securities. - Ensure lending decisions by merged institutions (Development Finance Institutions merged with public commercial banks) are made on purely commercial principles. - Continue addressing governance problems in urban cooperative banks. - Over medium term, build a strong globally competitive financial sector by opening the banking system further to private and foreign investors: raise the FDI cap for private banks and eliminate the 10 percent limit on voting rights for foreign investors. ### Oil Price Burden-Sharing and Energy Policy - Directors viewed the authorities’ burden-sharing approach to high international oil prices as understandable but potentially unsustainable. - Recommended allowing the automatic pricing mechanism to work to: - Protect government revenues. - Limit losses to state-owned petroleum companies. - Provide incentives for more efficient energy use. ### Statistical and Data Improvements - Directors urged improving quality and timeliness of statistics: - Priority to developing more timely and comprehensive indicators of inflation. - More timely data on state finances. - Welcomed Fund technical assistance to develop an integrated state fiscal data base and debt register. ### Key Quantitative Indicators (selected figures from the report) - Growth: - Change in real GDP at factor cost: 5.8 (2001/02), 4.0 (2002/03), 8.5 (2003/04), 6.6 (2004/05) 2/ - Inflation: - Change in wholesale prices (period average): 3.4 (2001/02), 3.6 (2002/03), 5.4 (2003/04), 6.7 (2004/05) 2/ - Change in consumer prices (period average): 4.3 (2001/02), 4.0 (2002/03), 3.9 (2003/04), 4.1 (2004/05) 2/ - External (in billions of U.S. dollars): - Merchandise exports 3/: 44.7 (2001/02), 53.8 (2002/03), 64.7 (2003/04), 78.2 (2004/05) 2/ - Merchandise imports 3/: 56.3 (2001/02), 64.5 (2002/03), 80.2 (2003/04), 107.8 (2004/05) 2/ - Current account balance (in percent of GDP): 0.7 (2001/02), 1.2 (2002/03), 1.7 (2003/04), -0.2 (2004/05) 2/ - Direct investment, net 4/: 4.7 (2001/02), 3.2 (2002/03), 3.4 (2003/04), 5.3 (2004/05) 2/ - Portfolio investment, net: 2.0 (2001/02), 0.9 (2002/03), 11.4 (2003/04), 9.9 (2004/05) 2/ - Capital account balance: 8.6 (2001/02), 10.8 (2002/03), 20.5 (2003/04), 20.4 (2004/05) 2/ - Gross official reserves 5/: 54.7 (2001/02), 76.1 (2002/03), 113.0 (2003/04), 129.4 (2004/05) 10/ - Reserves (in months of imports) 6/: 8.0 (2001/02), 9.3 (2002/03), 10.1 (2003/04), 13.0 (2004/05) 10/ - External debt (in percent of GDP) 5/: 20.6 (2001/02), 20.6 (2002/03), 18.5 (2003/04), 16.5 (2004/05) 2/ - Short-term debt (in percent of GDP) 5/7/: 3.0 (2001/02), 3.8 (2002/03), 2.1 (2003/04), 3.2 (2004/05) 2/ - Debt service ratio (in percent of current receipts): 13.5 (2001/02), 16.0 (2002/03), 15.6 (2003/04), 7.3 (2004/05) 2/ - Change in real effective exchange rate (in percent) 5/: 2.3 (2001/02), -5.4 (2002/03), -0.9 (2003/04), 2.6 (2004/05) 10/ - Financial variables: - Central government balance (in percent of GDP) 8/: -6.3 (2001/02), -6.0 (2002/03), -5.1 (2003/04), -5.0 (2004/05) 2/ - General government balance (in percent of GDP) 8/: -10.1 (2001/02), -9.6 (2002/03), -9.7 (2003/04), -9.3 (2004/05) 2/ - Consolidated public sector balance (in percent of GDP) 8/: -10.1 (2001/02), -9.6 (2002/03), -9.7 (2003/04), -9.3 (2004/05) 2/ - Change in broad money (in percent) 5/: 14.1 (2001/02), 14.7 (2002/03), 16.5 (2003/04), 13.4 (2004/05) 10/ - Interest rate 5/9/: 6.1 (2001/02), 5.9 (2002/03), 4.2 (2003/04), 5.2 (2004/05) 10/ *IMF Public Information Notice No. 05/12 — Executive Board conclusions of the 2004 Article IV consultation with India* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0586.pdf_