## _cr0655 — IMF staff report (selected excerpts) ## Source details **Canonical URL:** [_cr0655 — IMF staff report (selected excerpts)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0655.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0655.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0655.pdf.json) --- ### Executive summary — recent performance and outlook - Real GDP growth exceeded 8 percent y/y in the first half of 2005/06, led by strong domestic demand. - Real GDP growth should moderate to 6¾ percent in 2006/07 as the economy adjusts to high oil prices and rising domestic and global interest rates. - For 2004/05, GDP growth was nearly 7 percent; growth is set to exceed 7½ percent in 2005/06, led by private investment and household demand. - Real per capita incomes have risen by over 50 percent over the past decade. - Import and export growth (including services) exceeded 33 percent per year in 2003–04. - The share of exports to Asia rose to about one–third, up from less than one-fourth in 2000. - Poverty: 35 percent of the population living on less than a dollar a day in 2000. ### Risks and near-term outlook - Key near-term risks: - rapidly rising domestic demand, - a widening trade and current account deficit, - inflationary pressures. - Asset price indicators: - equity prices up 43 percent from end–April; average price–earnings ratio of 18.4 at mid–November; - property prices in some major cities have risen by over 20 percent annually over the past two years. - Monetary policy response: - October hike in interest rates judged appropriate; staff encouraged the RBI to remain vigilant. - Staff projections (selected): - Real GDP growth projected at 7½ percent in 2005/06. - Real GDP growth expected to decline slightly to below 7 percent in 2006/07. - Inflation projection: 5¼ percent in 2005/06 and 6¾ percent in 2006/07. - Medium-term baseline projection: growth at 6½ percent annually. - Reform scenario: growth could reach 8 percent if successful fiscal adjustment and structural reforms occur. - Slow-reform scenario: growth closer to 6 percent with worsening fiscal outlook. ### External sector and capital flows - Trade and current account: - Trade deficit widened to over 5¼ percent of GDP in 2004/05; current account reverted into deficit for the first time in three years. - In the first quarter of 2005/06 the trade deficit reached 2 percent of projected annual GDP. - Exports and imports grew by 21 percent and 30 percent y/y, respectively, in July–October (2005). - Net oil imports and price trends (selected): - Net oil imports (US$ billions): 15.5 (2002/03), 17.0 (2003/04), 22.3 (2004/05), 32.4 (2005/06). - Oil price (Indian basket; U.S. dollars): 26.2 (2002/03), 27.8 (2003/04), 38.9 (2004/05), 54.9 (2005/06). - Percent change in oil price: 19.3 (2002/03), 6.1 (2003/04), 39.9 (2004/05), 41.2 (2005/06). - Capital inflows: - Capital flows tripled to about $32 billion per annum. - Almost one-half of inflows in 2004/05 were debt-creating. - Net FDI about 10 percent of private capital inflows. - Portfolio investments about one-third of total private capital inflows and about 13 percent of market capitalization. - Reserves exceed the stock of portfolio investments, NRI deposits, and short-term residual maturity external debt by about $50 billion. - ECB approvals capped at $9 billion per annum; foreign investment in debt capped at $2.25 billion. - Reserves: - Reserves rose modestly so far this fiscal year ($1.6 billion) despite strong capital inflows. ### Fiscal strategy, public finances, and oil quasi-fiscal costs - Fiscal performance and targets: - Following three years of declining fiscal deficits, a “pause” in deficit reduction was announced for 2005/06. - Central government overall and current deficit targets for 2005/06: overall deficit target 4.3 percent of GDP; current deficit target 2.7 percent of GDP. - Staff estimate: general government actual and structural deficit fell below 7½ percent of GDP, stabilizing public debt at around 86 percent of GDP. - Staff project general government actual and structural deficit to rise to 7¾ percent of GDP in 2005/06. - Oil price pass-through and quasi-fiscal costs (Box 2 highlights): - Domestic gasoline and diesel prices noted as $0.96 and $0.67 per liter respectively. - After an increase of about 7 percent in September, domestic gasoline and diesel prices remain around 10 percent below import parity levels. - Price controls imposed quasi-fiscal costs estimated at ¾ percent of GDP in 2004/05 and ½ percent of annual GDP in the first half of 2005/06. - Explicit budget subsidies amounted to 0.1 percent of GDP per year. - Staff estimates: overall cost of oil subsidies increased by 0.2 percent of GDP to 0.7 percent of GDP in 2004/05. - Subsidies borne off-budget doubled from 0.3 percent of GDP to 0.6 percent of GDP. - Leakage of benefits to higher income households substantial (almost 40 percent in the case of kerosene). - Oil company revenue losses noted at ½ percentage points of GDP due to lack of pass–through in first half of 2005/06. ### Monetary policy, inflation dynamics, and supply constraints - Headline inflation reached 4¾ percent in October. - Inflation drivers: - Rising pass-through of world oil price increases and robust domestic demand. - Supply-side constraints indicated by capacity utilization, peak electricity shortages, and average turnaround time in ports. - Monetary policy actions: - RBI raised reserve requirements and policy interest rates in 2004/05; reverse repo rate raised to 5¼ percent at mid-term October review and to 5½ percent on January 24 (2006). - Staff recommended vigilance and readiness to tighten further if needed. - Money and credit: - Broad money (M3) growth (12-month percent): 14.1 (2001/02); 14.7 (2002/03); 16.7 (2003/04); 12.4 (2004/05); 17.0 (2005/06, 25-Nov-05). - Bank credit grew by over 30 percent in the year ending March 2005; bank credit growth about 25.7 percent as of 25-Nov-05. - Aggregate credit-to-deposit ratio exceeded 60 percent. - Credit card debt rose 36 percent in 2004/05. ### Financial sector health, prudential measures, and Basel II - Banking sector: - Commercial banks continued to reduce NPAs; aggregate capital adequacy remains high (CAR around 12.0–12.9 in recent years). - Bank holdings of government paper stand at 38 percent of assets. - Cooperative banks account for about 6 percent of banking system assets and remain in poor health. - Credit quality and concentrations: - Rapid credit growth concentrated in public sector banks and priority sectors; priority sectors accounted for 40 percent of total nonfood credit growth. - Nonperforming loans reported at 8 percent on average in some contexts; gross NPLs to gross loans: 5.2 percent (end-March-2005 aggregate). - Regulatory and supervisory responses: - RBI raised risk-weights on housing and real estate loans and imposed controls on real estate investments. - RBI announced increase in general provisioning (exemption for agricultural and SME sectors) and tighter supervision on lending to real estate and other high risk sectors. - Staff advised raising risk weights on “priority sector” lending where NPLs higher than average, improving consumer education on credit cards, and strengthening regulation of urban and rural cooperative banks. - Basel II readiness: - Authorities plan to commence Basel II in 2007 with Standardized Approach for credit risk and Basic Indicator Approach for operational risk by end–March 2007. - Many banks may need to raise additional capital; Basel II norms could reduce CAR by 1–2 percentage points for private banks. - RBI taking steps to train supervisors and extend risk-based supervision. ### Structural reforms, infrastructure, and public–private partnerships - Reform imperatives: - Accelerate tariff reduction and foreign investment liberalization; improve business climate and regulatory environment; reform restrictive labor laws. - Policy options with potentially large pay-offs include faster convergence to ASEAN tariff levels and broader FDI liberalization in insurance and retail. - Infrastructure financing: - SPV set up to address lack of long–term infrastructure financing; SPV borrowing limit for 2005/06 set at Rs. 100 billion ($2.2 billion). - Staff welcomed sectoral guidelines and model concession agreements but emphasized need for independent regulators and better project appraisal. - Steps to develop corporate debt markets recommended: transparency in issuance, streamlined registration, lower barriers to institutional participation, and development of derivatives trading. - Power sector: - Technical and commercial losses remain high; electricity shortages widespread; industrial tariff rates not internationally competitive. - Staff urged faster implementation of the 2003 Electricity Act and regulatory guidelines to restructure State Electricity Boards. ### Public finances, center–state relations, pensions, and social spending - Fiscal roadmap and implementation risks: - Authorities’ medium-term fiscal strategy is broadly appropriate but implementation has fallen behind (tax base broadening, subsidy reform). - Cost of exemptions estimated to exceed 1½ percent of GDP annually. - Staff advised removing exemptions quickly and introducing a goods and services tax (GST) over the medium term. - State finances: - Twelfth Finance Commission measures and new debt relief incentives aim to induce state fiscal reform; staff recommended tighter global borrowing caps and stronger conditionality for some states. - Pensions: - Pension outlays rose to 2¼ percentage points of GDP in 2004/05. - World Bank estimates unfunded pension liability of central and state governments exceeds one–third of GDP. - January 2004: mandatory defined contribution scheme introduced for newly–recruited central government civil servants; 15 state governments have joined so far. - Pending Pension Bill would set up a pensions regulator and prudential norms. - Staff recommended parametric changes to defined benefit schemes to ease fiscal burden. ### Trade, globalization, and labor market issues - Trade policy and FTAs: - Authorities committed to decreasing customs duties to ASEAN levels (9 percent) by 2009; peak non-agricultural tariff rate declined from 20 percent to 15 percent; average tariffs fell by 5 percentage points to 17 percent. - Staff encouraged faster liberalization and cautioned against trade diversion from multiple PTAs. - Labor market reform: - Less restrictive labor laws would enhance employment prospects; some 100 million new labor market entrants expected in the next decade. - Staff-supported reforms include amending contract labor law, streamlining labor regulations, and raising cutoff sizes for exemptions. - FDI and SEZs: - Progress toward liberalizing FDI; staff welcomed raising FDI limits in some sectors and urged increases in insurance and retail. - Authorities plan to expand SEZs to spur FDI with tax incentives and single window clearance. ### Scenarios and medium-term fiscal projections (Annex I highlights) - Baseline scenario: - Center meets FRBM targets; states’ adjustment falls short of TFC targets. - Growth stabilizes at 6½ percent; debt declines to 80 percent of GDP by 2009/10. - Reform scenario: - Both center and states meet medium-term targets; annual revenue increases of about 0.9 percent of GDP. - Capital spending rises cumulatively by 3¼ percentage points of GDP by 2009/10; growth accelerates to 8 percent; debt declines to under 77 percent of GDP by 2009/10. - Unchanged policies scenario: - Revenue rises less than ½ percentage point per annum; primary deficit remains around 2 percent of GDP; growth slows to 6 percent; debt would rise. ### Key headline statistics (selected, preserved exactly) - Nominal GDP (2004/05): US$691 billion - Population (2004/05): 1.08 billion - GDP per capita (2004/05): US$640 - Current account balance (US$ billions): 2001/02: 3.4; 2002/03: 6.3; 2003/04: 10.6; 2004/05: -6.4; 2005/06 (prov./proj.): -23.1 - Merchandise exports (US$ billions): 44.7 (2001/02); 53.8 (2002/03); 64.7 (2003/04); 80.8 (2004/05); 97.3 (2005/06) - Merchandise imports (US$ billions): 56.3 (2001/02); 64.5 (2002/03); 80.2 (2003/04); 161.7 (2004/05); 161.7 (2005/06) - Net oil imports (US$ billions): 15.6 (2001/02); 17.1 (2002/03); 22.4 (2003/04); 32.1 (2004/05); 41.9 (2005/06) - Broad money (M3) growth (12-month percent): 14.1 (2001/02); 14.7 (2002/03); 16.7 (2003/04); 12.4 (2004/05); 17.7 (2005/06, selected series) - Bank credit growth: over 30 percent (year ending March 2005); 25.7 percent (25-Nov-05) - Bank holdings of government paper: 38 percent of assets - General government deficit: under 7½ percent of GDP (after 0.8 percentage points reduction in subnational deficits) - Staff projection: general government deficit to rise to 7¾ percent of GDP in 2005/06 - Reserves (end-period, US$ billions): 54.1 (2001/02); 76.1 (2002/03); 113.0 (2003/04); 141.5 (2004/05); 143.8–146.0 (2005/06 various months) ### Principal policy recommendations (enumerated) - Near-term macro policy: - Gear policies to keep inflationary pressures in check; consider modest interest rate hikes if needed. - Maintain two-way exchange rate flexibility and continue monitoring reserve and capital flow risks. - Fiscal policy: - Overperform on 2005/06 budget to counter demand pressures and strengthen FRBMA credibility. - Accelerate tax base broadening: remove exemptions, accelerate GST preparations, expand services tax base. - Move to full pass–through of oil prices with targeted compensation for the poor; phase out LPG subsidies and better target kerosene; consider replacing subsidies with targeted cash transfers. - Record oil-related transactions transparently in the budget; reintroduce an automatic pricing mechanism (APM) and switch from ad valorem to specific petroleum taxation in a revenue-neutral manner with annual inflation indexation. - Financial sector and prudential policy: - Strengthen prudential standards in selected sectors; raise risk-weights where NPLs are higher; tighten supervision of cooperative banks. - Accelerate readiness for Basel II implementation and augment supervisory skills. - Consider measures to deepen government and corporate bond markets and broaden the institutional investor base. - Structural reforms: - Accelerate infrastructure reforms, PPPs, and development of long-term financing instruments. - Continue tariff liberalization and FDI liberalization, improve business climate, and pursue feasible labor market reforms. - Implement subsidy and pension reforms to create fiscal space for infrastructure and priority social spending. - State-level reforms: - Use TFC incentives, tighter borrowing caps, better fiscal reporting, and conditional grants to strengthen state fiscal adjustment. - Link small savings interest rates to market rates and reform small-savings borrowing practices. *Source: IMF staff report (CR/0655) excerpts as provided in the supplied content.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview and recent performance - Real GDP growth exceeded 8 percent y/y in the first half of 2005/06, led by strong domestic demand. - Real GDP growth should moderate to 6¾ percent in 2006/07 as the economy adjusts to high oil prices and rising domestic and global interest rates. - For 2004/05, GDP growth was nearly 7 percent; growth is set to exceed 7½ percent in 2005/06, led by private investment and household demand. - Real per capita incomes have risen by over 50 percent over the past decade. - Import and export growth (including services) exceeded 33 percent per year in 2003–04. - The share of exports to Asia rose to about one–third, up from less than one-fourth in 2000. - Poverty: 35 percent of the population living on less than a dollar a day in 2000. ### Risks and outlook - Key near-term risks: rapidly rising domestic demand, a widening trade and current account deficit, and inflationary pressures. - Stronger-than-expected domestic demand supported by fast credit growth poses key upside risks to growth and inflation. - Asset price concerns: equity prices up 43 percent from end–April; average price–earnings ratio of 18.4 at mid–November; property prices in some major cities have risen by over 20 percent annually over the past two years. - Monetary policy response: the October hike in interest rates was judged appropriate; staff encouraged the Reserve Bank of India (RBI) to remain vigilant in view of upside risks. ### External sector and capital flows - The trade deficit widened to over 5¼ percent of GDP in 2004/05 and the current account reverted into deficit for the first time in three years. - In the first quarter of 2005/06 the trade deficit reached 2 percent of projected annual GDP. - Exports and imports grew by 21 percent and 30 percent y/y, respectively, in July-October (2005). - Continued strong capital inflows have offset the widening external deficit; reserves rose modestly so far this fiscal year ($1.6 billion). - Capital inflows composition and vulnerabilities: - Capital flows tripled to about $32 billion per annum. - Debt-creating flows dominate private capital inflows; almost one-half of inflows in 2004/05 were debt-creating. - Net FDI now about 10 percent of private capital inflows. - Portfolio investments account for about one-third of total private capital inflows and about 13 percent of market capitalization. - Reserves exceed the stock of portfolio investments, NRI deposits, and short-term residual maturity external debt by about $50 billion. - ECB approvals are capped at $9 billion per annum; foreign investment in debt is capped at $2.25 billion. ### Macroeconomic policy recommendations - Near-term focus: ward off inflationary pressures. - Fiscal policy: overperformance on the budget would help address demand pressures and strengthen the credibility of the Fiscal Responsibility Law (FRBMA). - Monetary policy: staff welcomed the RBI’s commitment to increased exchange rate flexibility and urged vigilance. - Capital controls and reserve buffers noted as mitigating factors against reversals, but growing reliance on volatile inflows underscores the need for sound macroeconomic policies. ### Fiscal strategy and public finances - The government’s medium-term fiscal strategy is broadly appropriate; faster implementation is key. - Need for tax base broadening; implementation of the government’s 2004 roadmap to increase tax revenue has fallen behind schedule. - Recommendations to broaden the revenue base by quickly removing exemptions and introducing a goods and services tax. - To create fiscal space for infrastructure and priority social spending: implement subsidy reform and address fast-rising pension outlays through parametric changes. - Recent changes in center-state relations should support state-level adjustment; strengthened conditionality and tighter global borrowing limits may be required if all states are to achieve fiscal consolidation targets. ### Structural reforms and growth agenda - India’s growth spurt provides an opportunity to fast-forward structural reforms: improve infrastructure, further open and liberalize the economy, and alleviate poverty. - Policy options with potentially large pay-offs: accelerate tariff reduction and foreign investment liberalization; improve business climate and regulatory environment; reform restrictive labor laws. - Political consensus remains a constraint: privatization, foreign investment liberalization, and power-sector reform have slowed; labor and agricultural reform are stalled in places. ### Financial sector and credit dynamics - Banking sector health continues to improve. - Rapid credit growth presents a new challenge: the credit boom signals financial deepening but risks deterioration in credit quality. - Regulatory response: the RBI raised risk-weights on housing and real estate loans and imposed controls on real estate investments aimed at curbing speculative FDI inflows. - Boxed findings: credit growth is a focus (Box 4 referenced in source). ### Inflation dynamics and pass-through effects - Inflation remained low through August 2005 but rose in recent months reflecting higher pass-through of world oil price increases and robust demand. - WPI and adjusted measures indicate rising inflationary pressures (figure data in source). - The impact of higher oil prices highlighted as a driver of inflation (Box 2 referenced in source). *Source: IMF staff Executive Summary (CR/0655) as provided in the supplied content.* ### 10. Headline inflation has remained ### 10. Headline inflation has remained ### Inflation dynamics and supply constraints - Headline inflation reached 4¾ percent in October. - In 2004/05, the RBI tightened liquidity by raising reserve requirements and policy interest rates; this, together with incomplete pass–through of higher oil prices, helped moderate inflation. - Indicators of broad and reserve money growth have picked up (Table 5). - Supply–side constraints appear to be tightening, as suggested by: - capacity utilization, - peak electricity shortages, - average turnaround time in ports (Figure 4). ### Oil prices, pass-through, and quasi-fiscal costs (Box 2) - After an increase of about 7 percent in September, domestic gasoline and diesel prices remain around 10 percent below import parity levels. - Domestic gasoline and diesel prices noted as $0.96 and $0.67 per liter respectively. - Price controls imposed quasi-fiscal costs estimated at: - ¾ percent of GDP in 2004/05, - ½ percent of annual GDP in the first half of 2005/06. - Explicit budget subsidies amounted to 0.1 percent of GDP per year. - Staff estimates: overall cost of oil subsidies increased by 0.2 percent of GDP to 0.7 percent of GDP in 2004/05. - Subsidies borne off-budget doubled from 0.3 percent of GDP to 0.6 percent of GDP. - Leakage of benefits to higher income households is substantial (almost 40 percent in the case of kerosene). - Net oil imports and related figures (India: Oil Prices and Imports): - Net oil imports (in billions of U.S. dollars): 15.5 (2002/03), 17.0 (2003/04), 22.3 (2004/05), 32.4 (2005/06) - Imports: 18.1 (2002/03), 20.6 (2003/04), 29.1 (2004/05), 42.3 (2005/06) - Exports: 2.6 (2002/03), 3.6 (2003/04), 6.8 (2004/05), 9.9 (2005/06) - Net oil imports (in percent of GDP): 3.1 (2002/03), 2.8 (2003/04), 3.2 (2004/05), 4.2 (2005/06) - Oil price (Indian basket; U.S. dollars): 26.2 (2002/03), 27.8 (2003/04), 38.9 (2004/05), 54.9 (2005/06) - Percent change in oil price: 19.3 (2002/03), 6.1 (2003/04), 39.9 (2004/05), 41.2 (2005/06) ### Fiscal developments and implications - Following three years of declining fiscal deficits, a “pause” in deficit reduction was announced for 2005/06. - The central government fiscal deficit came in below target in 2004/05 for the second consecutive year, helped by cyclical rebound in revenue and expenditure compression, but reflecting greater recourse to off–budget petroleum subsidies. - The current deficit was reduced by 1 percentage point, twice the minimum required under the Fiscal Responsibility and Budget Management Act (FRBMA). - Staff estimates that the general government actual and structural deficit fell below 7½ percent of GDP, enough to stabilize public debt at around 86 percent of GDP (Table 7). - For 2005/06, the central government overall and current deficit targets are: - overall deficit target: 4.3 percent of GDP, - current deficit target: 2.7 percent of GDP. - The budget implies a rise in the general government actual and structural deficit to 7¾ percent of GDP, imparting a pro–cyclical impulse to the economy. - Nearly 70 percent of government market borrowings completed by end-October. - Yields on the 10-year benchmark bond softened by 13 basis points since end-April. - Staff note: oil companies have suffered ½ percentage points of GDP in revenue losses due to the lack of pass–through in the first half of 2005/06. ### Banking sector, credit growth, and financial risks - Commercial banks continued to reduce NPAs; aggregate capital adequacy remains high (Table 8 and Figure 6). - Banks reduced exposure to interest rate risk by decreasing holdings of government paper and shortening maturity. - Bank holdings of government paper stand at 38 percent of assets, still in excess of statutory requirements. - Cooperative banks account for about 6 percent of banking system assets and remain in poor health. - Credit growth: - Bank credit grew by over 30 percent in the year ending March 2005. - Ratio of private sector credit to GDP grew to around 40 percent. - Aggregate credit-to-deposit ratio exceeded 60 percent. - Credit card debt rose 36 percent in 2004/05. - Nonperforming loans reported at 8 percent on average in some contexts. - Rapid credit growth concentrated in public sector banks and priority sectors; priority sectors accounted for 40 percent of total nonfood credit growth. - Staff stress tests show resilience, but concerns remain about credit quality, NPAs highest in public banks and some priority sectors, and pressure on capital adequacy for some banks. ### Growth and inflation outlook (staff projections) - Real GDP growth projected at 7½ percent in 2005/06. - Real GDP growth expected to decline slightly to below 7 percent in 2006/07, reflecting further pass-through of higher oil prices and rising global and domestic interest rates (Table 9). - Inflation projection: - 5¼ percent in 2005/06, - 6¾ percent in 2006/07, reflecting expected upward adjustment in fuel prices. - Medium-term staff projection: growth at 6½ percent annually in the medium–term under baseline. - Reform scenario: growth could reach the authorities’ objective of 8 percent if successful fiscal adjustment and structural reforms occur. - Slow-reform scenario: growth closer to recent historical average of 6 percent; fiscal outlook would worsen with rising general government deficit and fading positive growth–interest differential by 2010/11. ### Policy recommendations and discussions - Near-term macroeconomic policy should be geared toward keeping inflationary pressures in check. - Fiscal policy: - Staff advised overperformance on the 2005/06 budget to counter demand pressures, meet FRBMA targets, and strengthen credibility. - VAT introduction on April 1 in 20 states proceeded well; VAT receipts rose 14 percent y/y in the first half of 2005/06 (preliminary estimates). - Staff recommended moving to full pass–through of oil prices with adequate compensation mechanisms for the poor to curb quasi–fiscal costs and encourage energy efficiency. - Staff supported phasing out LPG subsidies and improving targeting of kerosene subsidies; short-run targeting could restrict subsidies to below-poverty-line (BPL) households under the existing ration card system. - Over time, replace subsidies with targeted support such as cash transfers to the poor. - Reintroduce an automatic pricing mechanism (APM) for petroleum products and switch from ad valorem to specific petroleum taxation in a revenue-neutral manner with annual automatic inflation indexation. - Staff cautioned to record any oil bond transactions transparently as budgetary subsidies. - Monetary and exchange rate policy: - Staff suggested a modest interest rate hike to keep inflation expectations in check and to adjust to rising global interest rates. - The RBI raised the reverse repo rate to 5¼ percent at its mid-term October policy review, citing upside inflationary pressures from oil prices and higher world interest rates. - Staff recommended that the RBI monitor conditions closely and stand ready to tighten further if needed. - Structural reforms: - Far-reaching structural reforms needed over the medium term to address constraints on growth and absorptive capacity. - Priorities include fiscal adjustment to create space for infrastructure and social spending, energy policy reform, tax base broadening, and measures to address risks from rapid credit growth. - In the states, TFC implementation can boost state fiscal adjustment, but expenditure reforms (power sector, wage and pension, subsidy reforms) and revenue measures (higher user charges, tax base broadening) are needed for sustainability. *Source: IMF staff report excerpt.* ### 20. There was agreement that appreciation of the rupee over the past year had not ### 20. There was agreement that appreciation of the rupee over the past year had not ### Exchange rate, reserves, and competitiveness - Staff estimates using an extended PPP approach suggest the exchange rate was fairly valued at end-2004. - India’s rising share in global export markets indicates competitiveness is not a problem. - RBI’s new REER index rose by 7.6 percent since 2003-04 and by 6.4 percent since 1993-94. - Staff’s broader REER measure appreciated by 7 percent since 1993. - Vector-error-correction model specifications produced divergent estimates: - One specification suggests the rupee was undervalued by about 15 percent at end-2004. - An alternative specification (including a control for the 1991 balance of payments crisis) finds the rupee fairly valued at end-2004. - Other studies cited: - Davoodi (2005): rupee 40 percent undervalued at end-2000. - Benassy-Quere et al (2005): 16 percent undervalued at end-2001. - Milesi-Ferretti, Ricci, Lee and Jayanthi (2005): 30 percent undervalued at end-2004. - Conclusions: - Empirical investigations find little evidence of overvaluation. - Large stock of reserves enabled India to weather exogenous shocks; RBI did not see current reserves as excessive. - Given increased reliance on more volatile capital inflows and a widening current account deficit, staff agreed current reserves provided a useful buffer against potential reversals, but emphasized need for continued structural reforms and supporting macroeconomic policies. ### Fiscal adjustment strategy and revenue reforms - Authorities’ medium–term fiscal roadmap is revenue-led due to large spending needs for infrastructure and priority social spending. - Implementation risks: - Implementation of the 2004 FRBMA roadmap for raising tax revenue had fallen behind schedule. - Subsidy reform envisaged in a 2004 government report was stalled. - Staff baseline projection implications: - With only gradual tax base broadening, medium-term rise in tax revenue would be more modest than authorities’ targets. - An additional ¾ percent of GDP in non-interest current expenditure savings would be required to meet FRBM targets. - Tax base expansion measures: - Authorities plan to allow existing exemptions to lapse over the next four years and to publish tax expenditure estimates. - Ongoing expansion of the services tax base and IT enhancements to strengthen compliance. - GST remains a medium-term objective; preparations should be accelerated (phase out CST, reach agreement with states on GST revenue sharing). - Staff advised lowering personal income tax exemption threshold in the medium run. - Cost of exemptions: - A study estimates annual cost of key tax exemptions exceeds 1½ percent of GDP. ### Expenditure priorities, subsidies, and social programs - Expenditure restructuring needed to create fiscal space for priority social and infrastructure spending. - New programs and spending: - Rural employment program (REGS) guarantees 100 days of public works employment per year per family head. - 2005/06 budget provides for continued increases in education and health spending and a four-year program to provide basic infrastructure for the poor. - Fiscal cost and targeting notes: - Annual cost of REGS estimated at about 1 percentage point of GDP once implemented in all states, with 90 percent borne by the central government. - Staff urged more progress in reforming subsidies as recommended in the 2004 government report; many subsidies are costly and not well targeted. - Staff suggested consideration of replacing multiple welfare programs and implicit/explicit subsidies with a more formal social safety net over time. - Wage bill: - Authorities remained committed to containing the wage bill despite increasing wage pressures; last civil service pay awards were in 1998. ### Center–state fiscal relations and small savings - Reforms to strengthen state finances: - New debt relief incentives intended to induce states to pass and implement fiscal responsibility laws targeting current balance by 2009. - Center intends to enforce a global borrowing constraint and promote greater reliance on market borrowing. - Staff noted some states would remain under fiscal stress and recommended stronger adjustment paths for some states, tighter borrowing caps, better fiscal reporting, and tighter link between grants and fiscal performance. - Small savings: - Recent steps to curb growth of small savings deposits—against which states can borrow without restrictions—are welcome. - Staff advised linking administered interest rates on these savings schemes to market rates as a move toward eventual elimination. ### Pensions and long-term fiscal sustainability - Recent pension developments: - January 2004: mandatory defined contribution scheme introduced for newly–recruited central government civil servants; 15 state governments have joined so far. - Pending Pension Bill would set up a pensions regulator and guidelines for pension fund managers, prudential norms, investments, and capital requirements. - Pension coverage expected to increase over time as system extends voluntarily to all states and parts of private sector. - Fiscal concerns: - Pension outlays rose to 2¼ percentage points of GDP in 2004/05. - World Bank estimates unfunded pension liability of central and state governments exceeds one–third of GDP. - Staff recommended parametric changes to existing defined benefit pension system to ease fiscal burden and control unfunded liabilities; authorities favored waiting until NPS well established before making changes. ### Infrastructure bottlenecks, PPPs, and power sector - Public-private partnerships (PPPs) and financing: - Authorities issued new sectoral guidelines and model concessionary agreements for roads and ports. - Special purpose vehicle (SPV) set up to address lack of long–term infrastructure financing; SPV would borrow domestically with government guarantee to finance commercially viable projects with private participation. - SPV borrowing limit for 2005/06 set at Rs. 100 billion ($2.2 billion); lead banker responsible for project appraisal. - Staff welcomed measures but emphasized need for better regulatory practices, independent regulators in all sectors, and financial reforms to expand investor base. - Key steps to develop long-term corporate debt markets include greater transparency in issuance, streamlining registration procedures and tax provisions, lowering barriers to institutional participation, and development of derivatives trading. - Staff underscored need to reflect in fiscal accounts all future fiscal risks, including guarantees. - Power sector constraints: - Technical and commercial losses remain high; electricity shortages widespread; industrial tariff rates not internationally competitive. - Losses of state utilities remain a large drain on state finances despite diminishing trends. - Implementation of the 2003 Electricity Act continues; reforms uneven across states with some reintroducing free power for farmers. - Staff urged faster implementation of the Act, introduction of regulatory guidelines to catalyze restructuring of State Electricity Boards, and increased private participation. - National Electricity Tariff Policy expected to set pricing rules and provide guidelines on phasing out cross-subsidy surcharges. ### Banking system development, prudential measures, and Basel II - Financial intermediation and access: - Private credit is under 40 percent of GDP, compared to over 100 percent for countries such as Korea and Malaysia. - Large branch network gives overall access comparable to regional peers, but large segments of the population lack access. - Indian banks have one of the largest exposures to government securities; banking sector dominated by public sector banks (PSBs) whose prudential indicators, though improved, remain less favorable than new private and foreign banks. - Credit growth and prudential issues: - Pickup in credit growth raises concerns about credit quality. - Authorities tightened prudential regulations; banks showing strong profitability and low impaired loans reflecting improved risk management. - Risks from asset price increases handled with measures tightening capital market exposure limits and prudential norms on housing loans. - Staff advised additional prudential measures in selected sectors, raising risk weights on “priority sector” lending where NPLs were higher than average, and greater consumer education regarding credit card debt. - RBI announced increase in general provisioning (exemption for agricultural and SME sectors) and tighter supervision on lending to real estate and other high risk sectors; RBI considering tightening loan classification norms and introducing “special mention” loans requiring provisions. - Basel II implementation: - Authorities plan to commence Basel II in 2007. - Banks required to adopt the Standardized Approach for credit risk and Basic Indicator Approach for operational risk by end–March 2007. - RBI taking steps to train supervisors, enhance monitoring of banks’ risk management, and improve market discipline and disclosure. - RBI plans to extend the pilot project for risk–based supervision (currently covering 23 banks) to more banks. - Many banks would need to raise additional capital to satisfy new capital requirements; discussions suggest Basel II norms could reduce CAR by 1–2 percentage points for private banks, requiring commensurate capital increases. - Meeting the 2007 deadline requires rapid skill advancement in the RBI and commercial banks. - Cooperative banks: - Urban cooperative banks do not present systemic risk but failures could affect confidence; staff urged alignment of prudential regulations with scheduled commercial banks and resolution of dual oversight. - Rural cooperative banks in financial distress: NPAs reaching 35 percent in some banks, more than a third under-capitalized, about a quarter unprofitable. - Staff advised quick implementation of recommendations to bring these institutions under RBI supervision with norms on par with scheduled commercial banks. - Banking reform to increase competition and efficiency: - RBI initiatives aim to increase PSBs’ autonomy and gradually lift restrictions on foreign competition. - Staff noted increased foreign presence can improve banks’ performance by increasing technical know–how and efficiency. - Suggested policy moves: - Bring forward the 2009 target date for expanding FDI in domestic banks to include non-distressed banks and lift the 10 percent cap on voting rights. - Allow some PSBs to raise additional capital by reducing government share below the 51 percent requirement. *Source: _cr0655 - 20.* ### 33. Greater emphasis should be given to addressing other impediments to the ### 33. Greater emphasis should be given to addressing other impediments to the development of the financial system. ### Financial system impediments and recommendations - Shift from heavy reliance on priority lending toward removing roadblocks to lending: - Remaining difficulties in recovering assets. - Lack of well–developed credit registries. - Weak accounting practices in SMEs. - Positive recent developments: - The Securitization and Debt Recovery Act. - The new credit registry. - Continuing constraints: - Collateral requirements constrain potential lending. - Limits on microfinance continue to constrain potential. - Measures by the RBI to develop the government securities market are welcome: - Via primary dealers. - Introduction of short selling. - Important safeguards and deepening steps needed: - Ensure interest rates are market–determined—the government currently retains the right to determine cut–off rates. - Steps to deepen the market, including: - Expanding the institutional investor base. - Accelerating the use of derivatives. - Recent proposals to permit limited investment by domestic pension funds in local equity markets would help deepen India’s financial markets. ### India: Key Financial Soundness Indicators by Bank Ownership, end-March 2005 (In percent) - Market share (in assets): Domestic All Banks 100.0; State Banks 74.4; Private Banks 18.8; Foreign Banks 6.8 - Capital to risk weighted assets: 12.8; 12.9; 12.2; 14.0 - Tier I capital to risk weighted assets: 8.4; 8.0; 8.5; 11.2 - Gross NPLs to gross loans: 5.2; 5.5; 4.4; 2.8 - Net NPLs to capital: 11.7; 13.6; 9.5; 4.5 - Personnel expenses to total income: 15.3; 17.2; 9.0; 10.3 - Return on assets: 0.9; 0.9; 0.8; 1.3 - Return on equity: 13.6; 14.7; 11.7; 10.8 ### Box 6 — Foreign Banks in India (selected points) - RBI announced banking reforms in early 2005 to give public banks greater autonomy and provide guidelines for foreign bank expansion. - From 2005: - Foreign banks are allowed to establish wholly-owned subsidiaries (previously only branches were allowed). - RBI plans to amend legislation to eliminate the 10 percent cap on the voting rights of foreign banks. - Any acquisition of 5 percent or more by a foreign bank will still require RBI approval. - FDI is limited to private banks identified for restructuring, with a limit of 74 percent. - Full national treatment for wholly-owned subsidiaries of foreign banks and expansion of FDI to non-distressed banks is not envisaged until 2009. - Foreign banks currently account for about 7 percent of total assets of the banking system, and 5 percent of deposits. - Foreign shareholders account for 21 percent of total trading in the Indian stock market. - Empirical findings cited: - Larger foreign bank presence can enhance competitiveness and widen access of qualified borrowers to financing. - Foreign bank entry may lower risks through improved risk management techniques and more realistic provisioning against bad loans, and may contribute to making more capital or liquidity available when needed. - The key financial soundness indicators of foreign banks in India are somewhat better than for public or domestic private banks. ### How Can India Benefit More from Globalization? (selected findings and recommendations) - Tariff liberalization: - Authorities committed to decreasing customs duties to ASEAN levels (9 percent) by 2009. - Tariff reductions continued in 2004/05: - Peak non-agricultural tariff rate declined from 20 percent to 15 percent. - Average tariffs fell by 5 percentage points to 17 percent. - Staff encouraged faster liberalization; faster convergence to ASEAN levels would enhance competitiveness and help reach objective of doubling India’s share in world trade. - Trade facilitation: - Efforts to streamline customs procedures—pilot projects to improve risk-based assessments and reduce costly inspections—should be expanded together with reduction of nontariff barriers. - Multilateral and regional agreements: - Authorities supported the Doha Round as the best forum for addressing agricultural issues and expanding market access, but noted developed countries’ reluctance to reduce farm support undermined reaching an agreement. - Authorities view South Asian Free Trade Agreement and other regional/bilateral agreements as important for economic cooperation and building support for multilateral liberalization. - Staff supported efforts to enhance intra-regional trade but emphasized need for further MFN-based tariff reductions to minimize trade diversion from PTAs and cautioned against complex webs of tariff schedules and regulations from multiple PTAs. - Capital account liberalization: - Authorities aim to continue gradual liberalization of capital flows. - Proposals under consideration to progressively ease quantitative limits on foreign investors’ access to domestic equity and debt markets. - Range of views among authorities on scope and pace of liberalization due to concerns about origin of inflows and potential macroeconomic volatility. - Liberalization of outflows proceeding; further liberalization would be achieved through gradually lifting remaining restrictions. - Pension funds are not allowed to invest abroad under the draft Pension Bill, but this provision could be reconsidered once the system is well established. - Staff underlined potential benefits from further capital liberalization—more rapid financial sector development and enhanced risk diversification—but generally supported gradual approach given still-large fiscal imbalances. - FDI: - Progress toward liberalizing FDI; interest remains very high but actual FDI raised remains low relative to many other emerging market economies. - Staff welcomed raising of FDI limits in some sectors and urged increases in insurance and retail. - Continued improvement in overall business climate could have a large pay-off. - Authorities plan to expand Special Economic Zones (SEZs) to spur FDI, offering tax incentives, good infrastructure, and single window clearance. - Labor market reform: - Less restrictive labor laws would enhance employment prospects; some 100 million new labor market entrants expected in the next decade. - India’s labor laws perceived as more rigid than in other countries in the region, stalling large-scale manufacturing development. - Authorities acknowledged restrictive labor laws impede FDI in manufacturing but did not see them as key constraint for most Indian corporates. - Staff-supported reforms under consideration by authorities include: - Amending the contract labor law to expand industries able to hire contract workers. - Streamlining labor regulations. - Raising the cutoff size for firms exempt from certain labor laws, inspections, and reporting requirements. - Political opposition and lack of adequate social safety net complicate moves toward greater labor flexibility. - Textile sector evidence: - Textile and clothing production grew by over 11 percent y/y in January-October. - Exports to U.S. markets have grown by 23 percent y/y according to U.S. Bureau of Census data. - Roadblocks remain: labor market rigidities, poor infrastructure, legacy of small–scale industry reservation limiting economies of scale. ### Other issues - Current account and Article VIII: - India eliminated a restriction on payments for current account transactions subject to approval under Article VIII (Annex II, Section VII). Other restrictions remain and staff encouraged their removal. - Statistical improvements: - Planned publication of a CPI with a 2000 base year and a new producer price index. - Planned creation of a National Statistical Office in 2006, merging the Central Statistical Office with the National Sample Survey Organization. - While statistics are adequate for surveillance, weaknesses remain in timeliness and coverage (Annex V). - Authorities encouraged to address issues identified by the 2004 data ROSC and a recent follow–up technical assistance mission. - An FSAP update would be welcome given significant financial sector reforms and rapid insurance sector growth; authorities currently focused on self-assessment. ### Staff appraisal — Major findings and policy recommendations - Growth and outlook: - Structural reforms since the early 1990s have yielded rewards; growth nearing 7 percent in 2004/05 and increasingly broad–based. - In 2005/06, with a near normal monsoon, growth should exceed 7½ percent. - Structural agenda: - Favorable conditions provide opportunity to accelerate structural agenda: address infrastructure bottlenecks, deepen global integration, and accelerate annual growth to 8–10 percent to create jobs and improve rural living standards. - Improve business climate and regulatory environment; reform restrictive labor laws to encourage domestic and foreign private participation and job creation. - Macroeconomic vigilance: - Macroeconomic policies should remain vigilant in 2005/06 due to strong domestic demand and high world oil prices contributing to rising inflation and widening current account deficit. - Fiscal policy: - Fiscal policy should counter demand pressures. - Authorities should strive to meet the minimum adjustment required under the FRBMA to maintain credibility and lead by example for states. - Any revenue overperformance should be directed to deficit reduction and authorities should identify potential expenditure savings. - Oil prices and subsidies: - India must adapt to a higher oil price environment; government has shared burden but should move to full pass–through. - Government could replace special price subsidies with targeted support for the poor. - Desirable to reinstate an APM and shift petroleum taxation further toward a specific basis, in a revenue–neutral manner and with automatic inflation adjustments to protect real value of collections. - Government should consider full liberalization of oil prices in the medium run. - Monetary policy: - Monetary policy needs to remain focused on keeping inflation expectations in check. - Recent increase in the reverse repo rate was appropriate; further interest rate increases may be needed given tightening supply–side constraints and upside risks to domestic demand growth. - Exchange rate policy: - RBI should continue two–way flexibility in exchange rate management. - Despite recent real effective appreciation, competitiveness appears adequate and staff analysis finds exchange rate close to fair value. - Two-way flexibility will facilitate economic adjustment and encourage hedging of foreign exchange risk. - Public debt and fiscal environment: - Public debt remains high despite fiscal adjustment since 2001/02; medium–term fiscal environment more challenging. - Central government fiscal deficit reached an eight–year low in 2004/05 but improvement partly reflects cyclical upturn and low interest rates; high oil prices shifted off–budget; tax and expenditure reform slower than envisaged. - Large planned increases in infrastructure and social spending complicate center’s efforts to meet fiscal targets. - Tax and spending reform: - Further tax base broadening needed: - Introduction of a VAT in most states and expansion of services tax base are important progress. - Modernization of tax administration will help enlarge the tax net. - Central government can broaden tax base by trimming exemptions and continuing expansion of service tax base. - Development of tax expenditure estimates recommended. - Consolidate VAT gains by bringing remaining states on board, phasing–out the CST, and agreeing with states on revenue–sharing to lay ground for GST introduction. - Spending efficiency and subsidy reform needed: - Improve targeting of support to the needy. - Subsidy reform to free resources for infrastructure, social spending, and deficit reduction. - Proceed cautiously with rural employment program while providing incentives for self–targeting. - Consider replacing numerous welfare programs and subsidies over time with a better–targeted social safety net. *Source: _cr0655 - 33. Greater emphasis should be given to addressing other impediments to the (IMF staff report content as supplied).* ### 51. The pending passage of the Pension Bill would be a welcome step toward ### The pending passage of the Pension Bill would be a welcome step toward ### Pension reform - Introduction of fully–funded defined contribution pensions will: - help provide a secure and sustainable source of retirement income. - aid in the development of capital markets. - Unfunded pension liabilities of existing defined benefit schemes for civil servants: - require parametric revisions to ease the fiscal burden and make these liabilities manageable. ### States’ fiscal health and reforms - Recent important steps improved states’ fiscal health, but deeper reforms are needed: - States have, in the aggregate, succeeded in reducing their overall and current deficits. - Further reforms needed include tax base broadening and reforms of pension, subsidy, and power sectors to sustain and extend fiscal gains. - Introduction of a VAT in most states is an important step. - Implementation and limitations of TFC recommendations: - Implementation of TFC recommendations will provide states with greater resources and incentives to undertake fiscal reform. - Incentives provided may be too small to ensure that some states with large deficits adjust, and in other states, TFC targets are not sufficiently ambitious. - Harder budget constraints—via tight global borrowing ceilings, reform of small savings, and greater reliance on market borrowing—will be key to enhance the effectiveness of the TFC. ### Private investment, infrastructure, and regulatory framework - Ensuring regulatory and other policies support private investment and productivity growth is a key challenge. - Public–private partnerships (PPPs): - Emphasis on PPPs to ensure greater private participation in infrastructure is welcome. - Government should evaluate and account for all contingent liabilities associated with infrastructure projects. - SPV for infrastructure should be accompanied by financial reforms to broaden the long–term investor base. - Power sector: - The 2003 Electricity Act provides a solid framework for reform and implementation should be accelerated. - Regulatory framework: - An improved regulatory framework is needed to support private participation and productivity growth. ### Financial system resilience and development - Overall resilience: - The Indian financial system has remained resilient due to underlying strength of financial regulation and effective response to recent fast credit growth. - Prudential concerns and supervision: - Large and growing share of credit directed to higher–risk “priority sectors” suggests prudential standards may need strengthening and reliance on priority sector lending reduced by addressing impediments to lending. - RBI needs to monitor carefully credit card debt; the rapid rise in such debt and the already sizable share of nonperforming loans point to need for close supervision and consumer education. - RBI should continue efforts to strengthen regulation of UCBs, which remain in poor health. - Basel II readiness and disclosure: - RBI should continue efforts to ensure readiness for the planned move to Basel II by enhancing relevant skills for bank supervisors, monitoring improvements in commercial banks’ risk management systems, and improving disclosure practices of banks. - Financial sector development: - With improving financial soundness, authorities should emphasize underlying financial sector development. - Consider encouraging more foreign participation in the banking system to provide banks tools and incentives to increase efficiency. - RBI should consider accelerating implementation of its banking reforms. - Steps to develop the government and corporate securities market are welcome; certain aspects, such as the introduction of short–selling, could be accelerated. ### Global integration, trade, and FDI - India’s integration into the global economy has yielded benefits; further opening would allow fuller growth potential. - Trade policy: - Given excellent progress already made in reducing tariffs, faster convergence to ASEAN levels should be achievable. - Authorities’ pursuit of preferential trade agreements (PTAs) bolsters the case for MFN-based tariff reductions to reduce trade diversion potentially associated with PTAs. - Foreign direct investment and labor market reform: - Continued loosening of FDI limits, together with efforts to improve the business climate and liberalize labor laws, would have a major payoff. - Increased FDI would bring technological and managerial know–how to India while reducing reliance on shorter–term capital flows. - Although liberalizing labor laws is complex and socially contentious, some key steps short of fully flexible hiring and firing seem feasible in the near term. *Source: _cr0655 - 51. The pending passage of the Pension Bill would be a welcome step toward* ### 57. It is recommended that the next Article IV consultation take place within the standard ### It is recommended that the next Article IV consultation take place within the standard 12–month cycle. ### Real economy: growth and drivers - Growth has been described as "robust" and "helped by a normal monsoon." - Real GDP (at factor cost) growth (selected years and staff projections): - 2002/03: 4.0 percent - 2003/04: 8.5 percent - 2004/05: 6.9 percent - 2005/06 (prov./staff proj.): 7.6 percent; Jul/Aug/Sep/Oct/Nov/Dec monthly notes indicate continuation around "8.0" and "8.1" in parts of 2005/06 reporting. - Contributions to real GDP growth broken out by sector (as shown): Agriculture, Industry, Services (figures presented in charts). - Industrial indicators cited: - Strong industrial production; increased automobile production (passenger and commercial vehicles; charts in thousands). - Capacity utilization reporting close to or above optimal levels rising toward 2005. - Stock prices (BSE Sensex, 1995=1000) and business confidence indices increased markedly through 2005. ### External sector: current account, trade, capital flows, reserves, and exchange rate - The current account moved into deficit as trade deficit widened on high oil prices and strong domestic demand. - Current account balance (annual US$ billions): - 2001/02: 3.4 - 2002/03: 6.3 - 2003/04: 10.6 - 2004/05: -6.4 - 2005/06 (prov./proj.): -23.1 - Merchandise trade balance (US$ billions): - 2001/02: -11.6 - 2002/03: -10.7 - 2003/04: -15.5 - 2004/05: -38.1 - 2005/06 (prov./proj.): -64.4 - Merchandise exports (US$ billions): 2001/02: 44.7; 2002/03: 53.8; 2003/04: 64.7; 2004/05: 80.8; 2005/06: 97.3 - Merchandise imports (US$ billions): 2001/02: 56.3; 2002/03: 64.5; 2003/04: 80.2; 2004/05: 161.7; 2005/06: 161.7 (table notes customs vs. BOP basis) - Net oil imports (US$ billions): 2001/02: 15.6; 2002/03: 17.1; 2003/04: 22.4; 2004/05: 32.1; 2005/06: 41.9 - Capital flows and international reserves: - Foreign exchange reserves (end-period, US$ billions): 2001/02: 54.1; 2002/03: 76.1; 2003/04: 113.0; 2004/05: 141.5; 2005/06 (various months): 143.8–146.0 (series shows totals and month-to-month levels). - Increase in gross reserves (negative sign convention): 2001/02: -11.8; 2002/03: -22.0; 2003/04: -36.9; 2004/05: -28.6; 2005/06: -4.5 - Exchange rate and competitiveness: - Rupee/US$ (end-period series and indices); REER movement shown with end-period REER (January 2000 = 100) and period changes. - Figures indicate a depreciation of the exchange rate and a slowing of reserve build-up more recently. ### Money, credit, and inflation - Headline wholesale price inflation (WPI, twelve-month percent change) is "beginning to rise" with sectoral contributions (e.g., mineral oils; basic metals). - Money and credit growth (12-month percent change): - Broad money (M3): 2001/02: 14.1; 2002/03: 14.7; 2003/04: 16.7; 2004/05: 12.4; 2005/06 (25-Nov-05): 17.0 - Reserve money growth shown in monthly series and contributions (charts). - Credit to commercial sector (12-month percent change): 2001/02: 12.4; 2002/03: 18.5; 2003/04: 13.0; 2004/05: 26.0; 2005/06 (25-Nov-05): 25.7 - Interest rates and liquidity: - 91-day Treasury bill yields (end period): series shows movement around 5–6 percent in 2004–2005 (e.g., 5.7 on 13-Dec-05). - RBI raised reverse repo rates in line with market expectations amid accommodative liquidity. - Yield curve snapshots provided (1D, 3M, 1Y, 5Y, 10Y) with dates Oct-28-2005, Aug-2004, Oct-24-2005. ### Infrastructure and competitiveness - Electricity supply: peak shortage in electricity supply rose across 2001/02–2005/06 reaching 12.6 percent in 2005/06 (data from April 2005 to August 2005 cited). - Value lost to electricity outages (percent of sales) compares India unfavorably to peers (chart with India among worst). - Electricity costs for industrial clients in 2003 displayed in US$ per kwh, with India towards higher relative costs. - Port capacity and efficiency: - Many ports operating close to capacity; capacity utilization charts for major ports (03-04 and 04-05(P)). - Average pre-berthing time (hours) and average turn-around (days) increased for several ports between 03-04 and 04-05(P), indicating delays and slow processing. ### Fiscal trends and medium-term fiscal outlook - Fiscal balances: - Central government deficit (percent of GDP, est./proj.): series from 1997/98 through 2005/06 shows central deficit pausing adjustment in 2004/05–2005/06 (charts). - General government deficit (percent of GDP) fell but central government paused adjustment to facilitate greater transfers to states; state government deficits reduced in 2005/06 but projected to stall. - General government debt (percent of GDP) remains around mid-80s: e.g., 2004/05: 86.1 (est./proj. series). - Key fiscal numbers (central government operations, selected years, in billions of rupees and percent of GDP): - Total revenue and grants (2004/05 outturn): 3,680 (Rs. billion); ratios and historical series presented. - Total expenditure and net lending (2004/05 outturn): 5,192 (Rs. billion). - Overall balance (staff definition and authorities' definition) around -1,497 to -1,511 (Rs. billion) for 2004/05 in tables. - Central government primary balance and net interest payments presented; primary balance improving in projections. - Medium-term fiscal scenarios (Annex I): - Baseline: central government meets FRBM targets; states' adjustment falls short of TFC targets. Central government achieves current balance by 2008/09. Growth stabilizes at 6½ percent. Debt declines to 80 percent of GDP by 2009/10 but remains vulnerable to shocks. - Reform (best case) scenario: both center and states meet medium-term targets. Requires annual revenue increases of about 0.9 percent of GDP and improved public expenditure efficiency. Capital spending rises cumulatively by 3¼ percentage points of GDP by 2009/10; growth accelerates to 8 percent; debt declines to under 77 percent of GDP by 2009/10. - Unchanged policies (worst case): revenue rises less than ½ percentage point per annum; primary deficit remains around 2 percent of GDP; growth slows to 6 percent; growth-interest differential fades by 2009/10; debt would rise. - Projections and assumptions (Table I.1 / public sector debt sustainability): - Baseline public sector debt (percent of GDP): 2004: 86.2; 2005: 86.1; projections to 2010: 79.2 (2010). - Debt-stabilizing primary balance noted and identified debt-creating flows shown with numeric contributions across years. - Key macro assumptions underlying baseline (selected): - Real GDP growth (in percent): 2005/06: 7.3 (projection series shows 6.5 for later years as baseline stabilization) - Average nominal interest rate on public debt (in percent) around 8.0 across projections. - Inflation (GDP deflator) around 4–5 percent in projections. ### Corporate and financial sector soundness - Corporate leverage and liquidity: - Debt-equity ratio and current ratio (1998–2004) rising (charts with numerical scale: e.g., debt-equity ratio series 70–105 across 1998–2004). - Interest coverage ratio (operating profits to interest payments) declined across some years (chart). - Banking sector soundness: - Net nonperforming loans (percent of outstanding net loans): 1998/99: 5.5; 1999/00: 4.4; 2000/01: 2.9; 2003/04: 2.0 (chart). - Gross nonperforming loans (percent of outstanding loans): 1998/99: 10.4; 2001/02: 8.8; 2003/04: 7.2; 2004/05: 5.2 - Risk-weighted capital adequacy ratio (CAR): overall around 12.0–12.9 across 2001/02–2004/05; by bank type: public sector banks ~11.8–12.9; domestic private banks ~12.5–13.7; foreign banks ~12.9–15.0. - Commercial bank profitability and capital adequacy (return on assets and CRAR) remain comfortable in presented charts. - Financial indicators (selected): - Broad money (M3) growth and credit to commercial sector growth shown; credit growth strong in 2004/05 and 2005/06 (25.7 percent as of 25-Nov-05). - 91-day T-bill yield (end period) around 5.7 percent (13-Dec-05). ### External debt and balance of payments - External debt sustainability (Table 10 and related figures): - External debt (percent of GDP, end-period) series: 2001/02: 20.7; 2002/03: 20.6; 2003/04: 18.6; 2004/05: 17.9; 2005/06 projection: 17.9 - Short-term debt (percent of GDP) and ratios of reserves to short-term debt shown (ratio of gross reserves to short-term debt improved notably from early 2000s). - Gross external financing need (US$ billions): 2004/05: 39.1; projections show increases to 56.5 (2010/11) in the table (series across 2000–2010). - Debt-to-exports ratio declining in projections (e.g., 2004: 93.4; 2010/11: 45.6 in Table 10 projections). - Balance of payments (Table 3 highlights): - Overall balance (US$ billions): 2001/02: 11.8; 2002/03: 17.0; 2003/04: 31.4; 2004/05: 26.2; 2005/06: 4.5 - Foreign direct investment, net (US$ billions): 2001/02: 4.7; 2002/03: 3.2; 2003/04: 3.4; 2004/05: 3.0; 2005/06: 4.6 - Portfolio investment, net (US$ billions): 2001/02: 2.0; 2002/03: 0.9; 2003/04: 1.4; 2004/05: 8.9; 2005/06: 9.3 ### Key headline statistics (selected) - Nominal GDP (2004/05): US$691 billion - Population (2004/05): 1.08 billion - GDP per capita (2004/05): US$640 - IMF quota: SDR 4,158.2 million - Net of forward liabilities (foreign exchange reserves, US$ billions end-period): series shows 78.5; 114.4; 141.5; ...; 143.8 across years. - Current account balance (percent of GDP, selected): 2001/02: 0.7; 2002/03: 1.2; 2003/04: 1.8; 2004/05: -0.9; 2005/06 projection: -3.0 ### Policy implications and recommendations implicit in the analysis - Maintain standard 12–month Article IV consultation cycle (explicit recommendation). - Fiscal policy: - Implement FRBM and TFC-targeted consolidation to achieve current balance for central government by 2008/09 in the baseline. - For stronger outcomes (reform scenario), pursue revenue-raising of about 0.9 percent of GDP annually and improve public expenditure efficiency to support higher capital spending and faster growth. - Avoid "unchanged policies" trajectory which would leave primary deficits around 2 percent of GDP and allow debt to rise. - Monetary and macroprudential stance: - Address rising money supply and credit growth amid low interest rates and accommodative liquidity to rein in wholesale inflation pressures. - RBI actions (raising reverse repo) are noted as responses to liquidity and inflation dynamics. - External and structural policies: - Monitor reserve accumulation trends, capital flows, and exchange rate developments given the widening trade deficit and stronger domestic demand. - Address infrastructure bottlenecks (electricity shortages, port capacity and delays) to sustain higher growth and competitiveness. - Financial sector vigilance: - Continue strengthening bank asset quality monitoring and provisioning standards, given progress in NPL reduction but remaining vulnerabilities. - Monitor corporate leverage, interest coverage, and sectoral lending concentrations. *Italic: Source — IMF staff report content as provided in the supplied PDF excerpts.* ### 1. While India’s macroeconomic statistics are adequate for surveillance, weaknesses ### _cr0655 - 1. While India’s macroeconomic statistics are adequate for surveillance, weaknesses remain in the timeliness and coverage of certain statistical series ### Overview - India produces extensive economic and financial statistics and subscribed to the SDDS on December 27, 1996; began posting metadata on the Dissemination Standards Bulletin Board on October 30, 1997, and is currently in observance of the SDDS using flexibility options for: - timeliness of data on general government operations, and - periodicity and timeliness of labor market data. - Authorities plan further improvements in timeliness, periodicity, and coverage across several statistical areas. - Many key financial variables are available weekly or monthly and are published in official documents or via press releases. ### Data ROSC (ROSC data module, IMF Country Report No. 04/96; published April 2004) — key assessments and prioritized recommendations - The ROSC assessed India’s dissemination practices against SDDS and quality of six datasets using the Data Quality Assessment Framework (DQAF). - Identified issues relate to periodicity, coverage, and quality. Prioritized recommendations target national accounts, consumer and wholesale price indices, fiscal, monetary, and balance of payments statistics. Major domain findings: - National accounts - CSO rebased annual national accounts and began publishing quarterly data in 1999. - Dissemination lag for quarterly releases reduced to two months from three months. - Planned release of new national accounts series with base year 1999–2000 in January 2006. - Quarterly data available only from 1996Q2 and relate only to production-based data. - Expenditure category information available with considerable delay (at least ten months after end of fiscal year). - CSO plans to disseminate quarterly expenditure-based aggregates starting in 2007 and aims to reduce dissemination lag for annual expenditure-based estimates to three months. - Industrial production index (IPI) - May 2000: CSO released revised IPI time series using WPI (base year 1993/94) as deflator. - Government contracted CMIE to increase number of respondents and products in the sample. - Price statistics - CPIs are based on weights at least twenty years old and do not fully capture current price developments. - CSO plans to publish a revised CPI with a 2001 base year and a new producer price index. - Presently four CPIs for narrow consumer categories (industrial workers; urban and nonmanual employees; agricultural laborers; rural laborers). - CSO compiling an all-India CPI covering general population of urban and rural sectors separately. - CPIs published with a lag of about one month. - WPI published weekly with a lag of two weeks and is subject to large revisions, especially during rising inflation. - New WPI series published in 2000 (updated weights, new categories, base year 1993/94); representativeness may be undermined by small product sample and infrequent weight updating. - External sector statistics - Concepts and definitions broadly in line with BPM5, but RBI presentation does not follow BPM5. - Trade data suffer from quality, valuation, timing, and coverage problems; trade prices, volumes, and composition not regularly available timely. - External debt statistics available quarterly from January 2001 with a one quarter lag. - Short-term external debt presented on an original maturity basis; short-term residual maturity attribution available only annually and excludes residual maturity of medium- and long-term nonresident Indian accounts. - IIP statistics cover BPM5-prescribed sectors and annual data disseminated within six months of reference period. - India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity under SDDS in December 2001. - Up-to-date variables (total foreign reserves, foreign currency assets, gold, SDRs) available weekly via RBI weekly statistical supplement. - Monetary and financial statistics - RBI website and RBI Bulletin publish interest rates, exchange rates, foreign reserves, monetary survey, and government securities auction results. - Frequency and quality of dissemination have improved substantially. - Crucial data (RBI forward liabilities and intervention data) still published with lags of two to three months. - Mission (May 2002) found broad conformity with MFSM but deviations: - Resident sector sectorization does not provide full sectoral distribution of domestic credit; current subdivisions: (i) central government, (ii) state government, (iii) 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. - Recommendation: adopt full range of sectors per MFSM and include accrued interest on a monthly basis instead of quarterly. - Fiscal operations - Ministry of Finance posts selected central government monthly fiscal data and quarterly debt data on its website. - No monthly fiscal performance data at the state level; annual data available only with an eight to ten month lag. - Consolidated information on local government operations unavailable. - Functional and economic classification of expenditures available with considerable lag; scope to improve analytical presentation of fiscal accounts. - Reporting to IMF for Government Finance Statistics Yearbook is adequate but limited to cash data and central government coverage. ### Additional statistical reform issues being addressed (from August 2001 Report of the National Statistical Commission) - Revise statistical and reporting methods to reflect shift to a more market-oriented economy after elimination of industrial licensing. - CSO to improve proactive and effective interaction with other agencies in decentralized statistical system; planned establishment of the National Statistical Commission noted as a first step. ### Table of Common Indicators Required for Surveillance (selected items, as of December 13, 2005) — frequency and data-quality flags (as presented) - Exchange Rates: Date of latest observation 12/13/05; Date received 12/13/05; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 12/2/05; Date received 12/9/05; Frequency W; Frequency of Reporting W; Frequency of Publication W. - Reserve/Base Money: 12/2/05; 12/9/05; W; W; W. - Broad Money: 11/25/05; 12/9/05; BW; BW; BW; Data quality flags include O, O, LO, LO and O, O, O, O, O. - Central Bank Balance Sheet: 9/05; 7/05; A; A; A. - Consolidated Balance Sheet of the Banking System: 8/05; 7/05; A; A; A. - Interest Rates: 12/13/05; 12/13/05; D; D; D. - Consumer Price Index: 11/26/05; 12/9/05; W; W; W; Data quality flags include O, LNO, O, O and LNO, LO, O, O, O. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 7/05; 7/05; A; A; A; Data flags include LNO, LO, O, O and O, O, O, O, LO. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: 10/05; 10/05; M; M; M. - Stocks of Central Government and Central Government‑Guaranteed Debt: 7/05; 7/05; A; A; A. - External Current Account Balance: 10/05; 10/05; Q; Q; Q; Data quality flags LO, O, LO, O and LO, O, O, O, LO. - Exports and Imports of Goods and Services: 10/05; 10/05; Q; Q; Q. - GDP/GNP: 9/05; 9/05; Q; Q; Q; Data quality flags LO, LNO, LO, LO and LNO, LNO, O, O, LO. - Gross External Debt: 11/05; 11/05; Q; Q; Q. ### Recent economic developments and IMF staff/PIN highlights (February 2006) - Industrial production: 8 percent growth in October-November (softened; slightly below first-half levels). - GDP growth: 8 percent in the first half of the year; staff projects growth of over 7½ percent for 2005/06; in 2006/07 growth expected to decline slightly. - External current account: in first half of fiscal year (April-September) external current account deficit reached 1¾ percent of projected annual GDP (in line with staff projections). - Trade: healthy export growth of more than 20 percent (y/y); import growth of almost 50 percent—more than 40 percent excluding oil—pushed trade deficit above 4 percent of projected annual GDP. - Balance of payments: strong capital inflows, led by portfolio investment, contributed to a small balance of payments surplus; recent customs data indicate exports and imports growth slowed significantly during October-December. - Financial markets and reserves: - Since mid-December, net inflows from foreign institutional investors totaled close to US$2 billion, contributing to a 3 percent appreciation of the rupee against the dollar. - After rising more than 42 percent in 2005, the SENSEX is up about 5 percent this year. - International reserves fell by $7 billion in late December (India Millennium Deposits redemption) but recovered by more than US$2 billion to reach $139 billion on January 20. - Inflation and monetary policy: - WPI stood at 4.4 percent in mid-January; staff revised downward WPI inflation projection to 4¾ percent this fiscal year and 5.5 percent next year. - RBI raised key policy rate by 25 bps on January 24; reverse repo rate increased to 5½ percent. - Government securities yields: rates rose 50 bps at the short end and 20 bps at the longer end after the announcement. - Budgetary developments (through December): - Overall central government deficit stood at 3.1 percent of projected annual GDP (72 percent of the annual budget target). - Current deficit at 2¼ percent of GDP (84 percent of budget). - Government expects revenue overperformance of 0.2 percent of GDP (special dividends from state-owned companies). - Expenditures revised up by 0.2 percent of GDP (compensation, in bonds, for oil company losses); offset by expected savings including defense, resulting in small fiscal overperformance. - Structural measures implemented: - Allow FDI in the retail sector for single-brand stores, up to a maximum of 51 percent. - Concessions awarded for modernization of Delhi and Mumbai airports; winning consortiums offered a 74 percent stake. - RBI allowed banks to appoint business correspondents to take deposits and offer loans without opening branches. - National accounts revision released January 31: - 2004/05 real GDP growth at constant factor prices estimated at 7.5 percent (revised up from earlier estimate of 6.9 percent). - Services and industry growth revised upward by 0.4 percentage point to 9.9 percent and 8.6 percent respectively. - Investment grew by around 16 percent for the third year in a row. - Revisions to historical nominal GDP figures and sectoral composition minimal. - Public Information Notice summary: - GDP growth in 2004/05 at 7½ percent (recently revised upward from 6.9 percent). - Staff projects inflation to rise from about 4¾ percent in 2005/06 to 5½ percent in 2006/07. - Staff projects current account deficit to reach 3 percent of GDP in 2005/06. - Asset markets: equity prices up around 50 percent from end-April; property prices up by over 20 percent annually in major cities over past two years. - Exchange rate: rupee appreciated by 4 percent against the dollar in the eight months to June 2005 (6½ percent in real effective terms); volatility in second half of 2005 with a period of depreciation. *Source: Statement by the IMF Staff Representative (February 6, 2006) and Public Information Notice (PIN) No. 06/17 (February 21, 2006).* ### 0.8 percentage points reduction in subnational deficits, contributed to a fall in the general ### _cr0655 - 0.8 percentage points reduction in subnational deficits, contributed to a fall in the general ### Fiscal developments and public debt - A 0.8 percentage points reduction in subnational deficits contributed to a fall in the general government deficit to under 7½ percent of GDP, enough to stabilize public debt at about 86 percent of GDP. - The 2005/06 Budget deficit target of 4.3 percent of GDP falls short of the minimum reduction required by the Fiscal Responsibility and Budget Management Act. - Significant spending increases for key social and infrastructure needs and higher transfers to the states were factors behind the shortfall. - Staff project the general government deficit to rise, for the first time in four years, to 7¾ percent of GDP. - Directors noted that, notwithstanding deficit reduction since 2001/02, India’s large public debt remains a key constraint on growth. - Without further enhancing tax revenues and reducing lower-priority spending, creating fiscal space for planned large increases in infrastructure and social spending will be difficult. - Fiscal consolidation is seen as a prerequisite for: - more complete financial sector development, - further opening up of the capital account, - and reducing the risk that government borrowing needs will crowd-out the private sector as credit to the private sector rises fast. ### Banking sector and financial stability - Commercial banks have continued to reduce nonperforming assets, and aggregate capital adequacy remains high. - Banks have reduced exposure to interest rate risks by decreasing holdings of government paper and shortening maturity. - Declining profitability due to rising interest rates has been in part offset by higher credit growth. - Interest rate risk remains a concern: bank holdings of government paper are at 38 percent of assets and in excess of statutory requirements. - Rapid credit growth raises concerns about credit quality. - Cooperative banks, accounting for about 6 percent of banking system assets, remain in poor health. - Directors commended the underlying strength of financial regulation and the effective response to recent rapid credit growth. - Recommendations for the financial sector included: - close monitoring of fast-growing credit card debt, - consideration of further strengthening prudential standards where appropriate, - reducing reliance on priority sector lending floors by addressing structural reforms in lending, - strengthening regulation for cooperative banks, - ensuring RBI readiness for the planned move to Basel II by enhancing monitoring of banks’ risk management systems, upgrading supervisory skills, and strengthening disclosure requirements, - increasing private and foreign participation in the banking sector, including accelerating implementation of the RBI’s banking reform roadmap. ### Macroeconomic performance and risks - The economy showed resilience in 2004/05 despite high world oil prices and a weak monsoon, with growth remaining robust and becoming broader-based. - These trends continued in 2005/06, with growth of more than 7½ percent for the full year expected. - Directors emphasized vigilance in macroeconomic policies due to evolving conditions, noting upside inflation risks from strong domestic demand, a widening current account deficit, and rapid credit growth. - Directors recommended that fiscal policy should counter demand pressures and underlined the importance of overperforming on the budget and meeting the minimum adjustment required under the Fiscal Responsibility and Budget Management Act. - Some Directors cautioned that markets might interpret the pause in deficit reduction in the current fiscal year as a weakening of the commitment to reform. ### Energy policy and inflation - Directors underscored the need for the Indian economy to adapt to permanently higher international oil prices. - They recommended moving gradually to the full pass-through of oil prices—with targeted support for the poor—to help limit fiscal and quasi-fiscal losses and provide incentives for more efficient energy use, aiding competitiveness in the medium term. - Monetary policy should remain focused on keeping inflation expectations in check. - Increases in the reverse repo rate by the Reserve Bank of India in October 2005 and January 2006 were seen as appropriate. - Directors welcomed the RBI’s continued two-way flexibility in exchange rate management. ### Structural reforms and long-run growth - Directors supported government objectives to address infrastructure bottlenecks, alleviate rural poverty, and deepen global integration. - Accelerating structural reforms, including improving the business climate and reforming labor laws, was recommended to foster private and foreign investment and job creation; with acceleration, India could achieve sustained economic growth of 8–10 percent. - Tax reform acceleration was viewed as critical to meet deficit reduction targets: - welcomed introduction of the value-added tax in most states and steps to widen the services tax base and modernize tax administration, - underscored need to further broaden the tax base by trimming exemptions and eventually introducing a goods and services tax with few exemptions, - looked forward to development of tax expenditure estimates. - Greater spending efficiency and improved targeting of subsidies were required; Directors viewed the government’s 2004 subsidy reform blueprint as appropriate and urged rapid implementation. - The new rural employment program represents a potentially large expenditure commitment; Directors advised proceeding cautiously. - Pension reform initiation was welcomed; passage of the Pension Bill would allow fully funded, defined contribution pensions. Revisions to existing defined benefit schemes for civil servants were also required to reduce large unfunded pension liabilities. - State-level fiscal reforms: Directors noted aggregate state deficit reduction in recent years and welcomed Twelfth Finance Commission reforms that provide greater resources and incentives for fiscal reform. They recommended further strengthening state finances via increased conditionality, hardening budget constraints, tighter global borrowing ceilings, tax base broadening, and reforms in pension, subsidy, and state electric utility areas. - Directors supported public-private partnerships for infrastructure investment but cautioned that improved regulatory framework and financial reforms to broaden investor base are also needed. - On trade and FDI: - Further opening of the economy would allow full growth potential to be reached, - Faster convergence of tariff levels to ASEAN levels would be desirable, - Broad-based tariff reductions would help minimize trade diversion from preferential arrangements, - Continued loosening of sectoral limits on foreign direct investment, improved business climate, and labor law liberalization could foster growth and job creation while reducing reliance on shorter-term capital flows. - Some Directors noted that further privatization could spur efficiency gains and provide resources to reduce public debt. - Directors urged consideration of labor market reforms, including expanded contract employment and streamlined labor regulations and reporting requirements. ### Key statistics and selected indicators (as reported) - General government deficit: under 7½ percent of GDP (stabilized public debt at about 86 percent of GDP). - 2005/06 Budget deficit target: 4.3 percent of GDP. - Staff projection: general government deficit to rise to 7¾ percent of GDP in 2005/06. - Bank holdings of government paper: 38 percent of assets. - Cooperative banks’ share of banking system assets: about 6 percent. - Growth expectations for 2005/06: more than 7½ percent for the full year; with reforms, potential sustained growth of 8–10 percent. - Selected table excerpts (reported flows and levels): - Change in real GDP at factor cost (base year 1999/2000): 5.8 3.8 8.5 7.5 7.6 2/ - Change in wholesale prices (period average): 3.4 3.4 5.4 6.4 4.7 2/ - Central government balance (in percent of GDP): -6.4 -6.0 -5.1 -4.3 -4.3 2/ - General government balance (in percent of GDP): -10.1 -9.7 -9.0 -7.4 -7.7 2/ - Gross official reserves (end of period): 54.7 76.1 113.0 141.5 139.5 10/ - (In months of imports): 8.0 9.3 8.7 7.7 5.7 10/ - External debt (in percent of GDP, end of period): 20.7 20.6 18.6 17.9 17.9 2/ - Short-term debt (in percent of GDP): 3.0 3.8 1.9 2.7 2.4 2/ - Debt service ratio (in percent of current receipts): 13.8 16.3 16.3 4.7 6.9 2/ - Change in broad money (in percent): 14.1 14.7 16.7 12.4 17.7 11/ - Interest rate (91-day Treasury Bill rate): 6.1 5.9 4.2 5.3 6.7 12/ - Merchandise exports (in billions of U.S. dollars): 44.7 53.8 64.7 80.8 97.3 2/ - Merchandise imports (in billions of U.S. dollars): 56.3 64.4 80.2 119.0 161.7 2/ - Current account balance (in billions of U.S. dollars): 3.4 6.3 10.6 -6.4 -23.1 2/ - Current account balance (in percent of GDP): 0.7 1.2 1.8 -0.9 -3.0 2/ *Public Information Notice based on the Executive Board discussion summarized in the provided content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0655.pdf_