## _cr0763 — Executive Summary

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### Executive Summary: Key Findings
- India’s economy in a fourth year of rapid expansion, with growth ranging around 8 percent and becoming more broad-based.
- Inflation is contained while credit and asset markets are booming, partly reflecting financial deepening.
- Economic activity and financial markets resilient despite volatile oil prices, slowing U.S. growth, and tightening global liquidity.
- Main policy challenges:
  - Maintain price and financial stability while advancing fiscal and structural reform.
  - Central bank stance: continued gradual removal of monetary accommodation is appropriate to provide insurance against a possible inflation overshoot.
  - Rapid credit growth may pressure asset quality; vigilant supervision, improved risk management and further tightening of prudential standards recommended.
  - Broaden and deepen financial markets: more liquid government securities markets, broaden investor base, foster corporate debt and derivatives markets.
  - Public debt, while declining relative to GDP, is high—measures needed to achieve the center’s medium term targets and create fiscal space for priority social spending (revenue and expenditure measures including broadening the tax base and reforming subsidies).
  - Job creation in the organized sector remains lackluster; infrastructure enhancement and further trade liberalization are priorities.

### I. Economic Backdrop and Recent Macro Developments
- Growth and demand:
  - GDP growth has ranged around 8 percent for four years; Q1 2006/07 demand accelerated to almost 9 percent y/y.
  - Domestic demand main driver; consumption/GDP ratio nearly two-thirds.
  - Investment rebound following corporate restructuring; manufacturing expanding at over 10 percent y/y.
  - Staff estimated trend growth: 7.5 percent annually — continued growth at this rate would double per capita real income in 13 years.
- External sector and capital flows:
  - Current account deficit widening as buoyant imports offset rising exports.
  - Strong capital inflows finance the current account deficit; inflows dominated by portfolio flows and external commercial borrowings (ECBs).
  - Reserves rose to $167 billion by end-October 2006 — equivalent to about 7½ months of imports or about 7¼ times short-term external debt.
  - RBI raised limits on external commercial borrowings by $250 million to $750 million and doubled banks’ credit to joint ventures abroad to 20 percent of banks’ capital.
- Exchange rate and capital flows:
  - Rupee depreciated in first half of 2006; RBI intervened to ease volatility after redemption of Indian Millennium Development Bonds (repayment amount of some $7 billion, including accrued interest).
  - Since mid-2006 depreciation the rupee regained ground; real effective exchange rates broadly around its 2004−2005 level.
- Monetary policy, credit, and financial markets:
  - Since October 2005, RBI gradually raised policy rates:
    - Reverse repo rate risen 100 bps to 6 percent.
    - Repo rate risen 125 bps to 7.25 percent.
  - High credit growth prompted prudential tightening: higher provisioning and boosted risk weights in high-growth areas (including real estate) to above Basel norms.
  - Stock prices recovered and reached historical highs; PE ratios high relative to other countries and India’s recent past; real estate prices continue to grow rapidly.
- Fiscal stance and public debt:
  - Fiscal consolidation paused in FY 2005/06.
  - General government deficit broadly unchanged at 7.4 percent of GDP.
  - General government debt remains high—over 80 percent of GDP.
  - Oil bonds equivalent to 0.3 percent of GDP issued in 2005/06; planned further 0.4 percent of GDP in 2006/07 plus 0.4 percent of GDP in FCI subsidy bonds.

### III. Outlook and Risks
- Near-term macro outlook:
  - Real GDP growth expected to ease to 8.2 percent in 2006/07.
  - WPI inflation expected to remain in the 5–5½ percent range.
  - Robust domestic demand expected to slightly widen the current account deficit.
- Balance of risks tilted to the upside:
  - Risks include demand-driven inflation and asset-quality deterioration from rapid credit growth.
  - International risk: sharper U.S. slowdown could trigger capital outflows and volatility.
- Factors limiting vulnerabilities:
  - Reserves equivalent to over seven months of imports.
  - Short-term external debt amounts to only 12 percent of reserves.
  - Overall external debt is 70 percent of exports.
  - Current account deficit at 1½ percent of GDP described as manageable.
  - A 1-percentage point decline in U.S. growth would reduce India’s growth by about 0.1–0.2 percent in the short run.

### IV. Fiscal Sustainability: Background, Risks, and Policy Measures
- FRBMA targets:
  - Central government revenue (current) deficit of zero and an overall deficit of 3 percent of GDP by 2008/09.
  - Government aims to eliminate general government revenue deficit and reduce general government overall deficit to 6 percent of GDP by 2008/09.
- Staff estimates and gaps:
  - Achieving center’s FRBMA current-balance target in FY2008/09 requires additional measures equivalent to 0.8 percentage points of GDP beyond current-policies baseline.
  - Cumulative decline in general government deficit since 2003/04 enactment of FRBMA: 2¾ percent of GDP; fall in debt/GDP of around 5 percentage points.
  - 13 of 28 states failed to reduce deficits from previous-year levels in 2005/06; 11 states had deficits more than 1 percentage point of state GDP above the 3 percent medium-term TFC target.
- Policy options to meet targets while protecting priority spending:
  - Save a projected 0.2 percent of GDP tax windfall in 2006/07 to overperform the budget.
  - Revenue measures: broadening the tax base by removing CIT and excise duty exemptions could boost revenues by up to 1½ percent of GDP.
  - Expenditure measures: eliminating non-essential subsidies and better targeting food, oil, and fertilizer subsidies could save up to 2¼ percent of GDP.
  - Implement a market-based petroleum pricing mechanism; improve spending efficiency via output-based budgeting and improved service delivery.
  - State-level measures: tighter borrowing ceilings, reduce dependence on NSSF in favor of market borrowings subject to caps; comprehensive NSSF reform recommended.
  - Civil service pay review: caution on Sixth Pay Commission implementation in 2008/09 to limit fiscal risks.

### V. Managing Price and Financial Stability
- Observations and staff recommendations:
  - Monetary aggregates expanding well above RBI indicative projections; real interest rates low historically and cross-country.
  - Credit growth in mortgage, retail, and commercial real estate remains strong despite tightened norms.
  - RBI stance: gradual removal of monetary accommodation appropriate to anchor expectations and moderate credit expansion.
  - Financial stability measures:
    - Strengthen supervision, risk management, and targeted prudential measures.
    - Further tighten selected prudential norms; ensure early recognition of deteriorating credit quality.
    - Adopt Basel II and stress tests; shorten timeline for classifying sub-standard and doubtful loans to align with international practice.
    - Develop securitization: streamline capital requirements for mortgage-backed securitization, reform stamp duties on securitized products, remove legal impediments to secondary market trading.

### Asset Prices: Diagnosis and Policy Stance
- Asset price movements:
  - Holdings of real estate, equity and gold sizable relative to GDP; prices have risen sharply.
  - Since 2000, housing prices in main cities more than doubled; gold prices more than doubled.
  - January 2003–October 2006: SENSEX increased at a compound annual rate of about 40 percent.
- Preconditions for monetary policy to target asset prices not met for India due to rapid structural change and difficulty identifying reliable macro-financial relationships.
- Informal analysis: recent price movements appear driven by fundamentals (housing: rising per capita incomes, population growth, affordability, easier credit; stock market valuations supported by future growth).
- Empirical relation: a 10 percent increase in the stock market index associated with an increase in real private consumption of one tenth of one percent.
- Policy implication: RBI’s approach—tightening prudential norms, raising risk weights in high credit-growth areas, intensifying supervision—judged appropriate.
- Asset market structure (total value US$2,321 billion) and asset shares:
  - Gold: 35% of GDP.
  - Land and Buildings: 202.7% of GDP.
  - Equity: 136.8% of GDP.
  - Household financial assets (selected, percent of GDP across 1993/94, 2003/04, 2005/06): total financial assets 12.6, 14.0, 16.7; deposits 5.4, 5.8, 7.9; shares and debentures 1.7, 0.1, 0.8; insurance funds 1.1, 1.9, 2.2; provident and pension funds 2.1, 1.9, 1.9; currency 1.5, 1.5, 1.5; government securities/small savings 0.8, 2.8, 2.5.

### VI. Financial Market Development Priorities
- Key priorities and authority initiatives:
  - Improve benchmarks: deeper term money market for reliable short-term pricing; increase liquidity in the G-Sec yield curve to establish long-term pricing benchmarks.
  - G-Sec market measures (October 2006 and other steps): expand when-issued trading, extend permitted short sales, allow delivery of borrowed securities for repo, consolidate reissues, legalize stripping under Government Securities Act (2006), propose broaden foreign participation limit from $2 billion to $3.2 billion by March 31, 2007.
  - Corporate bond market: streamline procedures, harmonize stamp duties, set up market makers, develop clearing/settlement.
  - OTC derivatives: 2006 Amendment to RBI Act clarifies legal status and establishes RBI as regulator; banks required to hold minimum regulatory capital for off-balance sheet exposures and adhere to transparency and disclosure; 2006 guidelines introduce fair value accounting norms akin to IAS39.
  - Pension and insurance reforms: pension bill to create a regulator under consideration; new civil servants in central government and 17 states shifting to new pension system.
  - Tarapore Committee roadmap: gradual easing of capital controls linked with fiscal consolidation and financial-sector strengthening; envisaged steps include easing controls on foreign holdings of government and corporate bonds, foreign investment in stock market, and external commercial borrowing while keeping controls on resident individuals with gradually raised caps.

### VII. Employment, Infrastructure, and SEZs
- Employment and labor market:
  - Employment elasticity of growth low; organized sector employment roughly unchanged at about 27 million over the past decade and a half.
  - Some 60 percent of the labor force continues to work in agriculture.
  - Over 800 million Indians live on less than $2 a day.
  - Need to create jobs to absorb excess agricultural labor and 140 million new entrants to labor force over the next decade.
  - Skill gaps require education system adaptation.
- Infrastructure and PPP:
  - World Bank assessment: inadequate infrastructure costs about 1 percent per annum in foregone growth.
  - Infrastructure investment needs to rise by 4 percentage points of GDP over the medium term.
  - India Infrastructure Finance Company (IIFC) raised some $400 million and financed 5 mega-power projects.
  - Recommendations: strong independent sector regulators, develop domestic bond markets for infrastructure finance, record contingent liabilities in the budget.
- Special Economic Zones (SEZs):
  - Over 300 applications; approvals for 34 zones as of October 2006.
  - Industry distribution of notified SEZs (percent of total (34)): IT 55%; Industry 15%; Pharma/bio 12%; Light industry 12%; Multi service 3%; Multi products 3%.
  - Concerns about revenue loss from blanket tax incentives and small size of many SEZs.
  - Mission suggestions: replace tax holidays with targeted incentives; consider raising size threshold for SEZs; approvals limited to projects bringing new capital goods or serving new contracts and domestic-market sales not exempt.

### VIII. Debt Sustainability: Baseline, Sensitivity, and Scenarios
- Baseline assumptions:
  - General government deficit of 6¼ percent of GDP in 2006/07 declining to 5 percent of GDP by 2011/12.
  - Under baseline, gross public debt falls from 80¾ percent of GDP to 69 percent of GDP over the same period.
- FRBML targets:
  - Under baseline, achievement of center’s current-balance target delayed by three years to March 2012.
- High growth scenario:
  - Sustained GDP growth higher by 1½ percentage point compared to baseline would lower general government deficit to under 4 percent of GDP and public debt to 62 percent of GDP by March 2012.
  - Higher growth combined with stronger tax measures and subsidy reform could allow meeting FRBML targets by 2008/09.
- Public sector gross debt projections (percent of GDP): 2001: 80.2; 2002: 85.3; 2003: 86.2; 2004: 86.1; 2005: 83.8; 2006: 81.4; 2007: 78.9; 2008: 76.8; 2009: 74.5; 2010: 72.1; 2011: 69.7.
- Table I.1 baseline macro assumptions (selected):
  - Real GDP growth (percent): 2001: 3.6; 2002: 8.3; 2003: 8.5; 2004: 8.4; 2005: 8.2; 2006: 7.7; projections 2007–2011: 7.5 each year.
  - Average nominal interest rate on public debt (percent): 2006: 8.4 (series and projections shown).
  - Average real interest rate (percent): 2006: 3.5 (series and projections shown).
  - Primary deficit (percent of GDP) projected to decline toward -0.7 by 2011 in baseline.

### IX. Data, Surveillance, and IMF Relations
- Statistical improvements planned:
  - Quarterly demand-side GDP release starting in 2007.
  - Reduce lag in annual expenditure-based estimates to three months.
  - New producer price index compilation; improved preliminary export estimates via expanded electronic customs reporting.
  - Implementation of 2004 FAD technical assistance recommendations in state finance statistics.
- APPENDIX II — Fund relations (as of October 31, 2006):
  - Membership joined 12/27/45; Article VIII.
  - Quota: 4,158.20 SDR Million; Fund holdings of currency: 3,719.11 SDR Million; Reserve position in Fund: 439.11 SDR Million.
  - SDR net cumulative allocation: 681.17 SDR Million; holdings: 4.93 SDR Million.
  - Outstanding purchases and loans: None.
  - Selected projected obligations to Fund (SDR million): 2006: 6.61; 2007: 27.36; 2008: 27.43; 2009: 27.36; 2010: 27.36.
  - Exchange rate arrangement: since March 1, 1993 the rupee floated; AREAER classification: managed floating with no pre-announced path.
  - Resident representative’s office opened November 1991; Mr. Joshua Felman replaced Mr. Michael Wattleworth as Senior Resident Representative in August 2006.

### X. Staff Appraisal and Executive Board Conclusions (high-level)
- Strong conjuncture provides favorable environment to accelerate reforms to boost sustainable growth and reduce poverty.
- Priorities endorsed by Directors:
  - Fiscal consolidation, financial sector development, and removal of structural bottlenecks.
  - Vigilance against overheating; support for gradual removal of monetary accommodation.
  - Market-determined exchange rate policy supported; gradual capital account liberalization conditional on fiscal consolidation and financial deepening.
  - Recommendations to broaden tax base (eliminate sectoral and area-based CIT incentives, pare excise exemptions), accelerate subsidy reform, and strengthen state-level budget constraints.
  - Continue supervisory vigilance, implement comprehensive stress tests, proceed with Basel II, and deepen markets (short selling, when-issued trading, consolidated benchmarks, streamlined corporate bond issuance).
  - Structural reforms to strengthen independent regulators, improve PPP investment climate, modify SEZ framework to target incentives, and promote job-intensive inclusive growth.

*Executive Summary of IMF Staff Report _cr0763 — content as provided in the supplied PDF excerpt.*

### Executive Summary ......................................................................................................

### _cr0763 - Executive Summary

### Executive Summary: Key Findings
- India’s performance remains impressive: the economy is in a fourth year of rapid expansion, with growth ranging around 8 percent and becoming more broad-based.
- Inflation is contained while credit and asset markets are booming, partly reflecting financial deepening.
- Economic activity and financial markets have been resilient despite volatile oil prices, slowing U.S. growth, and tightening global liquidity.
- Main policy challenges are maintaining price and financial stability, while advancing fiscal and structural reform:
  - Demand pressures are building, raising the risk of higher inflation down the road. The central bank’s stance of continued gradual removal of monetary accommodation is appropriate and would provide insurance against a possible inflation overshoot.
  - Rapid credit growth may pressure asset quality. Vigilant supervision, improved risk management and further tightening of prudential standards would provide early warning of any emergent vulnerabilities.
  - Broader and deeper financial markets would support economic and financial stability over the medium term; steps to promote more liquid government securities markets, broaden the investor base, and foster corporate debt and derivatives markets would be useful.
  - Public debt, while declining relative to GDP, is high. Measures are needed to achieve the center’s medium term targets, and fiscal space is needed for priority social spending. Steps are warranted on both revenue and expenditure sides, including broadening the tax base and reforming subsidies. Better targeting the tax incentives for SEZs would reduce the risk of an erosion of the tax base. Overperforming on the 2006/07 budget would also help contain overheating pressures.
  - Despite fast growth, job creation in the organized (formal) sector is lackluster, and poverty remains widespread. Steps are needed to enhance infrastructure and further liberalize the trade regime.
- Decisive progress on these fronts would further boost sustainable growth and reduce poverty over the medium term, consistent with the authorities’ objectives.

### I. Background
- GDP growth has ranged around 8 percent for four years running; the expansion has been resilient in the face of volatile oil prices and slowing U.S. growth.
- Domestic demand is the main driver of activity; India’s consumption/GDP ratio—nearly two-thirds—is one of the highest in Asia.
- Investment has rebounded strongly following corporate restructuring, fed by buoyant corporate profits; exports are growing apace.
- Staff’s estimated trend growth: 7.5 percent annually — continued growth at this rate would double per capita real income in 13 years.
- Reform momentum is critical to sustain the demographic dividend and raise living standards; building consensus for reforms is challenging given diverse coalition partners and center–state dynamics.
- The 2006 Article IV consultation focused on four main policy challenges: (1) fiscal sustainability while financing development; (2) managing price and financial stability; (3) fostering a deeper and broader financial sector; and (4) promoting more job-intensive, inclusive growth (with focus on SEZs, infrastructure, and trade).

### II. Economic Backdrop: Recent Macro Developments
- Growth and inflation:
  - The economy continues to grow above trend. In the first quarter of 2006/07, demand accelerated to almost 9 percent y/y.
  - Growth is broad based: robust consumption, investment and exports. Manufacturing is expanding at over 10 percent y/y; industry has joined services as an engine of growth.
  - WPI inflation is contained; CPI (industrial workers) inflation exceeds 6 percent due to high food prices.
  - A normal monsoon is supporting agriculture.
- External sector and capital flows:
  - The current account deficit is widening as buoyant imports offset rising goods and services exports.
  - Strong capital inflows have comfortably financed the current account deficit; inflows remain dominated by portfolio flows and external commercial borrowings (ECBs), particularly convertible bonds.
  - Foreign institutional investor (FII) inflows rebounded after May/June stock market correction; gross FDI inflows have begun to rise, partly offset by a pickup in outward investment by Indian corporates.
  - Reserves rose to $167 billion by end-October 2006 — equivalent to about 7½ months of imports of goods and services or about 7¼ times short-term external debt.
  - To facilitate expansion of Indian corporations’ overseas activities, the RBI raised limits on external commercial borrowings (by $250 million to $750 million) and doubled the amount banks can extend in credit to joint ventures abroad to 20 percent of banks’ capital.
- Financial markets and corporate behavior:
  - Credit and asset markets are booming; Indian corporates are expanding overseas through high-profile acquisitions.
  - Corporate profitability is strong and leverage is relatively low following a decade of restructuring.

### Boxed Findings (selected)
- Rangarajan Committee (Box 1) recommendations included:
  - A new pricing mechanism for petrol and diesel based on trade parity price (weighted average of import parity and export parity prices in the ratio of 80:20) as an indicative ceiling price.
  - For petrol and diesel, reducing the customs duty from 10 percent to 7.5 percent; moving from a combination of ad valorem and specific taxes to specific taxes; and implementing a uniform sales tax.
  - Restricting kerosene subsidies to below-poverty-line families and financing subsidies through the budget.
  - Gradually eliminating the subsidy on LPG; report suggested subsidies could be reduced from 0.8 percent to 0.4 percent of 2005/06 GDP if implemented, and that subsidies should be financed through specific taxes with the remainder through the budget.
  - Since the report, the government has reduced the customs duty for petrol and diesel; the trade parity price has been adopted but the automatic pricing mechanism has not become operational; reforms on kerosene and LPG subsidies have yet to be implemented.
- India Goes Global—Boom in Overseas Acquisitions (Box 2):
  - Indian corporates acquired $7.2 billion in the first three quarters of 2006; Tata Steel announced an $8–9 billion bid for Corus in October 2006.
  - Drivers of the boom: access to advanced markets and technology; high profitability and low leverage enabling financing (including leveraged buy-outs and SPVs); emergence of internationally efficient manufacturers beyond IT and services.
  - Policy implication: better information is needed to monitor and manage attendant risks; banks should be aware of clients’ worldwide financial exposures including leverage through overseas activities; macroeconomic data on outward FDI can be improved, specifically to include outflows financed through offshore vehicles.

### III. Outlook and Risks
- Short- to medium-term outlook is favorable if reform momentum is maintained; risks include inflationary pressures from rising demand and potential asset-quality deterioration from rapid credit growth.
- Policy stance:
  - Gradual removal of monetary accommodation by the central bank is appropriate to guard against inflation overshoot.
  - Vigilant banking supervision, improved risk management, and tighter prudential standards are needed to detect and contain vulnerabilities.

### IV. Key Policy Challenges
- Overarching aim: maintain price and financial stability while advancing fiscal and structural reform.

A. How Can India Best Achieve Fiscal Sustainability While Financing Development?
- Public debt is declining relative to GDP but remains high; measures are needed to achieve center’s medium-term targets and create fiscal space for priority social spending.
- Policy measures recommended:
  - Steps on both revenue and expenditure sides, including broadening the tax base and reforming subsidies.
  - Better targeting of tax incentives for SEZs to reduce risk of tax base erosion.
  - Overperformance on the 2006/07 budget would help contain overheating pressures.

B. How Can India Best Manage Price and Financial Stability?
- Demand pressures and asset-market booms warrant a gradual tightening of monetary policy to provide insurance against inflation overshoots.
- Rapid credit growth may pressure asset quality:
  - Strengthen supervision and risk management.
  - Further tighten prudential standards and monitoring for early warning signs.
- Financial-market development would aid stability: promote more liquid government securities markets, broaden investor base, and foster corporate debt and derivatives markets.

C. What Are the Priorities for Fostering A Broader and Deeper Financial Sector?
- Deeper government securities markets, broadened investor base, and development of corporate debt and derivatives markets are policy priorities.
- Pension reform and liberalization steps (referenced in the Tarapore report and Box 4) are important for long-term market development.

D. How Can Reforms Promote More Job-Intensive, Inclusive Growth?
- Despite rapid growth, job creation in the organized sector is weak and poverty remains widespread.
- Priorities include enhancing infrastructure, further liberalizing trade regime, and ensuring that SEZ and other reforms support employment generation.

E. Other Issues
- Structural reforms such as labor market reform and privatization remain politically and technically challenging; progress is likely to be steady and gradual.

### V. Staff Appraisal
- The strong conjuncture provides a favorable environment to accelerate the government’s reform program to boost sustainable growth and reduce poverty.
- Continued vigilance on macroeconomic management, fiscal consolidation, monetary policy normalization, financial supervision, and structural reforms is essential to sustain the expansion.

*Executive Summary of IMF Staff Report _cr0763*

### 8.      The rupee has fluctuated against the U.S. dollar and its real effective value is

### _cr0763 - 8.      The rupee has fluctuated against the U.S. dollar and its real effective value is

### Exchange rate and capital flows
- The rupee depreciated against the U.S. dollar in the first half of 2006, against a backdrop of tightening global liquidity and a widening current account deficit.
- The RBI intervened in the foreign exchange market to ease exchange-rate volatility and smooth domestic liquidity pressures that arose following the redemption of Indian Millennium Development Bonds (repayment amount of some $7 billion, including accrued interest).
- Since the mid-2006 depreciation, the rupee has regained ground against the dollar and the RBI has intervened only occasionally, both buying and selling dollars.
- Real effective exchange rates: described as broadly around its 2004−2005 level; chart referenced shows percent changes, August 2005-August 2006 (appreciation/depreciation).

### Monetary policy, credit, and financial markets
- Since October 2005, the RBI has gradually raised policy rates:
  - Reverse repo (borrowing) rate has risen 100 bps to 6 percent.
  - Repo (lending) rate has risen 125 bps to 7.25 percent.
- High credit growth prompted the RBI to tighten prudential standards:
  - Raising general provisioning requirements.
  - Boosting risk weights in high-growth areas, including real estate, to above Basel norms.
- Indicators of financial soundness (while backward looking) suggest banks’ balance sheets and income remain healthy.
- Financial markets:
  - Stock prices recovered from May/June turbulence, reaching new historical highs on the back of strong foreign and domestic purchases.
  - PE ratios are now high relative to other countries and India’s recent past.
  - Real estate prices continue to grow rapidly.
  - SENSEX and FII inflows shown (SENSEX, Oct. 2005=100; inflows in USD billions).

### Fiscal stance and public debt
- Fiscal consolidation paused in FY 2005/06.
- General government deficit was broadly unchanged at 7.4 percent of GDP.
- General government debt remains high—over 80 percent of GDP—reflecting both budget deficits and off-budget subsidies.
- Oil bonds equivalent to 0.3 percent of GDP were issued to state petroleum companies in 2005/06; a further 0.4 percent of GDP is planned for 2006/07, along with 0.4 percent of GDP in Food Corporation of India (FCI) subsidy bonds.
- Fiscal impulse chart referenced; central government and general government series displayed (percent of GDP).

### Near-term outlook and risks
- Near-term macroeconomic outlook:
  - Real GDP growth is expected to ease to 8.2 percent in 2006/07.
  - WPI inflation would remain in the 5–5½ percent range.
  - Robust domestic demand expected to contribute to a slight widening in the current account deficit.
- Balance of near-term risks is to the upside:
  - Concerns over whether credit and output buoyancy reflect financial deepening/rising productivity or overheating.
  - GDP continuing to grow above trend, international oil price pass-through not fully realized, buoyant credit and asset prices, and accommodative monetary conditions increase risk of overheating.
  - International risk: a sharper U.S. slowdown could trigger capital outflows and volatility in emerging markets.
- Factors limiting vulnerabilities:
  - Reserves equivalent to over seven months of imports.
  - Short-term external debt amounts to only 12 percent of reserves.
  - Overall external debt is 70 percent of exports.
  - Current account deficit at 1½ percent of GDP is described as manageable.
  - A 1-percentage point decline in U.S. growth would reduce India’s growth by about 0.1–0.2 percent in the short run.
  - Fiscal debt and deficit on a downward trajectory, helped by a favorable interest/growth differential.

### Key policy challenges (summary)
- Four main challenges identified:
  - Achieving fiscal sustainability while financing development by reducing high debt and creating fiscal room for priority spending.
  - Managing price and financial stability by limiting overheating risk and further strengthening financial regulation.
  - Fostering a broader and deeper financial sector to expand saving, investment, and risk management channels.
  - Promoting more job-intensive, inclusive growth through structural reforms so growth benefits the least advantaged.

### Fiscal reform: background, staff views, and measures
- Authorities’ medium-term fiscal strategy pillars:
  - Fiscal Responsibility and Budget Management Act (FRBMA).
  - Twelfth Finance Commission (TFC).
- FRBMA targets:
  - Central government revenue (current) deficit of zero and an overall deficit of 3 percent of GDP by 2008/09.
- Government aims:
  - Eliminate general government revenue deficit and reduce general government overall deficit to 6 percent of GDP by 2008/09.
- Recent fiscal developments:
  - Consolidation under the FRBMA has resumed: 2006/07 central and state budgets imply a 1 percent of GDP cut in the general government deficit.
  - Cumulative decline in the general government deficit since 2003/04 enactment of FRBMA: 2¾ percent of GDP; fall in debt/GDP of around 5 percentage points of GDP.
- Staff estimates on gap to targets:
  - Achieving the center’s FRBMA target of current balance in FY2008/09 will require additional measures equivalent to 0.8 percentage points of GDP (beyond the current-policies baseline).
  - States: 13 of 28 states failed to reduce their deficits from previous-year levels in 2005/06; 11 states (about a quarter of aggregate states’ deficit) had deficits more than 1 percentage point of state GDP above the 3 percent medium-term TFC target.
- Policy options to meet targets while protecting priority spending:
  - Save a projected 0.2 percent of GDP tax windfall in 2006/07 to overperform the budget.
  - Revenue measures:
    - Broadening the tax base by removing corporate income tax (CIT) and excise duty exemptions could boost revenues by up to 1½ percent of GDP.
  - Expenditure measures:
    - Eliminating non-essential subsidies and better targeting food, oil, and fertilizer subsidies could save up to 2¼ percent of GDP.
    - Implementing a more flexible, market-based pricing mechanism for petroleum products to limit fiscal risks and improve incentives.
    - Improve spending efficiency via output-based budgeting and improved service delivery.
  - State-level measures:
    - Tighter borrowing ceilings to align annual borrowing with FRL adjustments.
    - Reduce states’ dependence on National Small Savings Funds (NSSF) in favor of market borrowings subject to a borrowing cap; comprehensive NSSF reform recommended (link deposit rates to market rates; scale back tax exemptions).
  - Civil service pay review caution:
    - The Sixth Pay Commission (SPC) due to implement in 2008/09; staff caution to limit fiscal risks from pay revisions given past effects of pay reviews.

### Authorities’ views on fiscal strategy
- Authorities reaffirm commitment to FRBMA.
- They see scope to overperform on 2006/07 budget but acknowledge challenge to reach 2008/09 current deficit target.
- Strategy emphasizes tax administration strengthening, movement toward a national Goods and Service Tax (GST), improving expenditure management, and subsidy reform.
  - Tax administration steps: large taxpayer unit, increased electronic filing, better-targeted audits.
  - GST progress contingent on negotiations with states over revenue-sharing and interstate tax phaseout.
  - Expenditure focus: priority rural and social programs; National Rural Employment Guarantee introduced on a pilot basis with phased expansion.
  - Subsidy reform efforts include improving FCI cost efficiency and reducing interest burden; authorities note constraints on deeper oil subsidy reform.
- Authorities expect market discipline and demonstration effects to encourage laggard states; working group established to study NSSF reform options.
- On pay commission timing, authorities judged SPC concerns premature; compensation already indexed to inflation, so large hikes unlikely.

### Managing price and financial stability: staff views and recommendations
- Risks noted:
  - Monetary aggregates expanding at rates well above RBI indicative projections.
  - Real interest rates remain low from a historical and cross-country perspective.
  - Growth in mortgage, retail, and commercial real estate lending remains strong despite tightened risk weights and provisioning.
- RBI stance:
  - Continued gradual removal of monetary accommodation would provide insurance against a possible inflation overshoot, anchor inflation expectations, and moderate credit expansion.
- Staff recommendations to manage financial stability risks:
  - Use targeted prudential measures, better risk management, and enhanced supervision.
  - Further tighten selected prudential norms in specific sectors; ensure banks recognize early deterioration in credit quality.
  - Adopt Basel II and stress tests; shorten the timeline for classifying sub-standard and doubtful loans to align with international practice.
  - Develop securitization to help banks manage balance sheet risks:
    - Streamline capital requirements for mortgage-backed securitization products.
    - Reform stamp duties on securitized products.
    - Remove legal impediments to secondary market trading of such securities.

### Asset price boom: diagnosis and policy stance (Box 3)
- Asset value growth summary:
  - Holdings of real estate, equity and gold are sizable relative to GDP; prices in each class have risen sharply.
  - Since 2000, housing prices in India’s main cities have more than doubled; gold prices have more than doubled.
  - Between January 2003 and October 2006, the SENSEX increased at a compound annual rate of about 40 percent.
- Preconditions for monetary policy to address asset price volatility (listed):
  - Policymakers can accurately identify asset price misalignments and bubbles.
  - Fluctuations in asset prices are sizeable and macroeconomically significant.
  - Identifiable relationships exist between asset prices and inflation, asset prices and aggregate demand, and changes in monetary policy and changes in asset prices.
- Assessment for India:
  - These preconditions are not met in India because rapid structural change makes identification of reliable macro-financial relationships and asset price misalignment difficult.
  - Informal analysis suggests recent price movements appear driven by fundamentals: housing prices reflect rising per capita incomes, growing population, increased affordability, and easier credit; stock market valuations appear supported by future growth.
  - Wealth and financial accelerator channels likely small given households’ limited direct and indirect holdings of financial assets.
  - Staff finds that a 10 percent increase in the stock market index is associated with an increase in real private consumption of one tenth of one percent.
- Policy implication:
  - RBI’s approach—tightening prudential norms, raising risk weights in areas of high credit growth, and intensifying supervision—is judged appropriate.
- Structure of asset markets (total value of assets US$2,321 billion) and asset shares (in percent of GDP):
  - Gold: 35% of GDP.
  - Land and Buildings: 202.7% of GDP.
  - Equity: 136.8% of GDP.
  - Household financial assets (selected items, in percent of GDP, across 1993/94, 2003/04, 2005/06): total financial assets 12.6, 14.0, 16.7; deposits 5.4, 5.8, 7.9; shares and debentures 1.7, 0.1, 0.8; insurance funds 1.1, 1.9, 2.2; provident and pension funds 2.1, 1.9, 1.9; currency 1.5, 1.5, 1.5; government securities/small savings 0.8, 2.8, 2.5.

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

### 27.      The mission saw the present market-determined exchange rate policy as serving

### The mission saw the present market-determined exchange rate policy as serving India well.

### Exchange rate policy and competitiveness
- The mission viewed the present market-determined exchange rate policy as serving India well.
- The RBI’s approach allows two-way flexibility.
- The exchange rate appears to be broadly in line with fundamentals, although such empirical analysis is imprecise and should be treated with caution.
- Competitiveness does not seem to be a problem; evidence of wage pressures seems confined to a few sectors and to skilled labor.
- India’s share of world exports has been gradually trending upward over time, although it remains modest.
- Continued two-way flexibility in the exchange rate will:
  - allow appropriate adjustment of the exchange rate to rising trade flows, and
  - facilitate greater capital account openness (as contemplated by the Tarapore Committee on Fuller Capital Account Liberalization (Box 4)).
- Targeting the level of the real effective exchange rate (as suggested by the Tarapore Committee) would not be warranted.

### Capital account liberalization and the Tarapore Committee roadmap
- The Tarapore report envisages further gradual lifting of capital controls, linked with steps to strengthen the fiscal position and financial sector.
- The report’s key envisaged steps (Box 4 highlights) include:
  - Fiscal consolidation: The central government should target a current budget surplus of 1 percent of GDP by 2010/11 to allow the gross borrowing requirement to fall.
  - A “fairly valued” exchange rate: The RBI would target an exchange rate band of +/-5 percent around the neutral (not defined) level of the real effective exchange rate.
  - Strong domestic banking system: measures to encourage consolidation, emergence of four to five strong domestic banks, allow industrial houses to take stakes in Indian banks, and reduce Government’s (or RBI’s) share in public banks to 33 percent from 51 percent.
  - Well developed financial markets: broaden investor bases in money, government securities, corporate bond, and derivatives markets.
- Specific liberalization steps envisaged include gradual easing of controls on foreign holdings of Indian government and corporate bonds, foreign investment in India’s stock market, foreign bond issuance in rupees, external commercial borrowing, and Indian investment abroad. Controls on resident individuals would remain but caps on outflows would be gradually raised.

### RBI views, monetary policy stance, and near-term actions
- The RBI saw the balance of risks as broadly favorable; inflation expectations were well anchored and long-term bond yields had eased substantially from peaks.
- The RBI noted little evidence of generalized wage pressures and was closely monitoring demand conditions and asset prices.
- Given sustained rapid growth in monetary and credit aggregates and elevated asset prices, the RBI remained vigilant but preferred a calibrated response to avoid harming investment needed to sustain growth.
- After the staff mission, at its end-October mid-year review of monetary policy, the RBI:
  - raised the rate at which it injects liquidity by 25 bps to 7¼ percent, and
  - left unchanged the rate at which it absorbs liquidity at 6 percent.
- The policy of a market-determined exchange rate remains unchanged: no target or pre-announced path for the exchange rate; two-way variability is seen as encouraging corporations to hedge exposures.
- On Tarapore Committee recommendations on the REER, authorities noted a previous similar recommendation had not been adopted.

### Financial sector conditions, risks, and supervisory measures
- Authorities viewed strong credit growth as a sign of financial deepening and robust activity but remained alert to risks.
- Financial soundness indicators are strong: low gross and net nonperforming loans, reflecting loan recoveries, strong asset price growth, and turnaround in industrial profitability.
- Loan origination standards described:
  - low retail and mortgage NPLs—less than 2½ percent—reflect a nascent market;
  - conservative mortgage loan-to-value ratios of 60–70 percent;
  - loan size generally dependent on repayment capacity;
  - separation of banks’ loan origination and appraisal functions.
- Credit information bureau was fully operational, providing retail borrower information.
- Commercial real estate lending comprised only around 5.8 percent of total loans (including indirect exposure), but warranted continued attention.
- The RBI issued guidelines for banks to conduct stress tests of market, credit and other exposures; regular stress tests by systemically important banks, with RBI review, are expected.
- Prudential enhancements:
  - Risk weights and provisioning in high-growth sectors tightened.
  - Basel II implementation timeline extended: March 2008 for banks with foreign operations, and March 2009 for domestic banks.
  - The RBI estimates banks will need to raise an additional 1 percent in capital for Basel II implementation.
- Funding and market liquidity:
  - Banks reduced holdings of government securities to fund rapid credit growth.
  - Deposit growth picked up, aided by new tax incentives on term deposits and higher interest rates, helping reduce the incremental credit-deposit rate to under 80 percent.
  - RBI alerted banks to risks associated with wholesale commercial deposits as a growing but potentially less stable funding source.
- The authorities are undertaking a self-conducted assessment of financial stability and development and plan to publish its results.

### Financial market development priorities and authorities’ plans
- Developing India’s financial markets is seen as promoting more efficient intermediation, risk management, and financing for infrastructure, aiding capital account liberalization.
- Key challenges and priorities:
  - Improving benchmarks:
    - Deeper term money market needed to establish reliable short-term pricing benchmarks; current concentration at overnight maturity.
    - Increase liquidity in the G-Sec yield curve to establish long-term pricing benchmarks; G-Sec illiquidity due to fragmentation of benchmark issues, limited short selling and when-issued trading, low foreign investor participation, and statutory restrictions causing buy-and-hold behavior.
  - Developing corporate bond and derivatives markets:
    - Corporate bond market hampered by cumbersome procedures, statutory restrictions on holdings, and limits on foreign investor participation.
    - Market dominated by financial institutions and state-owned enterprises with maturities generally less than five years.
    - OTC derivatives market concentrated: India’s top 15 banks account for about 82 percent of the banking system’s off-balance sheet derivative exposure, of which two-thirds are held by foreign banks.
  - Broadening the institutional investor base via insurance and pension reforms; mutual fund and insurance industries have grown rapidly since deregulation in 2000.
- Authorities’ initiatives:
  - Money markets: focus on developing collateralized segments; creation of anonymous order matching trading screen in 2005; screen-based system for call and term money markets; restricted participation in unsecured call money market to primary dealers.
  - G-Sec market measures (October 2006 and other steps):
    - expanded scope of “when-issued” trading beyond reissues to selected new issues;
    - extended permitted short sales from intraday to five days;
    - allowed delivery of borrowed securities for repo transactions;
    - consolidating reissues along the yield curve while mindful of fiscal implications;
    - Government Securities Act (2006) legalizes stripping;
    - proposed to broaden foreign participation limit in the G-Sec market to $3.2 billion by March 31, 2007, from its current level of $2 billion.
  - Corporate bond market: authorities considering recommendations including permitting institutional investors to invest in rated corporate bonds, raising foreign institutional investment limits, harmonizing state level stamp duties and tax deduction at source, setting up market makers, developing trade reporting and clearing/settlement systems.
  - OTC derivatives: 2006 Amendment to the RBI Act clarifies legal status and establishes RBI as regulator; banks required to hold minimum defined regulatory capital to cover off-balance sheet exposures and adhere to transparency and disclosure requirements; 2006 guidelines introduce fair value accounting norms akin to IAS39.
  - Pension and insurance reforms: pension bill to allow creation of a regulator under consideration; new civil servants in the central government and 17 states shifting to the new pension system.
- Tarapore committee recommendations on capital account liberalization are also seen as a means to promote financial market development; RBI established a committee to streamline foreign exchange regulations and announced liberalization steps in October 2006 (including increases in limits on outflows by individual residents and overseas investments by mutual funds, and enhancements in currency hedging for external trade). Authorities stressed gradual liberalization in light of the fiscal deficit and need to further develop financial markets.

### Pension reform and implications for capital markets
- Decentralization of pension fund management can spur capital market development; international examples show pension-led asset demand growth of 1−1½ percent of GDP a year on average in Latin America and Eastern Europe.
- Supporting conditions for pension-driven market development include:
  - Build-up of a critical mass in assets under management.
  - Flexible capital market laws and regulations to allow new instruments.
  - Regulatory guidelines enabling portfolio diversification; empirical comparisons highlight varying pension fund allocations to corporate bonds (examples: Colombian pension funds 30 percent; Mexican funds less than 12 percent; Chilean funds 50–60 percent of outstanding private debt securities).
- The Indian pension reform’s mandatory pillar is restricted to new government entrants and may not build critical mass initially; concurrent improvements in corporate governance of exempt nongovernment provident funds could strengthen demand for new investment products and asset diversification.

*IMF staff report content.*

### 37.      Job creation has disappointed.

### _cr0763 - 37.      Job creation has disappointed.

### Employment and labor market findings
- The employment elasticity of growth is low.
- Employment in the organized sector has remained roughly unchanged at about 27 million over the past decade and a half.
- Some 60 percent of the labor force continues to work in agriculture.
- Over 800 million Indians live on less than $2 a day.
- The challenge is to create jobs at the scale needed to:
  - absorb excess agricultural labor, and
  - absorb the 140 million new entrants to the labor force over the next decade.
- Skill gaps indicate India’s education system must adapt to the evolving needs of the growing industry and service sectors.
- Government focus: address immediate bottlenecks such as inadequate infrastructure while encouraging job-led growth through special economic zones (SEZs) and trade liberalization.

### Infrastructure investment and public-private partnerships (PPP)
- World Bank assessment: inadequate infrastructure costs India about 1 percent per annum in foregone growth.
- Infrastructure investment needs to rise by 4 percentage points of GDP over the medium term to sustain current growth rates.
- With limited budgetary resources, the government’s strategy is to involve the private sector through public-private partnerships.
- Institutional measures:
  - India Infrastructure Finance Company (IIFC) established to provide finance and refinance facilities for long-term commercial infrastructure projects.
  - Model Concession Agreements developed in key infrastructure sectors to clarify the policy framework.
- IIFC progress: has raised some $400 million on the domestic market and provided financing to 5 mega-power projects.
- Additional measures recommended to bolster PPP framework:
  - Strong and independent sector regulators to reduce regulatory uncertainties for investors.
  - Developing domestic bond markets to facilitate infrastructure finance.
  - Any contingent liabilities to the government should be recorded in the budget.

### Special Economic Zones (SEZs)
- Role of SEZs in development strategy is debated; international experience suggests associated revenue losses could be high when tax incentives are not well targeted.
- Concerns:
  - Blanket tax incentives work against streamlining administration and broadening the tax base.
  - Small size of many approved SEZs suggests they may provide only limited infrastructure.
- Mission suggestions:
  - Consider replacing tax holidays with more targeted incentives.
  - Consider raising the size threshold for SEZs.
- Authority measures to limit diversion of planned investment into zones:
  - Approvals limited to projects that bring in new capital goods or service new contracts.
  - Income from sales to the domestic market would not be exempt.

Box 6 findings (SEZs specifics)
- SEZ Act 2005 intensified interest; SEZ policy aims: increase economic activity, promote exports and investment, create employment, develop infrastructure.
- Over 300 applications filed; approvals notified for 34 zones (as of October 2006).
- Fiscal cost concerns: corporate income tax holidays can lead to significant revenue losses via investment diversion.
- International experience: targeted tax incentives are more cost efficient than blanket CIT incentives.
- India-specific concerns:
  - Among the 34 SEZs, more than half are in the IT sector; these companies may simply relocate planned investments to SEZs.
  - Most SEZs are under 100 hectares, suggesting limited accompanying infrastructure.

Industry distribution for new SEZs with notification (In percent of total (34))
- IT: 55%
- Industry: 15%
- Pharma/bio: 12%
- Light industry: 12%
- Multi service: 3%
- Multi products: 3%

### Trade liberalization and tariffs
- Government strongly committed to multilateral trade liberalization; concerned about delay in Doha round and intends active role in restarting negotiations.
- Government stresses need for developed countries to reduce farm support.
- Tariff progress:
  - Simple average tariff is now around 15.2 percent, compared with over 30 percent earlier in this decade.
  - Mission encouraged accelerating tariff reductions to ASEAN levels (currently about 8¾ percent on a simple average basis) ahead of 2009.
- Mission and authorities: regional trade agreements are no substitute for multilateral liberalization; arrangements with liberal and simple rules of origin, with liberalization on an MFN basis, would likely yield largest payoff.
- Government planned to extend duty- and quota-free access to at least 50 least developed countries.

### Statistical system improvements
- Planned improvements:
  - Quarterly demand-side GDP to be released starting in 2007.
  - Lag in dissemination of annual expenditure-based estimates to be reduced to three months.
  - Steps underway to compile a new producer price index.
  - Improve preliminary export estimates through expanded electronic reporting by customs facilities.
- Implementation of 2004 IMF Fiscal Affairs Department technical assistance recommendations in state finance statistics.
- RBI participating in IMF Statistics Department initiative to compile financial soundness indicators.
- Priority going forward: improve timeliness and coverage of data on employment, wages, productivity, outward FDI, and state finance statistics.

### Staff appraisal — macro and policy recommendations
- Growth performance:
  - Growth of over 8 percent is in its fourth year.
  - Expansion has broadened to industry and investment.
  - Inflation remains subdued.
- Immediate challenge: manage near-term risk of inflationary pressures.
  - Increases in rates over the past year and RBI vigilance are welcome.
  - The central bank’s stance of continued gradual removal of monetary accommodation is appropriate.
  - Overperformance on the 2006/07 budget: channel anticipated revenue windfall to deficit reduction to support monetary stance and medium-term fiscal consolidation.
- Exchange rate arrangement: current arrangement remains appropriate.
- Medium-term reform priorities to move to higher growth path (9–10 percent):
  - Fiscal consolidation.
  - Financial sector development.
  - Address structural bottlenecks.
- Government finances:
  - Best position in over a decade, but further progress needed to reduce public debt and make room for social and infrastructure spending.
  - State-level deficit has fallen due to TFC reforms and introduction of VAT.
  - Implementation of the FRBMA and consolidation of state finances under the TFC will permit a steady decline in the public debt ratio.
- Measures to meet the center’s 2008/09 revenue deficit target:
  - Further broadening the tax base: eliminate corporate income tax incentives and pare excise exemptions; phase out interstate trade tax to pave way for a national GST.
  - Reform expenditure and improve efficiency: pursue broad-based subsidy reform; act promptly on recommendations for an automatic market-based mechanism for petroleum goods and better-targeted on-budget kerosene subsidies.
  - Tighten controls on state borrowing: lower annual borrowing targets in line with FRL targets, and reform the NSSF.
- Financial sector vigilance:
  - Rapid deepening welcome, but supervisory vigilance warranted.
  - Asset quality could come under pressure if rapid credit growth is sustained.
  - Comprehensive stress tests and publication of results recommended.
  - Implementation of Basel II and consideration of shortening timeline for recognizing doubtful NPLs.
- Financial market development recommendations:
  - Continue developing money and government securities markets, expand foreign participation in debt markets, and strengthen supervision of OTC derivatives activities.
  - Expand short selling, when-issued trading, and consolidate benchmark issues.
  - Streamline issuance requirements for corporate bonds and facilitate trading of securitized assets.
  - Raise limit on FDI in insurance and open the pension sector to private participation.
- Structural obstacles to job-intensive, inclusive growth:
  - Build strong and independent regulators to bolster investor interest in infrastructure and underpin PPP initiative.
  - Modify SEZ framework: increase minimum size and target tax incentives, avoiding blanket income tax exemptions that narrow the tax base and complicate administration.
- Trade policy role:
  - India can play a proactive role in restarting multilateral trade talks.
  - Staff welcomes unilateral extension of duty free, quota free access to LDCs.
  - Implement regional and bilateral arrangements with liberal and simple rules of origin and liberalization on an MFN basis.
  - Use rapid growth as opportunity to move more quickly towards ASEAN tariff levels, reducing tariffs on an MFN basis.

*Source: _cr0763 - 37.      Job creation has disappointed.*

### 53.      Staff recommends that the next Article IV consultation occur on the 12-month cycle.

### _cr0763 - 53.      Staff recommends that the next Article IV consultation occur on the 12-month cycle.

### Recommendation
- Staff recommends that the next Article IV consultation occur on the 12-month cycle.

### Growth: Recent Performance and Drivers
- "Growth has been robust... helped by a normal monsoon"
- Contributions to Real GDP Growth (Change in percent of previous year's GDP): Real GDP, Agriculture, Industry, Services (chart referenced).
- Indicators and levels noted:
  - Automobile production (passenger and commercial vehicles) in thousands (series 2001–2006 shown).
  - Industrial Production by Use (Percent change; three-month moving average) for Total, Capital goods, Consumer goods (series 2001–2006 shown).
  - India: Capacity Utilization (In percent of NCAER survey respondents operating at or close to capacity) series Jan-02 to Jul-06 with values reaching up to 120.
  - Stock Prices and Business Confidence: BSE Sensex (1995=1000, right scale) and Business confidence index (left scale) (series 2001–2006).
- Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; NCAER; and IMF staff projections.

### External Sector: Developments and Composition
- "The current account moved into deficit... as the trade deficit rose on high oil prices and strong domestic demand."
- Current Account (In billions of U.S. dollars) series 2001–2006 (chart referenced).
- Trade Deficit and Imports: Trade deficit (left scale); Petroleum imports (right scale); Capital goods imports (right scale).
- Exports and market share:
  - Goods and Services Exports (Four-quarter percent change) series 2001–2006 showed export growth easing but remaining strong.
  - Share of Global Exports of Goods (In percent) series 2001–2006 showed India's market share trending up.
- Capital Flows and International Reserves (In billions of U.S. dollars):
  - FDI, Portfolio, Debt flows (left scale); Foreign reserves (right scale) series 2001–2006 show reserves continue to rise.
- Exchange Rates:
  - Rupee/US$ (January 1999=100) and REER (right scale) series 2001–2006 show the real effective exchange rate has depreciated.
- Sources: Data provided by the Indian authorities; CMIE Pvt. Ltd.; and CEIC Data Company Ltd.
- Note: 1/ Customs data, based on U.S. dollar values.

### Money and Inflation
- "Headline inflation remains moderate... but money supply growth is strong..."
- Wholesale Price Inflation (Twelve-month percent change): Overall, Mineral oils, Basic metals, alloys, etc. (series 2002–2006).
- Broad Money and Reserve Money Growths (12-month percent change): Reserve money and Broad money (series 2002–2006).
- "as is credit growth... amid low interest rates..."
  - Credit Growth (12-month percent change): Non-food and Overall (series 2002–2006).
  - Interest Rates (Percent per annum): Real 10 year government bond rate and Real 91-day Treasury Bills (deflated by the WPI) (series 2002–2006).
- Liquidity indicators and policy response:
  - Liquidity Indicators (In Rs. Crore for RHS; in percent for LHS): Average Overnight Rates (right scale) and Average Repo Turnover (left scale) (Aug-04 to Sep-06).
  - RBI Policy Corridor and Call Rate (In percent): Repo rate, Reverse Repo Rate, Call rate (series 2005–2006).
- Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; and IMF staff projections.
- Notes: 1/ Deflated by the WPI. 2/ Average of call, CBLO, and repo market.

### Asset Markets and Capital Flows
- "The market recovered from spring turbulence... as have inflows."
  - India's Sensex 30 with MSCI Emerging Market (Index; January 5, 2006 = 100) series Jan-05 to Aug-06.
  - Foreign Institutional Investment Inflows (In billions of U.S. dollars; three-month moving average) series 2005–2006.
- Real estate price pressures (residential and commercial) in Indian rupees per square foot:
  - Residential: Mumbai, Delhi, Bangalore (H1 2005, H2 2005, Q1 2006).
  - Commercial: Mumbai, Delhi, Bangalore (H1 2005, H2 2005, Q1 2006).
- Interest rate spreads and forward discount:
  - Two-Year Swap Rates (U.S. dollars and Indian Rupee; Nondeliverable forwards) series Jan-05 to Sep-06.
  - Indian Rupee Development: 12 month NDF rate U.S. dollar/India Rupee series Jan-05 to Sep-06.
- Sources: Data provided by the Indian authorities; Bloomberg, Datastream International Ltd; and Colliers International.
- Note: 1/ Nondeliverable forwards.

### Fiscal Trends and Public Finances
- "The public sector deficit has fallen... reflecting the resumption of adjustment at the center... and consolidation at the state level."
- General Government Deficit (In percent of GDP) series 1997/98–2006/07 (Est., Proj.).
- Central Government Deficit (In percent of GDP) and State Government Deficit (In percent of GDP) series (Est., Proj.).
- General Government Debt (In percent of GDP) series 1997/98–2006/07 (Domestic and External components).
- Fiscal Responsibility and Budget Management Law (FRBML):
  - "The fiscal responsibility act should engineer a reduction in debt to GDP... but will require stepped-up reforms."
  - Under staff baseline and FRBML roadmap charts, Central Government Current Deficit (In percent of GDP) for 2003/04 through 2008/09 shown with labeled lines: FRBML roadmap, Budget 2006/07, Staff baseline.
- Key fiscal figures and projections (selected levels from tables):
  - Nominal GDP (2005/06): US$798 billion
  - Population (2005/06): 1.11 billion
  - GDP per capita (2005/06): US$716
  - Quota: SDR 4,158.2 million
- Central government operations (2002/03–2006/07; selected annual levels in billions of rupees and percent of GDP):
  - Total revenue and grants (2002/03 actual to 2006/07 staff proj.): e.g., 2002/03: 2,453; 2006/07 Staff proj.: 4,246 (in billions of rupees).
  - Net tax revenue examples: 2002/03: 1,601; 2006/07 Staff proj.: 3,342 (in billions of rupees).
  - Total expenditure and net lending examples: 2002/03: 3,934; 2006/07 Staff proj.: 5,683 (in billions of rupees).
  - Overall balance (in percent of GDP): e.g., Overall balance 2002/03: -6.0 percent; 2006/07 Staff proj.: -3.6 percent.
- Sources: Data provided by the Indian authorities; and staff projections.
- Notes: 1/ Excluding privatization receipts and off-budget bond issuance to state-owned oil companies and Food Corporation of India.

### External Sector Indicators (Selected)
- Trade and balance of payments (2001/02–2006/07 select figures):
  - Current account balance (US$ billions): 2001/02: -4.6; 2002/03: -5.5; 2003/04: -4.0; 2004/05: -4.7; 2005/06: -2.7; 2006/07 Prov./Proj.: -3.4 / 6.3 / 14.1 / -2.5 / -10.6 / -14.1 (table shows series—current account balance entries by year).
  - Merchandise exports (US$ billions): 2001/02: 44.7; 2002/03: 53.8; 2003/04: 66.3; 2004/05: 85.2; 2005/06: 104.8; 2006/07 Prov./Proj.: 128.6.
  - Merchandise imports (US$ billions): 2001/02: 56.3; 2002/03: 64.5; 2003/04: 80.0; 2004/05: 118.9; 2005/06: 156.3; 2006/07 Prov./Proj.: 192.2.
  - Net oil imports (US$ billions) series: 2001/02: 9.6; 2002/03: 7.8; 2003/04: 6.3; 2004/05: 12.6; 2005/06: 13.8; 2006/07: 11.9; later years up to 2006/07 show increases (e.g., 2005/06: 32.4; 2006/07: 40.1 in table contexts).
  - Foreign direct investment, net examples: 2001/02: 2.7; 2002/03: 3.5; 2003/04: 2.4; 2004/05: 2.1; 2005/06: 3.3; 2006/07: 4.7; later entries show 5.7 and 9.3 in other tables.
  - Gross reserves (US$ billions, end-period): 2001/02: 54.7; 2002/03: 76.1; 2003/04: 113.0; 2004/05: 141.5; 2005/06: 151.6; 2006/07: 172.9 (table entries vary across tables with 167.1 and 172.9 noted).
- Memorandum and ratios:
  - Gross reserves in months of imports (end-period): e.g., 2001/02: 8.0; 2002/03: 9.4; 2003/04: 9.2; 2004/05: 8.7; 2005/06: 7.6; 2006/07: 7.4 (projection).
  - External debt (percent of GDP, end-period) series: e.g., 2001/02: 21.1; 2002/03: 20.4; 2003/04: 17.8; 2004/05: 17.3; 2005/06: 15.8; 2006/07 projection: 16.5.
- Sources: CEIC; and staff estimates and projections.

### Financial Sector Soundness Indicators
- Risk-weighted capital adequacy ratio (CAR) (percent): 2001/02: 12.0; 2002/03: 12.7; 2003/04: 12.9; 2004/05: 12.8; 2005/06: 12.4.
- Net nonperforming loans (percent of outstanding net loans): 2001/02: 5.5; 2002/03: 4.4; 2003/04: 2.9; 2004/05: 2.0; 2005/06: 1.3.
- Gross nonperforming loans (percent of outstanding loans): 2001/02: 10.4; 2002/03: 8.8; 2003/04: 7.2; 2004/05: 5.2; 2005/06: 3.5.
- Credit/deposit ratio: 2001/02: 53.4; 2002/03: 56.9; 2003/04: 55.9; 2004/05: 64.7; 2005/06: 71.5.
- Lending to sensitive sectors (percent of total loans and advances): Real Estate Market exposures rose from 1.4 to 17.2 (series 2001/02–2005/06); Capital market exposures and commodities detailed by series.
- Sources: Indian authorities; and staff estimates.

### Debt Sustainability: Baseline, Sensitivity, and Scenarios
- Baseline assumptions (from Appendix I):
  - Macroeconomic assumptions as in Table 7, assume some increase in real interest rates and continued fiscal restraint.
  - Government assumed not to issue further bonds to state-owned petroleum companies, Food Corporation of India, or other state-owned entities over the medium term.
- Baseline debt path:
  - "Under the baseline scenario (a general government deficit of 6¼ percent of GDP in 2006/07 declining to 5 percent of GDP by 2011/12), gross public debt would fall from 80¾ percent of GDP to 69 percent of GDP over the same period."
- FRBML targets:
  - "Under the baseline scenario, while the general government overall borrowing requirement is brought under 6 percent of GDP by 2008/09, achievement of the current balance target by the central government is delayed by three years to March 2012."
- Sensitivity analysis highlights:
  - A gradual decline in the debt-to-GDP ratio would still occur under various shocks, including a scenario where the growth-interest-differential returns to its historical average.
  - "Only in the case of a return to historical averages for the primary balance, real GDP growth, and real interest rates would the debt ratio rise over the medium term."
- High growth scenario:
  - "A more ambitious adjustment path in the context of sustained GDP growth higher by 1½ percentage point (“high growth” scenario) compared to the baseline would lower the general government deficit to under 4 percent of GDP and public debt to 62 percent of GDP by March 2012."
  - "Higher growth, combined with stronger tax measures (including elimination of sectoral and area-based corporate incentives and paring of excise exemptions) and progress in subsidy reform would also allow the government to meet both FRBML targets by 2008/09."
- Public sector debt projections (selected table entries, calendar year basis):
  - Public sector gross debt (percent of GDP): 2001: 80.2; 2002: 85.3; 2003: 86.2; 2004: 86.1; 2005: 83.8; 2006: 81.4; projections: 2007: 78.9; 2008: 76.8; 2009: 74.5; 2010: 72.1; 2011: 69.7.
  - Change in public sector debt (percent of GDP): e.g., 2001: 5.2; 2002: 5.1; 2003: 0.9; 2004: -0.1; 2005: -2.4; 2006: -2.4; projected annual declines of around -2.4 to -2.5 thereafter.
- Bound and stress tests:
  - Public debt bound tests and shocks illustrated (interest rate shock, growth shock, primary balance shock, combined shock, real depreciation shock with one-time real depreciation of 30 percent in 2007 noted in figure captions).
- Table I.1 key macro assumptions under baseline (calendar year basis, selected):
  - Real GDP growth (in percent): 2001: 3.6; 2002: 8.3; 2003: 8.5; 2004: 8.4; 2005: 8.2; 2006: 7.7; projections 2007–2011: 7.5 each year.
  - Average nominal interest rate on public debt (in percent): historical series and projections shown (e.g., 2006: 8.4; projections ~8.4–8.6).
  - Average real interest rate (nominal minus GDP deflator): series and projections shown (e.g., 2006: 3.5; projected increases).
  - Primary deficit (percent of GDP): historical and projections show decline toward -0.7 by 2011 in baseline.
- Sources: International Monetary Fund; country desk data; and staff estimates.

### Millennium Development Goals and Social Indicators (Selected)
- Table 1 excerpts (1990–2004; World Development Indicators database, April 2006):
  - Poverty and nutrition:
    - Poverty headcount ratio at $1 a day (PPP) (% of population): 35.0 (year indicated).
    - Poverty headcount ratio at national poverty line (% of population): 36.0...29.0 (series).
    - Prevalence of undernourishment (% of population): 21.0...20.0.
    - Malnutrition prevalence, weight for age (% of children under 5): 64.0...47.0.
  - Education:
    - Literacy rate, youth total (% ages 15-24): 64.0...76.0.
    - Primary completion rate, total (%): 77.1 72.6 75.8 88.5 (series entries).
  - Health:
    - Mortality rate, infant (per 1,000 live births): 80.0 74.0 72.0 66.0 62.0 (series).
    - Mortality rate, under-5 (per 1,000): 123.0 104.0 ... 94.0 85.0.
  - Environment and infrastructure:
    - Improved water source (% of population with access): 68.0...86.0.
    - Improved sanitation facilities (% of population with access): 12.0...30.0.
  - ICT and development partnership:
    - Fixed line and mobile phone subscribers (per 1,000 people): 6.0 12.9 23.2 43.6 84.5.
    - Internet users (per 1,000 people): 0.0 0.3 1.4 6.8 32.4.
- Sources and notes: World Development Indicators database, April 2006. 1/ In some cases the data are for earlier or later years than those stated.

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

### APPENDIX II: INDIA—FUND RELATIONS

### APPENDIX II: INDIA—FUND RELATIONS (As of October 31, 2006)

### I. Membership Status
- Joined 12/27/45
- Article VIII

### II. General Resources Account
- Quota: 4,158.20 SDR Million (100.00 percent)
- Fund holdings of currency: 3,719.11 SDR Million (89.44 percent)
- Reserve position in Fund: 439.11 SDR Million (10.56 percent)

### III. SDR Department
- Net cumulative allocation: 681.17 SDR Million (100.00 percent)
- Holdings: 4.93 SDR Million (0.72 percent)

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements (approved and drawn amounts)
- Stand-By: Approval Date 10/31/1991; Expiration Date 06/30/1993; Approved 1,656.00 SDR million; Drawn 1,656.00 SDR million
- Stand-By: Approval Date 01/18/1991; Expiration Date 04/17/1991; Approved 551.92 SDR million; Drawn 551.92 SDR million
- EFF: Approval Date 11/09/1981; Expiration Date 05/01/1984; Approved 5,000.00 SDR million; Drawn 3,900.00 SDR million

### VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Charges/interest:
  - 2006: 6.61
  - 2007: 27.36
  - 2008: 27.43
  - 2009: 27.36
  - 2010: 27.36
- Total:
  - 2006: 6.61
  - 2007: 27.36
  - 2008: 27.43
  - 2009: 27.36
  - 2010: 27.36

### VII. Exchange Rate Arrangement
- Since March 1, 1993, the Indian rupee has floated against other currencies, although the Reserve Bank of India intervenes in the market periodically.
- AREAER classification: managed floating with no pre-announced path for the exchange rate.
- Accepted obligations of Article VIII, Sections 2, 3, and 4 on August 20, 1994.
- Restrictions on making of payments and transfers for current international transactions (subject to Fund approval under Article VIII, Section 2(a)):
  - Restrictions related to the non-transferability of balances under the India-Russia debt agreement.
  - Restrictions arising from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries.
  - Restriction on the transfer of amortization payments on loans by non-resident relatives.
- The Executive Board has not approved these restrictions.

### VIII. Article IV Consultation
- Previous Article IV consultation discussions: October 2005.
- Staff report (IMF Country Report No. 06/55) discussed by the Executive Board on February 6, 2006.

### IX. FSAP Participation and ROSCs
- Data model of the ROSC (IMF Country Report No. 04/96) issued April 2004.
- FSSA/FSAP report issued January 2001.
- Fiscal transparency ROSC (www.imf.org) issued February 2001.

### X. Technical Assistance (Department — Purpose — Date of Delivery)
- FAD — Public expenditure management (follow-up) — 5/96
- MAE — Government securities market (follow-up) — 7/96
- STA — SDDS and statistics — 12/96
- STA — Balance of payments statistics — 12/97
- STA — SDDS and statistics — 2/98
- FAD — State level fiscal database and debt register — 11/04
- FAD — Pilot study on public private partnerships — 12/04
- STA — Balance of payments statistics — 09/05

### XI. Outreach and Other Activities (Department — Purpose — Date of Delivery)
- OAP/APD/NCAER — Conference: A Tale of Two Giants: India’s and China’s Experience with Reform and Growth — 11/03
- FAD — Conference: International Experiences with Fiscal Reform — 1/04
- APD/FAD — Seminar: Decentralization: International Experiences with Subnational Debt Controls — 1/04
- APD — Training: Applying Debt Sustainability Templates to Indian States — 3/04
- APD — Training: Revenue Forecasting — 5/05
- APD — Seminar: Going Global: India’s Emerging Role in the World Economy at Centro di Studi Internazionali sull’Economia e lo Sviluppo — 6/06
- APD — Book: India Goes Global: Its Expanding Role in the World Economy — 8/06
- APD — Workshop: State-Level Inequality and Economic Performance at the Institute for Financial Management and Research — 10/06

### XI. Resident Representative
- Resident representative’s office opened in November 1991.
- Mr. Joshua Felman replaced Mr. Michael Wattleworth as Senior Resident Representative in August 2006.

*Source: APPENDIX II: INDIA—FUND RELATIONS (As of October 31, 2006).*

### 3.      In addition to the ROSC recommendations, the authorities are presently addressing a

### 3.      In addition to the ROSC recommendations, the authorities are presently addressing a

### Data compilation issues identified (per National Statistical Commission, August 2001)
- 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 CSO to initiate procedures through which its interaction with other agencies in the decentralized statistical system is made more proactive as well as effective.
- Planned establishment of the National Statistical Commission as a first step.

### Table of Common Indicators Required for Surveillance (selected entries, as of November 10, 2006)
- Exchange rates: Date of latest observation 11/16/06; Date received 11/16/06; Frequency D; Frequency of Reporting D; Frequency of Publication D.
- International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 11/3/06; Date received 11/10/06; Frequency W; Frequency of Reporting W; Frequency of Publication W.
- Reserve/base money: Date of latest observation 10/27/06; Date received 11/10/06; Frequency W; Frequency of Reporting W; Frequency of Publication W.
- Broad money: Date of latest observation 10/27/06; Date received 11/10/06; Frequency BW; Frequency of Reporting BW; Frequency of Publication BW; Data Quality – Methodological soundness: O, O, LO, LO; Data Quality – Accuracy and reliability: O, O, O, O, O.
- Central bank balance sheet: Date of latest observation 8/06; Date received 8/06; Frequency A; Frequency of Reporting A; Frequency of Publication A.
- Consolidated balance sheet of the banking system: Date of latest observation 8/06; Date received 8/06; Frequency A; Frequency of Reporting A; Frequency of Publication A.
- Interest rates: Date of latest observation 11/10/06; Date received 11/10/06; Frequency D; Frequency of Reporting D; Frequency of Publication D.
- Consumer price index: Date of latest observation 10/28/06; Date received 10/10/06; Frequency M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness: O, LNO, O, O; Data Quality – Accuracy and reliability: LNO, LO, O, O, O.
- Revenue, expenditure, balance and composition of financing – general government: Date of latest observation 8/06; Date received 8/06; Frequency A; Frequency of Reporting A; Frequency of Publication A; Data Quality – Methodological soundness: LNO, LO, O, O.
- Revenue, expenditure, balance and composition of financing – central government: Date of latest observation 8/06; Date received 8/06; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- Stocks of central government and central government-guaranteed debt: Date of latest observation 03/06; Date received 03/06; Frequency A; Frequency of Reporting A; Frequency of Publication A.
- External current account balance: Date of latest observation 6/06; Date received 6/06; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness: LO, O, LO, O; Data Quality – Accuracy and reliability: LO, O, O, O, LO.
- Exports and imports of goods and services: Date of latest observation 6/06; Date received 6/06; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q.
- GDP/GNP: Date of latest observation 5/06; Date received 5/06; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness: LO, LNO, LO, LO; Data Quality – Accuracy and reliability: LNO, LNO, O, O, LO.
- Gross external debt: Date of latest observation 12/05; Date received 3/06; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q.

### IMF Staff Representative statement (December 20, 2006) — Key updates since staff report (circulated November 29, 2006)
- Growth and activity
  - Real GDP growth accelerated to 9.2 percent y/y in the June-September quarter.
  - Industrial production growth eased to 6.2 percent y/y in October (temporary seasonal impact of holidays noted).
  - Staff revised GDP growth to 8.9 percent for FY2006/07 and to 8.2 percent for FY2007/08.
- External sector and inflation
  - Widening trade deficit amid strong momentum.
  - WPI inflation edged up to 5.3 percent in November.
  - Revised projected current account deficit for FY2006/07: 2 percent of GDP.
  - Revised projected inflation for FY2006/07: 5.2 percent.
- Fiscal developments
  - Central government’s net tax revenue grew 33.8 percent y/y during April-October.
  - State VAT collection rose over 30 percent y/y during April-September.
- Monetary policy and liquidity
  - RBI announced increases in the Cash Reserve Ratio (CRR): raise by 25 basis points to 5.25 percent on December 23, and another 25 basis points on January 6.
  - Expected to remove some Rs. 135 billion (2.2 percent of reserve money) in excess liquidity.
  - Monetary aggregates in November: M3 grew 19.3 percent y/y; reserve money grew 17.5 percent y/y; non-food credit expanded 30.1 percent y/y.
- Financial markets and reserves
  - BSE Sensex fell 5.8 percent between December 8 and 12, then stabilized.
  - Between end-November and December 13 the rupee gained 0.1 percent against the dollar.
  - Foreign exchange reserves stand at $175 billion (December 8).
- Fuel prices and cost recovery
  - Government cut domestic petrol prices by 4¼ percent and diesel by 3 percent; LPG and kerosene prices unchanged.
  - Impact on inflation likely limited (perhaps reducing WPI inflation by 0.1 percent).
  - Staff estimates: petrol is now 3½ percent above cost-recovery levels on an import parity basis; diesel is 4½ percent below cost-recovery levels on an import parity basis.

### Public Information Notice (PIN) No. 07/9 — IMF Executive Board conclusions (January 25, 2007) — Background and assessment highlights
- Growth and inflation
  - India’s economy: average growth of 8 percent in the last three years.
  - Manufacturing expanding at over 10 percent y/y.
  - Staff projects growth of about 9 percent this year, moderating toward trend in 2007/08.
  - WPI inflation contained within RBI’s indicative projection range of 5−5½ percent; CPI (industrial workers) exceeds 6 percent due to high food prices.
  - Staff projects WPI inflation to remain in the 5−5½ percent range in the near term.
- External balances and capital flows
  - Trade deficit in 2005/06: 6½ percent of GDP.
  - Current account deficit in 2005/06: 1¼ percent of GDP.
  - Reserve coverage stable at around 7½ months of imports of goods and services.
  - Capital inflows dominated by portfolio flows and external commercial borrowings; gross FDI inflows rising.
- Exchange rate and liquidity management
  - Exchange rate exhibited two-way flexibility; real effective rate broadly around its 2004/05 level.
  - RBI interventions limited to easing volatility and smoothing liquidity pressures.
- Financial markets and prudential measures
  - PE ratios high relative to other countries and India’s past; real estate prices growing rapidly.
  - RBI tightened prudential standards: raised general provisioning requirements and boosted risk-weights on high-growth areas, including real estate, to above Basel norms.
  - Banks’ backward-looking financial soundness indicators suggest balance sheets and income remain healthy.
- Fiscal policy and public debt
  - After three years of reduced deficits, general government deficit broadly unchanged at around 7½ percent of GDP in 2005/06.
  - General government debt remains high―over 80 percent of GDP.
  - Fiscal consolidation resumed in 2006/07: state and central government budget deficit targets of 2.7 percent of GDP and 3.8 percent of GDP, respectively.
  - Staff projects the general government deficit to overperform budget estimates by 0.2 percent of GDP on the back of strong revenue growth.

### Executive Board Assessment — Recommendations and priorities endorsed by Directors
- Reform priorities endorsed: fiscal consolidation, financial sector development, and removal of structural bottlenecks.
- Monetary policy
  - Vigilance against overheating; support for central bank’s gradual removal of monetary accommodation.
  - Overperformance on the 2006/07 budget could support policy by channeling revenue windfall to deficit reduction.
- Exchange rate and capital account
  - Market-determined exchange rate policy supported as appropriate.
  - Gradual approach to capital account liberalization recommended, in step with fiscal consolidation and financial deepening.
- Fiscal reforms
  - Reduce public debt to make room for social and infrastructure spending.
  - To reach central government revenue deficit balance by 2008/09, recommended:
    - Broaden the tax base by eliminating corporate income tax incentives and paring exemptions.
    - Reform interstate taxation to pave the way for a national goods and services tax.
  - Expenditure reform recommendations: implement government committees’ recommendations on subsidies, introduce an automatic market-based mechanism for petroleum goods, and better target kerosene subsidies.
  - Consider hardening state budget constraints, as several states face sizable adjustments.
- Financial sector and markets
  - Continue vigilance on asset quality given rapid credit growth; conduct comprehensive stress tests and authorities’ self assessment of financial stability and development.
  - Future implementation of Basel II to incentivize enhanced risk management.
  - Further deepen markets: expand short selling, consolidate benchmark issues, streamline issuance requirements for corporate bonds.
  - Broaden investor base and improve long-term funding: raise limit on FDI in insurance and permit private participation in the pension system.
- Structural reforms for inclusive growth
  - Strengthen implementation capacity and develop strong independent regulators to attract investment and support PPP initiatives.
  - Maximize contribution of Special Economic Zones while limiting potential revenue losses.
  - Improve business climate, reform education, and promote agricultural growth to alleviate rural poverty.
- Trade policy
  - Welcome commitment to multilateral trade liberalization and intention to play an active role in restarting multilateral trade talks.
  - Unilateral extension of duty free, quota free access to least-developed countries and continued reduction in trade tariffs noted.
  - Rapid growth presents an opportunity to move tariffs more quickly towards ASEAN levels.

### Selected Economic Indicators (key figures)
- Domestic economy
  - Change in real GDP at factor cost: 3.8 (2002/03), 8.5 (2003/04), 7.5 (2004/05), 8.4 (2005/06), 8.9 (2006/07 Proj.).
  - Change in industrial production: 5.8 (2002/03), 7.0 (2003/04), 8.4 (2004/05), 8.2 (2005/06), ...
  - Change in wholesale prices (period average): 3.6 (2002/03), 5.4 (2003/04), 6.5 (2004/05), 4.4 (2005/06), 5.2 (2006/07).
  - Change in consumer prices (period average): 4.0 (2002/03), 3.9 (2003/04), 3.8 (2004/05), 4.4 (2005/06), 6.6 (2006/07).
- External economy (in billions of U.S. dollars)
  - Merchandise exports: 53.8 (2002/03), 66.3 (2003/04), 85.2 (2004/05), 104.8 (2005/06), 127.6 (2006/07).
  - Merchandise imports: 64.5 (2002/03), 80.0 (2003/04), 118.9 (2004/05), 156.3 (2005/06), 196.8 (2006/07).
  - Current account balance: 6.3 (2002/03), 14.1 (2003/04), -2.5 (2004/05), -10.6 (2005/06), -17.9 (2006/07).
    - (In percent of GDP): 1.3 (2002/03), 2.3 (2003/04), -0.4 (2004/05), -1.3 (2005/06), -2.0 (2006/07).
  - Direct investment, net: 3.2 (2002/03), 2.4 (2003/04), 3.7 (2004/05), 5.7 (2005/06), 9.3 (2006/07).
  - Portfolio investment, net: 0.9 (2002/03), 11.4 (2003/04), 9.3 (2004/05), 12.5 (2005/06), 14.7 (2006/07).
  - Capital account balance: 10.8 (2002/03), 16.7 (2003/04), 28.0 (2004/05), 24.7 (2005/06), 48.6 (2006/07).
  - Gross official reserves: 76.1 (2002/03), 113.0 (2003/04), 141.5 (2004/05), 151.6 (2005/06), 175.4 (2006/07) — 7/ As of December 8, 2006.
    - (In months of imports): 9.4 (2002/03), 9.2 (2003/04), 8.7 (2004/05), 7.5 (2005/06), 7.9 (2006/07) — 7/ As of December 8, 2006.
  - External debt (in percent of GDP): 20.7 (2002/03), 18.6 (2003/04), 17.7 (2004/05), 15.7 (2005/06), 16.7 (2006/07).
  - Short-term debt (in percent of GDP): 3/ 5/ 3.8 (2002/03), 1.8 (2003/04), 3.1 (2004/05), 1.9 (2005/06), 2.2 (2006/07).
  - Debt service ratio (in percent of current receipts): 16.1 (2002/03), 16.0 (2003/04), 6.0 (2004/05), 9.7 (2005/06), 5.2 (2006/07).
  - Change in real effective exchange rate (in percent): -4.7 (2002/03), 1.0 (2003/04), 2.2 (2004/05), 4.4 (2005/06), -1.4 (2006/07) — 8/ IMF calculations as of November 30, 2006.
- Financial variables
  - Central government balance (in percent of GDP) 6/: -6.0 (2002/03), -5.1 (2003/04), -4.1 (2004/05), -4.2 (2005/06), -3.6 (2006/07).
  - General government balance (in percent of GDP) 6/: -9.7 (2002/03), -9.1 (2003/04), -7.3 (2004/05), -7.4 (2005/06), -6.2 (2006/07).
  - Change in broad money (in percent): 14.7 (2002/03), 16.7 (2003/04), 12.3 (2004/05), 21.2 (2005/06), 19.3 (2006/07) — 9/ As of November 24, 2006.
  - Interest rate (91-day Treasury bill rate): 5.9 (2002/03), 4.2 (2003/04), 5.3 (2004/05), 6.1 (2005/06), 7.1 (2006/07) — 10/ As of December 22, 2006.

*Content derived from the IMF staff report and Public Information Notice contained in the supplied PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0763.pdf_