## _cr0851 — Executive Summary and Selected Findings

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### Executive summary — Key findings
- India’s growth and macroeconomic stability reflect sound macroeconomic policies and past structural reforms.
- The economy expanded at an average rate of about 8½ percent for four years running, driven by rising productivity and investment.
- After rising sharply in early 2007, inflation has ebbed, and the current account deficit is moderate.
- India attracted record capital inflows amid heightened global uncertainties and slowing U.S. growth.
- Swelling capital inflows highlight key policy challenges: managing financial globalization and tackling supply constraints to growth.

### Policy implications and recommendations — Monetary and exchange rate
- Large capital inflows exacerbate tensions among exchange rate management, monetary independence, and financial openness.
- The RBI’s stance of accommodating increased exchange rate volatility, actively managing liquidity, and liberalizing outflows is assessed as appropriate.
- Use of capital controls could damp investment, raise doubts about commitment to fuller capital account convertibility, and pose questions about the exit strategy from new controls.
- Recommendations:
  - Strengthen monetary operations and communications.
  - Greater exchange rate flexibility to increase monetary policy effectiveness and deal with global market uncertainty.
  - Rely more on open market operations (OMOs) with a broad range of maturities rather than on the CRR, given an estimated annualized sterilization cost and tax on the banking system of about $3 billion (0.2 percent of GDP) from higher reserve requirements.
  - Focus policy on a broad-based CPI to orient policy around a clearer measure of the cost of living.
  - Increase frequency of policy meetings and elaborate inflation and demand-supply outlook in policy reviews; publish inflation expectations survey when ready.

### Policy implications and recommendations — Financial market development and capital account
- Sizeable cross-border capital movements require broader and deeper financial markets to:
  - Channel capital productively,
  - Accommodate higher exchange rate volatility,
  - Support financial stability.
- Priorities:
  - Develop a domestic corporate bond market (current market size less than 5 percent of GDP).
  - Improve onshore derivatives markets to help corporations manage risks.
  - Develop government debt market liquidity (turnover ratio about 70 percent; only four issues traded more than four times a week).
  - Address impediments: quantitative limits on institutional investors, restrictive issuance procedures, tax and stamp duty barriers, lack of repo market, low price transparency.
- Capital account policy:
  - Continue deliberate liberalization of outflows (steps in 2006 and 2007 welcomed).
  - Avoid using capital controls as a primary macro management tool; recent tightening of external commercial borrowing (ECB) restrictions did not curb overall flows but raised investment-financing concerns.
  - Authorities to use temporary space provided by existing restrictions to prepare the monetary framework for a more open capital account.

### Policy implications and recommendations — Fiscal
- Further fiscal consolidation is important to sustain growth and manage financial globalization.
- Despite impressive revenue performance, fiscal consolidation has stalled and public debt remains high, squeezing fiscal space for public investment.
- Key fiscal facts and projections:
  - Including off-budget bond issuance, general government deficit about 7¼ percent of GDP in 2006/07.
  - Central government deficit remained at 4½ percent of GDP in 2006/07.
  - States’ aggregate fiscal deficit rose to 2¾ percent of GDP.
  - Public debt roughly 80 percent of GDP in March 2007.
  - Staff projects general government debt to fall to 62 percent of GDP by 2012.
- Recommended measures:
  - Expenditure reforms: rationalize subsidies, cut tax exemptions, improve targeting and reduce diversion of food and fuel subsidies, phased re-alignment of domestic fuel prices to international levels with rule-based burden-sharing.
  - Revenue reforms: broaden tax base, enhance tax administration, implement GST (planned for April 2010) with early roadmap, consider single point of collection vs. dual-tier.
  - Supplement FRBMA with an explicit medium-term debt reduction framework covering consolidated government and non-financial public enterprises.

### Economic backdrop — Growth, inflation, and capital inflows
- Growth and productivity:
  - Growth averaged about 8½ percent in the four years through 2006/07 and is set to record 8¾ percent in 2007/08 (staff projection).
  - During July-September 2007, real GDP rose by 8.9 percent y/y.
  - Total factor productivity growth has averaged about 3⅓ percent in recent years.
- Inflation:
  - Headline WPI inflation eased from about 6¾ percent y/y earlier in 2007 to about 3½ percent y/y.
  - Core inflation (excluding food and energy) eased to about 4¾ percent y/y.
  - CPI inflation exceeds WPI inflation by over 2 percentage points.
- Capital inflows and external sector:
  - Capital inflows reached a record $45 billion in 2006/07 and accelerated in 2007/08.
  - Portfolio inflows from FIIs: overseas investors net $18.8 billion (Jan–Nov 2007) vs $9.5 billion (same period 2006).
  - Capital inflows more than finance the current account deficit (projected at about 1½ percent of GDP in 2007/08, versus a capital account surplus of 9½ percent of GDP in staff comparisons).
  - Exports growth: over 20 percent y/y in U.S. dollar value; buoyant imports, led by raw materials and capital goods, widened the trade deficit.

### Exchange rate dynamics, intervention, and liquidity management
- Exchange rate movements and reserves:
  - Rupee appreciated by 7 percent in real effective terms and by 7½ percent in nominal effective terms between December 2006 and August 2007, most appreciation between March and May 2007.
  - RBI accrued $65 billion in reserves (purchasing foreign currency) between end-May and end-November 2007 amid intervention to curb appreciation.
  - RBI intervention aimed at smoothing volatility in the bilateral U.S. dollar/rupee market; interventions were one-way purchases because there had been no net capital outflows since May 2006.
- Monetary instruments and actions:
  - Since October 2006, the cash reserve ratio (CRR) rose 200 bps.
  - The repo rate was hiked twice by 25 bps (last in April 2007); CRR raised by 50 basis points to 7.5 percent at October 2007 meeting.
  - Mission judged partially sterilized intervention maintained a wide interest differential which aggravated inflows.
  - Recommended: more rupee flexibility and avoidance of large prolonged foreign currency purchases to reduce sterilization costs and speculative inflows; better-developed derivatives markets to encourage private hedging.

### Banking sector performance, soundness, and risks
- Key indicators:
  - Aggregate capital adequacy ratio (CAR) at end-March 2007: 12.4 percent (above regulatory rate of 9.0 percent).
  - Ratio of scheduled commercial banks’ gross NPLs to advances fell to 2.7 percent (from 10.4 percent at March 2002).
  - NPL provisioning averaged 56 percent over the last year.
  - Unsecured retail loans are about 10 percent of all loans and require 100 percent provisioning; delinquency rising for some banks.
- Stress testing and Basel II:
  - Sensitivity analysis: the least capitalized bank (≈ 8 percent of total loans) can withstand more than a doubling of current NPLs before breaching statutory requirements; once Basel II takes effect and regulatory threshold rises to 10 percent, a 75 percent increase in NPLs would push the weakest bank below that threshold.
  - Basel II migration: foreign banks and Indian banks with foreign activities from March 2008; other banks by March 2009; estimated additional capital requirement about 1 percent of risk-weighted assets.
- Risks and structure:
  - Main risks: rapid credit growth, strong capital inflows, elevated real estate credit growth (~70 percent y/y), rising retail segment and unsecured lending, rising corporate foreign currency borrowing with incomplete hedging.
  - Public ownership accounts for about 70 percent of scheduled commercial bank assets; banking system fragmented with 82 commercial banks.
  - Return on assets low; directed lending and regulated rates, CRR tax, and foreign ownership limits constrain efficiency.
- Supervisory actions:
  - RBI frequent inspections, strengthened stress testing, guidance on monitoring unhedged currency exposures, work on supervisory process for globally-active conglomerates.

### Outlook and projections
- Near-term staff projections:
  - GDP growth: 8¾ percent in FY2007/08; 8¼ percent in FY2008/09.
  - Current account deficit: around 2 percent of GDP as services and remittances offset widening trade deficit.
- Medium-term staff projections:
  - GDP growth moderates to 8 percent (staff’s estimated potential).
  - Inflation around 4 percent.
  - Current account deficit around 2 percent of GDP, comfortably financed by private capital inflows.
  - Strong growth would help reduce general government deficit to about 4½ percent of GDP.
- Risks:
  - Growth risks broadly balanced: slowdown in developed economies could damp exports; diversification to fast-growing Asian and Gulf markets limits that risk; investment could surprise on the upside due to strong profits and savings.
  - Inflation risks to the upside: ample domestic liquidity (partly due to intervention), capacity constraints, sharply rising skilled wages, infrastructure deficits, and soaring international food and fuel prices.
  - Financial risks: potential increase in NPLs from past retail credit boom, but banks’ capital buffers make the credit cycle likely manageable; corporate leverage rising but remains low.
  - Fiscal risks: soaring commodity prices could boost subsidies; potential public compensation increases in FY 2008/09; tax collections may slow as growth eases.
  - External position: deemed sustainable and robust to shocks; reserves exceed total external debt.

### Structural reforms, supply constraints, and inclusiveness
- Supply constraints:
  - Infrastructure and skills shortages identified as critical constraints to sustained growth.
  - Power shortages acute: average firm reports power outages on 85 days per year; peak deficit reached 14½ percent this year.
  - Infrastructure investment needs estimated at about $500 billion over the medium term.
- Labor and education:
  - Skill premia rising: wages of managerial and supervisory staff rose 16 percent during 2007, with similar increase expected in 2008.
  - Unemployment among 26–30 year olds rises from 0.5 percent for the illiterate to 15.4 percent for those with postgraduate education and above, indicating skills mismatch.
  - Recommendations: more flexible labor regulations, expanded vocational and technical education, increased and more effective public spending on education (11th Plan envisages raising education spending to 6 percent of GDP).
- Trade and competitiveness:
  - Tariff liberalization: overall average tariff declined from 32.3 percent in 2002 to 15.8 percent in 2006; average agricultural tariffs at 40.8 percent.
  - Staff supports reducing tariffs to ASEAN levels and welcomes authorities’ commitment to multilateral trade liberalization and FTAs.
- Inclusive growth:
  - Poverty rate fell from 36 percent in 1993/94 to under 28 percent in 2004/05 (alternative measure places poverty at 21 percent in 2004/05).
  - Inequality rose in the 1990s; consumption growth became less inclusive.

### Selected fiscal and external numbers (preserved exactly as in source)
- Capital inflows: $45 billion in 2006/07.
- Overseas investors net purchases: $18.8 billion (Jan–Nov 2007) vs $9.5 billion (same period 2006).
- Current account projected at about 1½ percent of GDP in 2007/08.
- Capital account surplus cited as 9½ percent of GDP in comparative tables.
- Rupee appreciation: 7 percent REER and 7½ percent nominal effective between Dec 2006 and Aug 2007.
- RBI reserve accumulation: $65 billion between end-May and end-November 2007; reserve total reported as $276 billion (as of January 4) and $275.3 billion (end-December 2007) in subsequent statements.
- Fiscal balances and debt:
  - General government deficit about 7¼ percent of GDP in 2006/07 (augmented definition).
  - Central government deficit 4½ percent of GDP in 2006/07.
  - States’ aggregate fiscal deficit 2¾ percent of GDP.
  - Public debt roughly 80 percent of GDP in March 2007.
  - Staff projects general government debt to fall to 62 percent of GDP by 2012.
- Monetary instruments:
  - CRR rose 200 bps since October 2006; CRR raised by 50 basis points to 7.5 percent in October 2007.
  - Repo rate hiked twice by 25 bps (last in April 2007).
- Banking soundness:
  - Aggregate CAR at end-March 2007: 12.4 percent.
  - Gross NPLs to advances: 2.7 percent (end-March 2007).
  - NPL provisioning averaged 56 percent over the last year.
- Key macro aggregates (selected, preserved):
  - Real GDP growth series (2003/04–2007/08): 8.5; 7.5; 9.0; 9.4; 8.7.
  - Gross saving (percent of GDP): 30.4; 31.2; 32.6; 34.2; 35.6.
  - Foreign exchange reserves (US$ billions end-period): 113.0; 141.5; 151.6; 199.2; 273.5 (November 2007 series).
  - General government debt (percent of GDP): 85.7; 85.7; 82.9; 79.0; 75.2 (2003/04–2006/07).

### Institutional and Fund relations (selected)
- Membership: Joined 12/27/45; Article VIII.
- Quota: 4,158.20 SDR Million (100.00 percent).
- Fund holdings of currency: 3,875.99 SDR Million (93.21 percent).
- Reserve position in Fund: 282.24 SDR Million (6.79 percent).
- SDR cumulative allocation: 681.17 SDR Million (100.00 percent).
- Projected obligations to Fund (charges/interest): 2007: 6.80; 2008: 26.08; 2009: 26.06; 2010: 26.07; 2011: 26.07.
- Exchange rate arrangement: Since March 1, 1993, the Indian rupee has floated against other currencies, with periodic Reserve Bank of India intervention; AREAER classification: managed floating with no pre-announced path.

*Source: EXECUTIVE SUMMARY (_cr0851) — IMF staff report excerpts and related mission statements contained in the provided PDF content.*

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

### _cr0851 - Executive Summary

### Executive Summary — Key Findings
- India’s growth and macroeconomic stability reflect sound macroeconomic policies and past structural reforms.
- The economy expanded at an average rate of about 8½ percent for four years running, driven by rising productivity and investment.
- After rising sharply in early 2007, inflation has ebbed, and the current account deficit is moderate.
- India has attracted record capital inflows amidst heightened global uncertainties and slowing U.S. growth.
- Swelling capital inflows highlight key policy challenges: managing financial globalization and tackling supply constraints to growth.

### Policy Implications and Recommendations
- Monetary and exchange rate policy:
  - Large capital inflows exacerbate tensions among exchange rate management, monetary independence, and financial openness.
  - The RBI’s stance of accommodating increased exchange rate volatility, actively managing liquidity, and liberalizing outflows is assessed as appropriate.
  - Use of capital controls could dampen investment, raise doubts about commitment to fuller capital account convertibility, and pose questions about the exit strategy from new controls.
  - Strengthened monetary operations and communications along with greater exchange rate flexibility are suggested as a better way to increase monetary policy effectiveness and deal with uncertainty in global financial markets.
- Financial market development:
  - Sizeable cross-border capital movements require broader and deeper financial markets to channel capital productively, accommodate higher exchange rate volatility, and support financial stability.
  - A domestic corporate bond market is identified as an important alternative source of funds.
  - Better-developed onshore derivatives markets are needed to help corporations manage risks associated with financial integration.
- Fiscal policy:
  - Further fiscal consolidation is important for sustaining growth and managing financial globalization.
  - Despite impressive revenue performance, fiscal consolidation has stalled and public debt remains high, squeezing fiscal space for public investment in physical and social infrastructure.
  - Both expenditure and revenue measures are recommended, including rationalizing subsidies, cutting tax exemptions, enhancing tax administration, and broadening the tax base.
  - A tighter fiscal stance could also limit the inflationary impact of capital inflows.
- Structural reforms:
  - Reforms are needed to ease real sector rigidities, boost competitiveness, and ensure that benefits of growth are widely shared.
  - The government’s “inclusive growth” agenda prioritizes bridging infrastructure gaps (through active private sector participation), ensuring access to social services, and promoting a competitive environment that supports private sector investment and job creation.

---

### I. Economic and Political Context — Assessment
- Macroeconomic performance:
  - India’s macroeconomic performance is described as impressive, resulting from sound macroeconomic policies and steady reforms since 1991.
  - Growth averaged about 8½ percent in the four years through 2006/07, and is set to record 8¾ percent this year.
  - The poverty rate fell from 36 percent in 1993/94 to under 28 percent in 2004/05.
- Global financial integration and capital flows:
  - Productivity-driven growth and increasing financial integration have attracted record capital inflows.
  - With global portfolio weights on India rising, the inflows appear set to continue.
- The “impossible trinity” tension:
  - Capital inflows have put upward pressure on the exchange rate; authorities have intervened in the foreign exchange market.
  - Expansion in domestic liquidity required monetary tightening, maintaining a wide interest-rate differential.
- Supply constraints:
  - Supply constraints are identified as the critical challenge to sustained growth with stability.
  - Rapid growth is worsening shortages of infrastructure (especially electricity) and skilled labor.
  - Pressures on skilled wages are widening income inequality, potentially eroding support for growth-oriented reforms (Box 1).
- Structural reform environment:
  - Authorities maintained macroeconomic stability but critical structural reforms have lagged.
  - Budget deficit has fallen in recent years due to strong growth and the Fiscal Responsibility and Budget Management Act (FRBMA); price stability has been maintained.
  - To cope with capital inflows, authorities have allowed greater flexibility in the rupee, enhanced prudential measures, tightened selected capital controls, and hiked reserve requirements.
  - The 11th Plan envisions significant hikes in infrastructure and education spending, along with labor market reforms, but coalition politics complicate reforms.
- Consultation focus:
  - The 2007 Article IV consultation discussions focused on policies needed to manage financial globalization and tackle supply constraints to sustained growth, centering on macroeconomic policies (monetary, exchange rate, fiscal), capital account policy, financial stability, and structural reform.

### Box 1 — Inclusive Growth (summary points)
- Poverty reduction and inequality:
  - Rapid growth reduced poverty: share below poverty line fell from 45 percent in 1983, to 36 percent in 1993/94, and then to 27½ percent in 2004/05.
  - Inequality began to rise in the 1990s; between 1993/94 and 2004/05, the rural-urban consumption gap widened.
  - Consumption growth became less inclusive: in 1983–1993/94 growth at the bottom outpaced the top; in the 1990s this reversed, with much faster growth at the top—particularly in urban India.
  - In the 1990s, the bottom 50 percent experienced slower consumption growth than in the previous decade.
- Alternate poverty measure:
  - An alternative measure places the poverty rate at 21 percent in 2004/05 (down from 26 percent in 1999/2000), but comparable earlier-year estimates are unavailable under this measure.

---

### II. Economic Backdrop — Recent Performance and Trends
- Growth and productivity:
  - Growth remains strong, led by investment and productivity.
  - During July-September 2007, real GDP rose by 8.9 percent y/y.
  - Capacity utilization and business confidence remain high.
  - Total factor productivity growth has averaged about 3⅓ percent in recent years, within Asia exceeded only by China.
  - High-frequency data point to a recent deceleration in consumption, but investment indicators remain strong, fed by robust corporate profits.
- Inflation:
  - Headline WPI inflation eased from about 6¾ percent y/y earlier this year to about 3½ percent y/y, partly due to decelerating food and manufacturing prices and monetary tightening.
  - Core inflation (excluding food and energy) has eased to about 4¾ percent y/y.
  - CPI inflation exceeds WPI inflation by over 2 percentage points, reflecting the CPI’s higher weight on food.
- Capital inflows and external sector:
  - Capital inflows reached a record $45 billion in 2006/07, and accelerated this fiscal year.
  - Portfolio inflows from foreign institutional investors (FIIs) rose appreciably but accounted for less than a quarter of inflows.
  - Capital inflows more than finance the current account deficit (projected at about 1½ percent of GDP in 2007/08, versus a capital account surplus of 9½ percent of GDP).
  - Export growth remains robust at over 20 percent y/y in U.S. dollar value, but buoyant imports (led by raw materials and capital goods) pushed up the trade deficit.
- Financial markets:
  - Overseas investors bought a net $18.8 billion of stocks and bonds during January-November 2007, compared to $9.5 billion in the same period in 2006.
  - Long-term interest rates range around 8 percent.
  - Real estate markets have been buoyant, although cooling recently.

### Box 2 — Comparing BRICs: Exchange Rate, Capital Flows, and Macroeconomic Policy (summary points)
- Exchange rate and inflows:
  - Since the start of 2007, the BRICs experienced significant REER appreciation.
  - For India and Brazil, most 2007 real appreciation came from nominal appreciation; China and Russia had inflation-led appreciation.
  - India stands out in the BRICs as the only one with a current account deficit while experiencing sizeable inflows.
  - Capital inflows were large across BRICs; India and Brazil saw inflows mainly from capital accounts, China mainly from current account surplus.
- Policy responses:
  - Intervention: all BRICs intervened heavily in foreign exchange markets; Brazil is an independent floater, India and Russia are managed floaters, and China maintains a crawling peg.
  - Sterilization: India and China partially sterilize intervention, India at a higher rate than China; Brazil fully sterilizes consistent with its inflation target; Russia’s sterilization is limited.
  - Monetary policy: India and Brazil emphasize containing inflation; Russia’s policy is accommodative with base money growth accelerating to about 40 percent; China absorbs liquidity through higher reserve requirements and administrative measures.
  - Capital account: India liberalized outflows and selectively restricted inflows; Brazil increased outflows and then liberalized some; China restricts inflows other than FDI but has liberalized outflows.
  - Fiscal policy: In India, staff expect higher revenues to be fully spent; Brazil and China are using revenue over-performance to improve fiscal balances; Russia has increased spending of oil revenues since 2005.
- Comparative statistics (selected):
  - India: capital inflows reached a record $45 billion in 2006/07.
  - India: portfolio flows — overseas investors net $18.8 billion (Jan–Nov 2007) vs $9.5 billion (same period 2006).
  - India: current account projected at about 1½ percent of GDP in 2007/08; capital account surplus of 9½ percent of GDP.

---

*Source: EXECUTIVE SUMMARY (_cr0851)*

### 10.      Strong capital inflows have put

### 10.      Strong capital inflows have put

### Exchange rate dynamics and capital inflows
- The rupee appreciated by 7 percent in real effective terms and by 7½ percent in nominal effective terms between December 2006 and August 2007, with most appreciation occurring between March and May 2007.
- This REER appreciation was exceeded only by the Canadian dollar (8½ percent) and Brazilian real (9 percent).
- The RBI accrued $65 billion in reserves (purchasing foreign currency) between end-May and end-November 2007 amid intervention to curb appreciation.
- Rupee flexibility is roughly comparable to that of other large emerging-markets currencies and the yen.
- Large capital inflows are creating excess liquidity, maintaining a wide interest differential, and putting further pressure on the exchange rate—exacerbating tensions among exchange rate stability, monetary independence, and financial openness (the “impossible trinity”).

### Monetary and liquidity policy actions
- Since October 2006, the cash reserve ratio (CRR) has risen 200 bps.
- The repo (lending) rate was hiked twice by 25 bps (the last time in April 2007).
- With WPI inflation ebbing and slowing real estate prices and credit growth, the RBI left policy rates on hold at its October 2007 policy meeting, but raised the CRR by 50 basis points to 7.5 percent.
- The mission judged that partially sterilized intervention to smooth volatility maintained a wide interest differential which in turn aggravated inflows.
- Further rupee flexibility was identified as the most effective way to address the impossible trinity; the policy of a managed but market-determined exchange rate with intervention only to curb short-term volatility was deemed appropriate.
- Avoiding large and prolonged foreign currency purchases would reduce the need for costly sterilization and limit potential buildup of speculative inflows.
- A more flexible rupee, along with better-developed derivatives markets, would encourage private hedging.

### Fiscal developments
- Fiscal consolidation slowed in 2006/07.
- Including off-budget bond issuance, the general government deficit held steady at about 7¼ percent of GDP.
- The central government deficit remained at 4½ percent of GDP, with buoyant tax revenue offset by higher expenditure.
- The states’ aggregate fiscal deficit rose marginally to 2¾ percent of GDP.
- Revenues performed well, though expenditure rose faster due to rising public investment.
- Public debt remained high, at roughly 80 percent of GDP in March 2007.
- Note: The central government issued bonds amounting to 1 percent of GDP to oil companies and the Food Corporation of India to offset subsidy-related losses; staff treats these quasi-fiscal outlays as budgetary expenditure.

### Banking sector performance, soundness, and risks
- At end-March 2007, the aggregate capital adequacy ratio (CAR) stood at 12.4 percent, above the regulatory rate of 9.0 percent.
- The ratio of scheduled commercial banks’ gross non-performing loans (NPLs) to advances fell to 2.7 percent (from 10.4 percent at March 2002).
- NPL provisioning averaged 56 percent over the last year—well below the 150 percent and higher in comparable emerging market countries.
- Unsecured retail loans account for about 10 percent of all loans and require 100 percent provisioning; delinquencies on unsecured retail loans are rising for some banks.
- Sensitivity analysis of the ten largest banks indicates a sizeable increase in NPLs would be needed to reduce the weakest bank’s CAR below the regulatory threshold: the least capitalized bank (≈ 8 percent of total loans) can withstand more than a doubling of current NPLs before breaching statutory capital requirements.
- Once Basel II takes effect, the regulatory threshold for capital would rise to 10 percent, and a 75 percent increase in NPLs would push the weakest bank below that threshold.
- Market-implied default probabilities for banks have declined overall, but the range has increased in recent months; India’s bank risk is at the higher end of the range for Asian markets.

### Outlook and projections
- Near-term outlook: staff expects growth to moderate toward potential in the near term as weaker external demand moderates exports and consumption growth may slow due to the past rise in real interest rates, while investment should remain brisk.
- A favorable monsoon should deliver above-average agricultural growth.
- GDP growth projections:
  - GDP growth would moderate to 8¾ percent in FY2007/08.
  - GDP growth would further moderate to 8¼ percent in FY2008/09.
- The current account deficit should register around 2 percent of GDP as growing services and remittances offset a widening trade deficit.
- Medium-term prospects:
  - GDP growth would moderate to 8 percent (staff’s estimated potential growth).
  - Inflation should range around 4 percent.
  - The current account deficit would remain around 2 percent of GDP, comfortably financed by private capital inflows.
  - Strong growth would help reduce the general government deficit to about 4½ percent of GDP.
- Risks:
  - Growth risks are broadly balanced: a sharper-than-expected slowdown in developed economies could dampen exports, but increasing export diversification to fast-growing Asian and Gulf economies limits this risk; investment could surprise on the upside given strong corporate profits and domestic savings.
  - Inflation risks are to the upside: domestic liquidity remains ample (owing in part to intervention), capacity remains constrained, skilled wages are rising sharply, infrastructure deficits could be exposed by continued rapid growth, and soaring international food and fuel prices could stoke domestic price pressures.
  - Financial risks: some increase in NPLs may be in prospect from the past boom in retail credit, but banks’ sizeable capital buffers make the credit cycle likely manageable; corporate leverage is rising but remains low.
  - Fiscal consolidation is subject to downside risks from soaring global commodity prices boosting subsidies and potential public compensation increases in FY 2008/09, and tax collections may slow as growth eases.
  - External position: sustainable and robust to significant shocks; capital inflows could moderate as global liquidity eases, but given India’s vibrant baseline outlook and sizeable capital demands, inflows will likely remain strong; reserves exceed total external debt.

### Policy discussions and recommended framework
- Broad policy priorities identified:
  - Monetary and exchange rate policy calibrated to increasing financial openness.
  - Deepening and broadening capital markets—while maintaining financial stability—to intermediate capital inflows smoothly and finance infrastructure.
  - Fiscal consolidation to facilitate inclusive growth and cope with appreciation pressures.
  - Structural reforms to enhance economic flexibility and productivity.
- Preferred approach to sustained inflows in the current favorable growth conjecture included a package of measures:
  - Consistent monetary policy actions to address the impossible trinity.
  - More ambitious fiscal consolidation.
  - Continued liberalization of outflows.
  - Financial sector reforms to prepare for a more open capital account.
  - Structural reforms to increase the absorptive capacity of the economy (detailed in the source).
- On competitiveness and targeted support:
  - The mission assessed the rupee as in line with fundamentals; from a medium-term perspective the level is appropriate and exports and profits remain strong.
  - Where selected industries are affected, targeted, time-bound support (e.g., offering affected workers training and temporary financial assistance) could facilitate adjustment.
  - Enhanced labor market flexibility, improvements in power and transport infrastructure, and removal of small scale reservations would reduce business costs and increase economic flexibility.
  - Benefits of appreciation (lower inflation and cheaper imports) need better communication.

*Source: IMF staff report excerpt (sections 10–22) from the provided PDF content.*

### 23.      The mission welcomed steps taken to liberalize capital outflows in 2006 and 2007

### The mission welcomed steps taken to liberalize capital outflows in 2006 and 2007

### Capital account liberalization and capital flows
- Mission view:
  - Welcomed steps to liberalize capital outflows in 2006 and 2007.
  - Continuing to liberalize outflows—including by large domestic institutional investors—would signal commitment to fuller capital account convertibility.
  - Expected dynamic: local investors may not initially take full advantage, but over time outflows will rise as part of portfolio diversification, reducing net inflows.
- Risks of using capital controls for macro management:
  - Recent tightening of restrictions on external commercial borrowings did not curb overall flows but raised concerns about investment financing.
  - Such restrictions are likely to be effective only temporarily.
  - Further restrictions on capital inflows could foster uncertainty about the government’s commitment to fuller capital account convertibility and about the authorities’ “exit strategy.”
- Authorities’ stance:
  - Government intent remains gradual move toward fuller capital account convertibility with a hierarchy of preferences according to stability of flows (FDI and equity first).
  - Some role for existing controls to preserve financial stability, but authorities share staff doubts about long-term effectiveness of controls and note adverse impact of ECB restrictions on investment.
  - Ceilings on overseas investments of corporates, mutual funds, and individuals had been increased, but had not resulted in significant outflows to date.
  - RBI view: liberalizing outflows not seen as adequate solution because it would attract more inflows without significant balancing outflows.
  - Authorities said all possible options for maintaining stability would be considered, including non-monetary measures such as active capital account management (capital controls).

### Monetary policy framework, operations, and communications
- Use existing temporary space provided by controls to prepare for a more open capital account by strengthening the monetary framework.
- Monetary operations:
  - Mission welcomed heightened use of market sterilization instruments in 2007 and urged further reliance on open market operations (OMOs), with a broad range of maturities, rather than the CRR—which taxes banks.
  - Staff estimates annualized sterilization costs and the tax on the banking system from higher reserve requirements at about $3 billion (0.2 percent of GDP).
- Communications and meetings:
  - Mission welcomed improvements such as the 2005 shift from annual to quarterly reviews and increasingly forward-looking analysis in policy documents.
  - Recommended further increasing the frequency of policy meetings to reduce need for inter-meeting measures.
  - Monetary policy reviews could elaborate further on inflation and demand-supply outlook, including through eventual publication of the inflation expectations survey (pilot-testing stage, no timetable for release).
  - Suggested focusing policy on a broad-based CPI to orient policy around a clearer measure of the cost of living.
- Authorities’ monetary stance:
  - Stance unchanged and focused on domestic concerns; RBI reiterated policy of withdrawing accommodation through active liquidity management.
  - Sterilization costs are shared among the RBI, the banking system (through the CRR), and the budget (interest on stabilization bonds).
  - With mixed inflation signals, authorities judged cutting policy rates premature.

### Exchange rate policy
- RBI intervention aims at smoothing volatility in the bilateral U.S. dollar/rupee market rather than targeting the real effective exchange rate.
- Recent interventions were one-way (purchases of foreign exchange) because there had been no net capital outflows since May 2006.
- Authorities noted rupee had been on a weakening trend as recently as 2006 and that risks to capital flows exist on both upside and downside.
- Medium-term view: higher exchange rate flexibility could help India adjust to increasingly globalized financial markets.
- Authorities did not dispute staff’s assessment that the exchange rate appears to be in line with its medium-term equilibrium value but noted it is too early to assess effects of recent appreciation.
- Authorities view sizable trade deficit as a potential sign of loss of competitiveness due to appreciation; they stress firms should adapt by strengthening productivity.

### Financial markets: development priorities and impediments
- Priorities:
  - Develop government debt, corporate bond, and derivatives markets to intermediate capital inflows, expand risk management tools, and finance investment needs.
- Government debt market:
  - Turnover ratio of government debt is about 70 percent—lower than in Indonesia and Vietnam, and about half that in countries such as Thailand and Malaysia.
  - Only four issues are traded more than four times a week.
  - Impediments: narrow investor base; stringent short selling rules (positions may remain open for no more than five days; failure to deliver faces harsh penalties, including banning from trading); Statutory Liquidity Ratio (SLR) requires banks to maintain at least 25 percent of demand and time deposits in cash, gold, or government and other approved securities.
- Corporate debt market:
  - Market size is less than 5 percent of GDP, compared with over 20 percent of GDP in Thailand, Chile and Mexico, and 50-100 percent of GDP in more advanced economies.
  - Impediments: quantitative limits on institutional investors (pension funds and FIIs), restrictive issuance procedures (including requirement for two investment-grade ratings), tax deduction at source and stamp duties, lack of a repo market, low price transparency (most trading OTC).
  - Specific quantitative limits noted: pension funds allowed to invest up to ten percent of annual accruals in corporate bonds; total FII investment is capped at $1.5 billion.
- Derivatives and OTC markets:
  - OTC markets turnover rose threefold during 2004–2007 to over $8 billion per day but lack centralized risk management and transparency of exchanges.
  - Legal uncertainty exists about settlement in OTC markets, particularly closeout netting.
  - Attempts to introduce exchange-traded interest-rate contracts had limited success; currency futures are presently disallowed.

### Financial efficiency and stability: risks, structure, and supervisory actions
- Current risks and indicators:
  - Main risks: rapid growth in credit and strong capital inflows; these appear manageable but warrant close monitoring.
  - Financial soundness indicators are in prudent ranges and overall credit growth is decelerating.
  - Growth in credit to real estate remains elevated, at almost 70 percent y/y, and is concentrated in new private sector banks (accounting for more than 30 percent of their loan books).
  - Rapidly growing retail segment is relatively new to Indian banks.
  - Indian corporates’ foreign currency borrowing has risen; data on hedging are unavailable and anecdotes suggest hedging is far from complete.
- Banking system structure and efficiency:
  - Public ownership accounts for about 70 percent of scheduled commercial bank assets.
  - Banking system is fragmented, including 82 commercial banks.
  - Return on assets of domestic banks is low compared with other emerging and developed markets.
  - Impediments: credit targets to “priority sectors” (including agriculture, small scale industries, self employed) lead to small, costly-to-administer loans with higher default rates.
  - Regulated rates on savings deposits and small loans, short-term agricultural loans, and export credits; CRR taxes banks.
  - Foreign ownership subject to limits (to be reviewed in 2009).
- Supervisory and regulatory measures:
  - Stress tests of banks’ exposures and strengthened supervision under Basel II will help maintain banking stability.
  - Basel II implementation: foreign banks and Indian banks with foreign activities from March 2008; estimated increase in capital equivalent to about one percent of risk-weighted assets.
  - RBI actions: frequent inspection of banks’ credit and market risk books; special scrutiny for banks with substantial exposures to sensitive sectors; advice to banks to monitor unhedged currency exposures of corporate clients; work to put in place supervisory process for globally-active bank-led conglomerates.
  - RBI moved to strengthen stress testing, including credit risk in derivatives books, and closely watches banks’ derivatives exposures.
  - Pending move to Basel II seen as opportunity to further strengthen risk management and the supervisory review process.

### Authorities’ planned reforms and market development initiatives
- Government and market initiatives:
  - Consolidating benchmark government securities through swaps and buybacks and concentrating issues on benchmark maturities.
  - Government Securities Act of 2006 (came into force on December 1, 2007) allows stripping and reconstitution of government securities.
  - Fixed-Income Money Market and Derivatives Association (FIMMDA) developed a trade-reporting platform to improve price transparency.
  - RBI to introduce corporate bond repos once an efficient and safe settlement system based on delivery versus payment and electronic straight-through processing is implemented.
  - Securities and Exchange Board of India introduced smaller lot sizes for trading and in December 2007 reduced required ratings to one and allowed sub-investment grade debt.
- Derivatives market developments:
  - RBI April 2007 comprehensive guidelines on derivatives: eligibility criteria for market-makers and end-users, permissible instruments, documentation, prudential limits.
  - Draft guidelines on credit default swaps (May 2007) specified permitted structures, eligible counterparties, prudential norms, and risk management, accounting, and reporting requirements.
  - RBI October 2007 mid-term policy review proposed permitting authorized dealers to run options books and allow corporates to buy and write covered options.
  - November 2007 RBI Internal Working Group report on Currency Futures recommended creation of a dedicated exchange with initial participation limited to residents.
  - RBI Technical Advisory Committee on Markets sub-group considering how to reactivate interest rate futures market and whether to expand foreign participation.
- Foreign bank participation:
  - Foreign ownership review scheduled for 2009; one option is to grant subsidiaries of foreign banks the same treatment as Indian banks.
  - RBI roadmap for foreign bank participation is consistent with India’s WTO commitments and proposes foreign participation beyond existing WTO commitment of 12 branches per year.

*Source: _cr0851 - 23.      The mission welcomed steps taken to liberalize capital outflows in 2006 and 2007*

### 45.      A Committee on Financial Sector Assessment is undertaking a self-assessment of

### A Committee on Financial Sector Assessment is undertaking a self-assessment of financial stability and development

### Financial sector assessment
- A Committee on Financial Sector Assessment is undertaking a self-assessment of financial stability and development.
- Four advisory panels will issue separate reports addressing:
  - financial stability and stress testing;
  - financial regulation and supervision;
  - institutions and market structure;
  - transparency standards.
- The first group will conduct macro-prudential surveillance, including system-wide stress tests, and make recommendations for strengthening the financial system.
- The other groups will undertake assessments of relevant standards and codes and suggest measures to bridge identified gaps.
- The Committee is expected to complete its work by March 2008.

### Achieving Debt Reduction While Financing Priorities — Background and staff views
- Progress in consolidation has been mixed, with significant revenue gains eroded by expenditure overruns.
- Drivers of tax performance: rapid economic growth, high corporate profits, base broadening, and improved administration.
- States’ VATs now in all states but Uttar Pradesh have bolstered revenues, supplemented by higher central government transfers.
- Revenue gains offset by sharp increases in subsidies and higher-than-budgeted interest payments reflecting soaring commodity prices and rising sterilization costs.
- On staff’s definition (including off-budget bond issuance), the general government deficit has hovered at just over 7 percent of GDP since 2004/05.
- Central government’s deficit target for this year—3.3 percent of GDP—is likely to be met.
- Staff projects the augmented deficit at 4½ percent of GDP, about the same as last year, when including off-budget quasi-fiscal expenditure.
- Achieving revenue balance (FRBMA objective) would require consolidation of 2¾ percentage points of GDP (and about 1½ percentage points of GDP to achieve an overall deficit of 3 percent of GDP) based on staff’s augmented definition.
- Staff baseline assumes off-budget subsidy-related bond issuance will be phased out gradually, delaying achievement of current balance by a few years.
- Given rapid revenue growth, consolidation could have been more ambitious to accelerate debt reduction and help absorb inflationary impact of capital inflows.
- Risks to the baseline:
  - Spending risks: persistence of high fertilizer and fuel subsidy costs; increased government wages and pensions from the Sixth Pay Commission (SPC) award.
  - Revenue risks: corporate profits slowing after averaging 23 percent annually since 2004/05; tax losses from Special Economic Zones could rise to 1½ percent of GDP per year.
- On longer view, debt servicing costs (over 5 percent of GDP) absorb fiscal space needed for priority social and infrastructure projects.
- Recommendations:
  - Bold expenditure reforms to make space for social spending; revamp subsidies which are expensive and poorly targeted.
  - Phased re-alignment of domestic fuel prices to international levels paired with a shift to a rule-based pricing and burden-sharing mechanism for petrol and diesel.
  - Improve targeting and reduce diversion of food and fuel subsidies and other social assistance; broaden social safety net, including extending social insurance to informal-sector workers and old-age pensions to the poor.
  - Revenue reforms: in 2006/07, foregone revenue from exemptions amounted to 5.7 percent of GDP (roughly half of actual tax collections).
  - Implement the authorities’ GST (planned for April 2010) to streamline tax structure and bolster revenue; early announcement of a roadmap—including a timetable for merging VAT-like taxes and broadening the services tax—would help taxpayers prepare.
  - Consider a single point of collection versus a dual-tier system for ease of administration.
  - Raise non-tax revenue through user fees, contingent on significantly improved service delivery.
  - Supplement FRBMA with an explicit framework for medium-term debt reduction encompassing the consolidated government, including non-financial public enterprises.
- Staff projection: general government debt to fall to 62 percent of GDP by 2012, a decline of almost 20 percentage points (see Annex I).
- Aggregate state finances: sound overall, helped by fiscal responsibility legislation (adopted in all but two states), high transfers and debt forgiveness by the central government; consolidation targets under the 12th Finance Commission likely to be met ahead of schedule.
- State-level risks:
  - Slowdown in central government tax collections requires states to enhance revenues, especially given potential SPC costs.
  - Rising education and health spending could strain implementation and quality; monitoring and evaluation need improvement.
  - State liquidity management could be improved; cash-rich states could use excess revenue to consolidate debt more quickly.
- Authorities’ views:
  - Committed to FRBMA targets; significant revenue overperformance (especially corporate taxes) expected to offset higher interest payments and subsidies and allow central government deficit target to be met.
  - Acknowledge achieving revenue balance by March 2009 would be challenging given persistent expenditure pressures.
  - Plan to ramp up priority spending under the 11th Plan (2007–2012): education and health spending set to triple to 6 percent and 9 percent of GDP, respectively; total infrastructure investment targeted to rise from about 5¾ percent of GDP to 9 percent of GDP with increased private-sector share.
  - Aim to contain non-priority spending growth to avoid undermining consolidation.
  - Ministry of Finance agrees reforms are needed to secure lasting consolidation; committed to reducing subsidy bill though timing unclear.
  - Cautious optimism on state finances but note large role of central transfers and need for states to strengthen revenue-raising; concerns about hiring freezes creating labor shortages in education and health.
- Medium-term fiscal issues:
  - 13th Finance Commission preparing a road map for GST introduction (a dual-tier system with a common tax base would be the likely outcome) and will make recommendations for medium-term fiscal policy.
  - Authorities downplayed SPC expenditure risks, noting award unlikely to be as high as in 1997 and would likely be phased in.
  - Government plans to increase role of public-private partnerships to finance infrastructure.

### Addressing Supply Constraints to Sustain Growth — Background and staff views
- Strong and more inclusive growth underpins India’s economic stability; productivity must be bolstered to maintain competitiveness amid appreciation pressures.
- Inclusive growth needed to support fiscal sustainability and to build political consensus for growth-oriented reforms given perceptions of rising inequalities and lack of well-functioning social safety net.
- Education and labor-market reforms can accelerate growth and distribute benefits more widely.
  - Skill premia and consumption inequality are growing, especially in urban areas.
  - India registered one of the highest increases in skilled wages in the world; wages of managerial and supervisory staff rose 16 percent during 2007, with a similar increase expected in 2008.
  - Among 26–30 year olds, unemployment rates rise from 0.5 percent for the illiterate to 15.4 percent for those with postgraduate education and above, indicating serious mismatches between education provision and market needs.
  - More flexible labor regulations could increase formal sector employment, which has stagnated even as informal sector employment grows.
- Infrastructure shortfalls estimated to reduce GDP growth by 1 percent per annum.
  - Power shortages acute: average firm reports power outages on 85 days per year; peak deficit reached a 10-year high of 14½ percent this year.
  - Government estimates some $500 billion in infrastructure investment will be needed over the medium term in power and other sectors.
  - Prerequisite for private investment in power: more predictable and transparent regulatory framework (pricing and payment collections).
  - Streamline FDI regulations, develop corporate bond market and tap global capital markets (including by limiting restrictions on ECBs) to mobilize financing.
- Trade liberalization:
  - Overall average tariff declined from 32.3 percent in 2002 to 15.8 percent in 2006; average agricultural tariffs at 40.8 percent.
  - 2007/08 budget announced reduction of peak nonagricultural rate from 12.5 percent to 10 percent (subject to certain exemptions).
- Authorities’ plans and views:
  - “Faster and more inclusive growth” is guiding objective of the 11th Plan; priorities: access to social services, augmenting physical infrastructure, promoting competitive environment for private investment and job creation, including in agriculture.
  - Plan emphasizes secondary, higher and technical education; public spending on education envisaged to triple to 6 percent of GDP with further private-sector involvement.
  - Need greater emphasis on quality of service provision, with enhanced monitoring, evaluation and accountability; allowing FDI in education under consideration.
  - 11th Plan includes recommendations to make labor regulations more flexible, though political feasibility is unclear.
  - Reliance on public-private partnerships to bridge infrastructure gaps; progress varied across sectors with telecom, ports and roads attracting bulk of private investment.
  - In power sector, regulatory hurdles regarding payment mechanisms remain biggest obstacle; model concession agreements moving towards allocating greater share of risk to public sector.
  - Authorities committed to multilateral trade liberalization; plan to reduce tariffs to ASEAN levels by 2009 while noting domestic concerns and partner barriers may influence reductions.
  - India pursuing FTAs with key nations and hopeful for progress in the Doha Development round though concerned development focus is fading.

*Source: IMF mission text as provided in the content unit.*

### 68.      India’s impressive macroeconomic performance pays tribute to its sound

### India’s impressive macroeconomic performance pays tribute to its sound

### Macroeconomic overview and challenges
- India’s macroeconomic performance reflects sound macroeconomic policies and steady structural reforms over the past 16 years.
- Growth has brought further reductions in poverty while prudent macroeconomic policies have supported financial and economic stability.
- Two key challenges to sustaining performance:
  - Rapid capital inflows creating tensions associated with the “impossible trinity.”
  - Need for sustained, inclusive growth through structural reforms to underpin growth and increase economic flexibility and competitiveness.

### Monetary policy, liquidity management, and exchange rate
- Monetary operations and communications are adapting to financial globalization; the process can be stepped up.
- The RBI has:
  - managed liquidity more actively,
  - improved communication,
  - accommodated increased exchange rate volatility.
- Recommendations and observations:
  - Greater use of open market operations would enhance flexibility and effectiveness of monetary policy and decrease reliance on the tax of the CRR.
  - Further elaboration on the inflation outlook in more frequent monetary policy reviews would help guide expectations.
  - Staff judge rupee appreciation as an equilibrium phenomenon, reflecting strong economic fundamentals; the rupee is appropriately valued from a medium-term perspective.
  - A market-determined rupee and the policy of a managed float with some intervention to curb volatility but no target or preannounced path remain appropriate.
  - Further exchange rate flexibility will give monetary policy greater room to focus on containing inflation and reduce the costs of exchange rate management.
  - In combination with better-developed derivatives markets, a more flexible rupee would encourage hedging and avoid a buildup of speculative inflows.

### Capital account policy and capital controls
- Use of capital controls for macroeconomic management should be avoided as they could affect investment adversely.
- Recent experience with tightening ECBs restrictions demonstrates risks: such measures have not curbed overall flows but have raised concerns about investment financing.
- Government commitment to fuller capital account convertibility noted; imposing further restrictions on inflows may create confusion about that commitment and the authorities’ “exit strategy.”
- Preferred strategy:
  - Make capital account liberalization a deliberate process.
  - Use the temporary space provided by existing restrictions to prepare for a more open capital account.
  - Steps to liberalize capital outflows in 2006 and 2007 are welcome; further bolder steps would be warranted to reduce net inflows over time.

### Financial market development and intermediation
- Broader and deeper financial markets could better intermediate capital inflows, accommodate exchange rate adjustments, and finance India’s large investment requirements.
- Priorities:
  - Develop onshore corporate bond and derivatives markets to fund massive infrastructure investment needs and provide corporations with risk-management tools.
  - Develop exchange-traded currency and interest rate derivatives markets to complement growing OTC markets.

### Financial institutions and stability
- Efficiency of financial institutions can be enhanced through:
  - opening up further to foreign banks,
  - phasing out directed lending,
  - further loosening interest rate restrictions,
  - reducing the CRR,
  - further liberalizing FDI in financial services to spur competition and bring innovation and advanced financial technologies.
- RBI focus:
  - Appropriately maintains a strong focus on preserving financial stability.
  - Close scrutiny of banks’ credit portfolios and efforts to improve bank risk management make risks from a turn in the credit cycle likely manageable.
  - Pending adoption of Basel II will further strengthen bank risk management.
  - Ongoing review of financial stability and development emphasizes macro-prudential surveillance, including system-level stress testing; staff looks forward to publication of the report in March 2008.

### Fiscal policy and consolidation
- Further fiscal consolidation is essential to sustain inclusive growth and cope with financial globalization.
  - High public debt interest costs absorb fiscal space needed for priority social and infrastructure spending.
  - Consolidation would reduce crowding-out risks and set the stage for further financial openness.
  - A tight fiscal stance can shoulder some of the burden of adjusting to the inflationary impact of capital inflows.
- Measures needed on both spending and revenues:
  - Spending: phased reduction in fuel subsidies and gradual alignment of domestic prices to international levels warranted; a more rule-based pricing and burden-sharing mechanism would improve transparency.
  - Food and fertilizer subsidies can be better targeted.
  - Revenues: cutting exemptions would substantially boost the tax take.
  - Plans to introduce the GST are welcome; early announcement of a roadmap would help taxpayers prepare.
  - Collections from user fees could be raised but will require significantly improved service delivery.
- States:
  - Aggregate fiscal performance at the state level remains impressive, providing fiscal space to raise social spending.
  - Fiscal responsibility laws, large central government transfers, and introduction of the VAT have spurred rapid deficit reduction.
  - Liquidity management could be improved further.
  - Priority: improve the quality and quantity of state social spending.
- FRBMA:
  - Could be augmented to provide an explicit framework for future debt reduction.
  - An explicit medium-term debt reduction target for consolidated government could bolster commitment to further debt reduction.

### Structural reforms for competitiveness and inclusive growth
- Structural reforms to increase flexibility are key to competitiveness and inclusive growth.
- Issues and priorities:
  - Sustained productivity growth is essential to maintain competitiveness.
  - Widening disparities reflect rapid growth in skilled wages owing to skills shortages, which reflect gaps in education.
  - Infrastructure gaps and labor market rigidities will increasingly constrain growth.
  - Power sector: a more predictable regulatory environment is warranted to mobilize private sector funding.
  - Education: higher—and more effective—public spending on education is essential; FDI in education could play a supportive role, with a clearer regulatory regime.
  - Labor market: more flexible labor regulations can facilitate reallocation of labor to stronger sectors.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0851.pdf*

### 81.       Further trade liberalization can facilitate growth. Tariff reductions have reduced

### _cr0851 - 81.       Further trade liberalization can facilitate growth. Tariff reductions have reduced

### Trade liberalization and growth
- "Further trade liberalization can facilitate growth."
- Tariff reductions have "reduced the costs of key capital goods and raw materials" and, "in tandem with complementary structural reforms, have spurred domestic competition."
- Staff "supports the aim to reduce tariffs to ASEAN levels" and "welcomes the authorities’ commitment to multilateral trade liberalization."

### Growth dynamics and drivers
- Growth described as "robust," supported by:
  - Strong contributions to Real GDP Growth across Industry and Services (figures shown for 2001–2007).
  - Industrial Production by Use: notable percent changes and three-month moving averages for "Total," "Capital goods," and "Consumer goods" (2001–2007 series).
  - Automobile Sales: percent change (three-month moving average) for "All Motor Vehicles" and "Passenger Vehicles" (2001–2007).
  - "A normal monsoon" supporting agriculture; Rainfall and Agriculture series (2001–2007).
  - Indicators of demand: higher capacity utilization (NCAER survey respondents), rising stock prices (BSE Sensex, 1995=1000), and resilient business confidence (2001–2007).

### External sector and balance of payments
- Current account: "The current account is in deficit" driven by "a rising trade deficit, reflecting strong domestic demand."
  - Current Account shown in "billions of U.S. dollars" (2001–2007).
  - Trade Deficit and Imports: series include "Trade deficit (left scale)," "Petroleum imports y/y change," "Capital goods imports y/y change."
- Exports and market share:
  - "Export growth is easing from recent highs, but remains strong."
  - "Share of Global Exports of Goods and Services" series (1990–2006) indicates expanding world market share.
- Reserves and capital flows:
  - "Reserves continue to rise" alongside debt flows, portfolio, and FDI (quarterly series).
  - Exchange rate: "the exchange rate has appreciated sharply" — Rupee/US$ and REER (January 2000 = 100) series.
- Balance of payments table highlights (selected):
  - Merchandise exports: US$154.4 billion (2006/07).
  - Merchandise imports: US$241.9 billion (2006/07).
  - Net oil imports: US$71.0 billion (2006/07).
  - Current account balance: -17.4 (in US$ billions) for 2006/07; Current account balance (percent of GDP) -1.5 (projection reference).

### Exchange rate and intervention
- Foreign exchange intervention:
  - RBI Net FX Purchase and Foreign Exchange Reserves series (Sep-05 to Sep-07) show active intervention.
- Real Effective Exchange Rate (2000 = 100): "the REER has appreciated above its recent historical range."
- Exchange rate volatility:
  - "the rupee’s volatility has remained elevated."
  - 30-day moving standard deviation of daily log difference and 1 month option volatility series (Jan-05 to Sep-07).
- Market pricing of risk:
  - "The option market currently prices in a higher chance of depreciation of the currency."
  - Foreign Exchange Risk Reversals (1 month, 1 year) series (Mar-05 to Sep-07).

### External debt sustainability (staff projections and scenarios)
- External Debt Sustainability Framework (2003/04–2012/13) key baseline and scenario figures:
  - Baseline external debt: 18.5 (percent of GDP) in baseline column (2003/04–2007/08 table context).
  - External debt-to-exports ratio: 119.9 (2003/04) falling over projections to 67.8 (2012/13) in Table 11 series.
  - Gross external financing need (in billions of U.S. dollars): series from 5.2 to 102.0 in projections table (2003/04–2012/13).
- Sensitivity/bound tests (Figure 4 / Figure I.1):
  - Various shocks presented: Interest Rate Shock, Growth Shock, CA shock, Non-Interest Current Account Shock, Combined Shock, Real Depreciation Shock (30% depreciation in 2007/08 in one scenario).
  - Under many shocks, a gradual decline in debt-to-GDP still occurs; only a combination returning key variables to historical averages would raise the debt ratio over the medium term.

### Fiscal trends and public debt
- Fiscal consolidation: "Fiscal consolidation has slowed... partly reflecting modest deficit reduction at the central government level."
- General Government Fiscal Deficit (In percent of GDP) series (1997/98–2007/08) shows central and state contributions.
- Central Government (selected figures and projections):
  - Central government balance (authorities): -3.5 (2006/07); target and projections for 2007/08 and 2008/09 discussed.
  - Central Government Current Deficit: baseline and staff projection series; FRBMA roadmap and Budget 2007/08 compared to staff baseline.
- Public debt and debt path:
  - General Government Debt: series showing decline over projections (e.g., "gross public debt would decline over five years to 62 percent of GDP" under staff baseline).
  - Public sector debt path in Table I.1: Baseline Public sector debt figures (e.g., 84.8 in 2002 declining to 61.8 by 2012 under baseline).
- Augmented budget definition and off-budget bonds:
  - Staff uses an augmented definition including off-budget, subsidy-related bond issuance. Under assumptions, the augmented central government balance in 2008/09 is projected at 3.9 percent of GDP; measures of about "1¼ percent of GDP" would be needed to meet the deficit target; achieving revenue balance would require measures of "2½ percent of GDP."

### Monetary policy, money, and inflation
- Inflation and credit:
  - "Headline inflation has declined... as has credit growth."
  - Wholesale Price Inflation series (12-month percent change) with components including "Overall," "Mineral oils," "Basic metals, alloys, etc." (2002–2007).
  - Credit Growth (12-month percent change): "Non-food Credit" and "Credit to commercial Sector" (2002–2007).
- Interest rates and liquidity:
  - "Amid rising interest rates... money supply growth is strong."
  - Repo rate, Real 10 year government bond rate (deflated by WPI), and 91-day Treasury Bills series.
  - Broad Money and Reserve Money Growth (12-month percent change).
  - Liquidity indicators: Average Reverse Repo Turnover (Rs. Crore), Average Overnight Rate, Cash Reserve Ratio (percent) and RBI actions including raising reserve requirements.

### Asset markets and financial soundness
- Equity markets and inflows:
  - "Stock prices have recovered from summer turbulence... as have inflows."
  - Sensex vs. MSCI Emerging Asia index (January 3, 2005 = 100) and Foreign Institutional Investment inflows (three-month moving average in US$ billions).
- Credit default swap spreads and bank stocks:
  - CDS spreads series for select banks; "bank stocks have recovered"—BSE Bankex and Mumbai Sensex performance (Jan-02 onward).
- Interest rate spreads and forward premium:
  - "The spread versus U.S. dollar interest rates has eased... as reflected in the lower forward premium."
  - Two-Year Swap Rates series (U.S. Dollar and Indian Rupee), 12 month NDF rate and Rupee/U.S. Dollar series.
- Financial system soundness indicators (Table 8 highlights):
  - Risk-weighted capital adequacy ratio (CAR): 12.9, 12.8, 12.3, 12.3, 12.6 (2003/04–2007/08).
  - Net nonperforming loans (percent of outstanding net loans): 2.8, 2.0, 1.2, 1.0, 1.2 (2003/04–2007/08).
  - Gross nonperforming loans (percent): 7.2, 5.2, 3.3, 2.5, 2.8.
  - Loan/deposit ratio: 57.0, 65.5, 72.0, 74.6, 71.5 (2003/04–2007/08).

### Millennium Development Goals and social indicators (selected)
- Table 1 (selected indicators, 1990–2006):
  - Nominal GDP (2006/07): US$912 billion.
  - Population (2006/07): 1.13 billion.
  - GDP per capita (2006/07): US$809.
  - Indicators include poverty headcount ratios, malnutrition prevalence, literacy and education completion rates, maternal and child health metrics, access to water and sanitation, and ICT access (e.g., "Internet users (per 1,000 people)" 4.8 in latest year shown).

### Key macroeconomic aggregates and projections (selected figures)
- Macroeconomic Framework (Table 7 and Table 2 highlights):
  - Real GDP (year) growth: 8.5, 7.5, 9.0, 9.4, 8.7 (2003/04–2007/08 prov./proj series in Table 2).
  - Gross saving: 30.4, 31.2, 32.6, 34.2, 35.6 (percent of GDP for 2003/04–2006/07).
  - Broad money (y/y percent change, end-period): 16.7, 12.3, 21.2, 21.3, 22.8 (2003/04–2007/08).
  - Foreign exchange reserves (US$ billions end-period): 113.0, 141.5, 151.6, 199.2, 273.5 (2003/04–2006/07; Table 9 shows 273.5 as November 2007).
  - General government debt (percent of GDP): 85.7, 85.7, 82.9, 79.0, 75.2 (2003/04–2006/07).

*Prepared by IMF staff; sources and data as presented in the document.*

### ANNEX II: INDIA—RELATIONS WITH THE FUND

### ANNEX II: INDIA—RELATIONS WITH THE FUND (As of October 31, 2007)

### 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: 3,875.99 SDR Million (93.21 percent)
- Reserve position in Fund: 282.24 SDR Million (6.79 percent)

### III. SDR Department
- Net cumulative allocation: 681.17 SDR Million (100.00 percent)
- Holdings: 8.36 SDR Million (1.23 percent)

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements (SDR million)
- Stand-By: Approval 10/31/1991; Expiration 06/30/1993; Approved 1,656.00; Drawn 1,656.00
- Stand-By: Approval 01/18/1991; Expiration 04/17/1991; Approved 551.93; Drawn 551.93
- EFF: Approval 11/09/1981; Expiration 05/01/1984; Approved 5,000.00; Drawn 3,900.00

### VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Charges/interest:
  - 2007: 6.80
  - 2008: 26.08
  - 2009: 26.06
  - 2010: 26.07
  - 2011: 26.07
- Total:
  - 2007: 6.80
  - 2008: 26.08
  - 2009: 26.06
  - 2010: 26.07
  - 2011: 26.07

### VII. Exchange Rate Arrangement
- Since March 1, 1993, the Indian rupee has floated against other currencies, with periodic Reserve Bank of India intervention.
- AREAER classification: managed floating with no pre-announced path for the exchange rate.
- On August 20, 1994, India accepted the obligations of Article VIII, Sections 2, 3, and 4.
- Maintains restrictions subject to Fund approval under Article VIII, Section 2(a):
  - Non-transferability of balances under the India-Russia debt agreement.
  - Restrictions from unsettled balances under inoperative bilateral payments arrangements with two Eastern European countries.
  - Restriction on 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 held in October 2006.
- Staff report (IMF Country Report No. 07/63) discussed by the Executive Board on December 20, 2006.

### IX. FSAP Participation and ROSCs
- Data module of the ROSC (IMF Country No. 04/96) issued in April 2004.
- Fiscal transparency ROSC issued in February 2001.

### X. Technical Assistance (Department — Purpose — Date of Delivery)
- MAE — Government securities market — 2/94
- MAE — Foreign exchange market — 2/95
- FAD — Expenditure control — 5/95
- FAD — Public expenditure management — 8/95
- 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 — Brookings Institution Panel: Is India’s High Growth Sustainable? — 4/07

### XI. Resident Representative
- Resident representative’s office opened in November 1991.
- Mr. Joshua Felman has been Senior Resident Representative since August 2006.

*Statement by the Staff Representative on India — January 23, 2008*

### 1.      This statement contains information that has become available since the staff report

### _cr0851 - 1.      This statement contains information that has become available since the staff report

### Recent data and growth and inflation outlook
- Industrial production growth eased to 5⅓ percent y/y in November.
- Services export growth slowed to 5½ percent during April-September 2007.
- Staff maintained GDP growth projection of 8¾ percent for 2007/08 and 8¼ percent for 2008/09.
- WPI edged up to 3½ percent y/y in late December.
- Staff revised annual inflation projection to 3.9 percent for 2007/08.
- Authorities: real GDP growth averaged 7.6 percent per annum during 2002-07; averaged 9.2 percent during 2005-07.
- Real GDP increased by 9.1 percent in the first half of 2007-08 over the corresponding period of the previous year.
- Policy endeavour: contain headline inflation close to 5 percent in 2007-08.

### Financial markets, liquidity, and monetary conditions
- Rupee remained close to a nine-year high since late September; Sensex set new records.
- Reserve accumulation slowed in December to $3.5 billion, compared to a monthly average of $9.1 billion between April and November.
- As of January 4, reserves stand at $276 billion.
- In December, M3 grew by 23 percent y/y; non-food credit grew by 24 percent y/y; reserve money growth rose to 30 percent y/y.
- Short-term rates have fallen 150 basis points over the last month and are now at the bottom of the policy rate corridor.
- Overnight interest rate showed some volatility early in 2007-08 but reverted to the LAF corridor since August 2007.
- Yields on long-term government bonds have edged down.
- RBI sterilized reserve accumulation via MSS issuance, increase in CRR, and daily OMOs; growth of money supply remains relatively high while credit growth has decelerated and remains within the RBI projected trajectory.

### Capital inflows, balance of payments, and exchange rate effects
- Merchandise exports increased by 22.6 percent in 2006-07; imports expanded by 24.5 percent, resulting in a trade deficit of over US $ 59 billion.
- Current account deficit was US $ 9.8 billion, 1.1 percent of GDP in 2006-07.
- Current account deficit was US $10.7 billion during the first half of 2007-08.
- Capital inflows nearly doubled from US $ 25 billion in 2005-06 to US $ 46 billion in 2006-07.
- Net capital inflows crossed the US $ 50 billion mark during the first half of 2007-08.
- Staff projections show net capital inflows would reach US $ 110 billion during 2007-08.
- Foreign exchange reserves increased by US $ 76.1 billion during 2007-08 so far, reaching US $ 275.3 billion by end-December 2007.
- The rupee appreciated by around 10 percent against the US dollar between March 2007 and January 2008.
- Only about a quarter of net capital inflows during the last three years have been absorbed; overall investment rate remains high and largely financed by domestic saving.
- External commercial borrowings (ECB) during the first half of 2007-08 were US $ 13.7 billion versus US $ 7.5 billion in the corresponding period of the previous year.

### Fiscal performance and revenue developments
- Corporate taxes have continued to grow at an annual rate of about 40 percent in recent months.
- Personal income taxes have continued to grow at about 35 percent.
- Central government’s fiscal deficit may come in below the budget target; better-than-budgeted fiscal performance likely at the state level.
- With introduction in Uttar Pradesh on January 1, 2008, all Indian states now have the VAT.
- During 2006-07 both gross fiscal deficit and revenue deficit of the Central Government were lower than budgeted.
- During April-November 2007 fiscal deficit decreased by 11 percent and revenue deficit decreased by 17.2 percent compared with the corresponding period of the previous year.
- Combined gross fiscal deficit of state governments is budgeted to moderate from 2.8 percent of GDP in 2006-07 to 2.3 percent in 2007-08.
- State governments are expected to generate a revenue surplus during 2007-08.
- Government committed to expenditure of Rs. 250 billion through public investment in agricultural sector in the next four years.
- Government has targeted a disbursal of institutional agricultural credit of Rs. 2,250 billion during 2007-08.
- Planning Commission estimated investment required for infrastructure at Rs.20 trillion or US $ 500 billon.
- Investment in infrastructure needs to increase from current level of 5 percent of GDP to 9 percent.
- Fiscal deficit target for 2007-08 is 3.3 percent; FRBM target of 3 percent by 2008-09 appears feasible.
- Government met half yearly target of total non-debt receipts for 2007-08.

### Structural reforms, medium-term challenges, and policy priorities
- Authorities stress need to persevere with reforms to attain faster and more inclusive growth; Approach to Eleventh Plan (2007-12) projects average GDP growth at 9 percent with acceleration to around 10 percent by end of plan period.
- Population growth assumption: 1.5 percent per year; implication: real per capita income could double in 10 years at projected growth.
- Eleventh Plan aims to double agricultural growth to 4 percent per annum through increased investment, expansion in irrigated areas, diversion into high value products, easy access to credit, improved incentives and market functioning.
- Emphasis on reinvigorating agriculture which employs nearly 60 percent of the labour force.
- Eleventh Plan envisages raising public spending in education to 6 percent of GDP and ensuring elementary education to all children by 2010.
- Emphasis on expanding vocational education and skill development through public investment and public private partnership (ppp).
- Infrastructure investments to be achieved through combination of public investment, ppp and exclusive private investment.
- Reform of subsidy regime aimed at making subsidies explicit, transparent and better targeted.
- Direct tax reform approach: reasonable tax rates, fewer exemptions, wider tax base.
- Indirect tax approach: reduce customs duty rates to ASEAN levels over time; expand CENVAT base with eventual move towards a single CENVAT rate.
- Next major step in indirect taxation reform: move towards a national level Goods and Services Tax (GST) integrating national Excise Duties and Service Tax with state VAT by 2010.
- Additional financial market steps: beginning February 1, institutional investors (including foreign ones), in addition to retail investors, will be allowed to short sell equities.
- Corporate debt market proposed regulatory changes to simplify primary issuance for publicly listed firms and require exchange listing of private placements.

*Statement by Adarsh Kishore, Executive Director for India and Deepak Mohanty, Advisor to Executive Director; January 23, 2008*

### 19.      The tax administration has been strengthened through creation of new large

### _cr0851 - 19.      The tax administration has been strengthened through creation of new large

### Tax administration and revenue measures
- Creation of new large taxpayers units.
- Expansion of mandatory electronic filing of returns.
- Extension of e-payment facility.
- Making the permanent account number (PAN) as the sole identification number for all participants in the securities market.
- Result: These measures "have resulted in a large increase in income-tax assessees."

### Expenditure policy and fiscal consolidation
- Emphasis shifted from outlays to outcomes to ensure budgetary provisions are spent within the year and intended outcomes are achieved.
- Proposal to consolidate outcome budgets of various ministries for transparency and better accountability.
- Austerity measures implemented, including a ban on creation of new posts.
- Focus on moderation of non-developmental expenditure, but given growing needs for social sector and physical infrastructure, the approach to fiscal consolidation "continues to be revenue driven."

### Financial sector policy and supervision
- Policy emphasis: develop a sound, efficient, and diversified financial system to facilitate smooth transmission of monetary policy with financial inclusion.
- RBI initiatives to refine supervisory and regulatory processes in light of organizational complexity, cross-border mergers and acquisitions, and financial globalization:
  - Strengthening monitoring mechanism for financial conglomerates in coordination with other peer regulators.
  - Reviewing supervisory policy for banks that are holding companies for subsidiary entities in Financial Conglomerates.
  - Issuance of a discussion paper on an appropriate conglomerate structure in the Indian financial system.
  - Moves to put in place institutional arrangements for cross-border supervision and supervisory cooperation.

### Financial markets developments
- Initiatives to integrate market segments through instrument expansion and legal framework focus:
  - Extension of short sales in government securities.
  - Introduction of ‘When Issued’ market in central government securities.
  - Expansion of hedging facilities in the foreign exchange market.
- Amendment of the Reserve Bank of India Act to strengthen legal framework for regulation of OTC derivatives including credit derivatives.
- Credit delivery augmented with a focus on agriculture, small and medium enterprises and inclusive growth.

### Banking system soundness and indicators (as reported)
- Capital adequacy ratio in March 2007: 12.3 percent.
- Migration to Basel II:
  - Indian banks with international presence and foreign banks operating in India: switching over to Basel II in March 2008.
  - Other banks: switching over by March 2009.
  - Estimated additional capital requirement with migration to Basel II: 1 percent.
- Asset quality and provisioning:
  - Ratio of net NPAs to net assets in March 2007: 1 percent.
  - RBI has raised risk weights and provisioning requirements for real estate sector.
- Bank composition and performance:
  - Return on total assets (RoA) of banks in March 2007: 0.9 percent.
  - As on December 2007: 29 foreign banks operating in India with 273 branches; 35 banks with representative offices.
  - Extent of presence of foreign banks exceeds WTO commitment.
  - Both public sector and private sector banks have significant foreign share holdings.

### IMF Public Information Notice (PIN) summary — Background and outlook highlights
- Growth performance:
  - Growth rate averaged about 8½ percent in the four years through 2006/07 (April 2006-March 2007).
  - Staff projects growth of 8¾ percent in 2007/08, moderating toward potential thereafter.
- Inflation:
  - After rising in early 2007, WPI inflation "has ebbed to 3¼ percent" due to decelerating food and manufacturing prices.
  - CPI inflation exceeds WPI inflation by over 2 percentage points.
  - Staff projects WPI inflation to remain in the 3½−4 percent range in the near term.
- External sector and capital flows:
  - Export growth: "over 20 percent year-on-year in U.S. dollar value."
  - Projected current account deficit in 2007/08: 1½ percent of GDP.
  - Capital inflows: record US$45 billion in 2006/07.
  - Projected capital account surplus in 2007/08: 9½ percent of GDP.
  - RBI reserves accrued between end-March and end-November 2007: US$73 billion (from interventions).
- Monetary policy responses:
  - Since October 2006, cash reserve ratio (CRR) has risen 200 basis points.
  - Repo (lending) rate hiked twice by 25 basis points in the 12 months prior to October 2007 policy meeting.
  - RBI left policy rates on hold at October 2007 meeting, but raised the CRR by 50 basis points to 7.5 percent.
- Fiscal stance:
  - Including off-budget bond issuance, general government deficit about 7¼ percent of GDP in 2006/07.
  - Central government deficit remained at 4½ percent of GDP in 2006/07.
  - States’ aggregate fiscal deficit rose to 2¾ percent of GDP.
  - Public debt nearly 80 percent of GDP in March 2007.
- Executive Board assessment priorities and recommendations:
  - Sustain rapid and inclusive growth, foster job creation, and maintain macroeconomic and financial stability amid large capital inflows.
  - Manage financial globalization and tackle supply constraints through enhanced monetary framework, financial sector development, fiscal consolidation, and removal of structural bottlenecks.
  - Support for RBI’s active liquidity management and managed float; recognition that rupee appreciation reflects fundamentals though concerns about competitiveness in some labor-intensive sectors.
  - Encouragement to develop domestic corporate bond and derivatives markets and implement more market-based monetary operations.
  - Call for continued vigilance on rapid growth of real estate credit and welcoming of forthcoming Basel II implementation.
  - Fiscal recommendations: more rapid fiscal consolidation; expenditure reforms to create space for priority spending; phased reduction in fuel subsidies with adequate and well-targeted safety nets; support for national goods and services tax; cutting tax exemptions, increasing user fees, and improving tax administration to broaden tax base.
  - Structural reforms emphasized: bridge infrastructure gaps with private sector participation; ensure access to social services; promote competitive environment; make labor regulations more flexible; increase and improve public spending on education.

### Selected economic indicators (selected rows preserved exactly as in source)
- Growth (y/y percent change, GDP at factor cost): 2003/04: 8.5; 2004/05: 7.5; 2005/06: 9.0; 2006/07: 9.4; 2007/08 Proj.: 8.7.
- Industrial production: 2003/04: 7.0; 2004/05: 8.4; 2005/06: 8.2; 2006/07: 11.3.
- Wholesale prices (1993/94 weights, y/y percent change, period average): 2003/04: 5.4; 2004/05: 6.5; 2005/06: 4.4; 2006/07: 5.5; 2007/08 Prov.: 3.9.
- Consumer prices - industrial workers (2001 weights): 2003/04: 3.9; 2004/05: 3.8; 2005/06: 4.4; 2006/07: 6.7; 2007/08 Prov.: 6.0.
- Gross saving (percent of GDP): 2003/04: 30.4; 2004/05: 31.2; 2005/06: 32.6; 2006/07: 34.1; 2007/08: 36.0.
- Gross investment (percent of GDP): 2003/04: 28.0; 2004/05: 31.5; 2005/06: 33.8; 2006/07: 35.3; 2007/08: 37.3.
- Central government balance - authorities (percent of GDP): 2003/04: -4.5; 2004/05: -4.0; 2005/06: -4.1; 2006/07: -3.5; 2007/08: -3.1.
- Central government balance - staff (percent of GDP): 2003/04: -5.1; 2004/05: -4.2; 2005/06: -4.5; 2006/07: -4.5; 2007/08: -4.3.
- General government balance - staff (percent of GDP): 2003/04: -9.1; 2004/05: -7.3; 2005/06: -7.1; 2006/07: -7.2; 2007/08: -6.2.
- General government debt (percent of GDP): 2003/04: 85.7; 2004/05: 85.7; 2005/06: 82.9; 2006/07: 79.0; 2007/08: 74.8.
- Broad money (y/y percent change, end-period): 2003/04: 16.7; 2004/05: 12.3; 2005/06: 21.2; 2006/07: 21.3.
- Credit to commercial sector (y/y percent change, end-period): 2003/04: 13.0; 2004/05: 26.0; 2005/06: 32.2; 2006/07: 25.4.
- 91-day treasury bill yield (percent, end-period): 2003/04: 4.2; 2004/05: 5.3; 2005/06: 6.1; 2006/07: 8.0.
- 10-year government bond yield (percent, end-period): 2003/04: 5.1; 2004/05: 6.7; 2005/06: 7.5; 2006/07: 8.0.
- Stock market (y/y percent change, end-period): 2003/04: 83.4; 2004/05: 16.1; 2005/06: 73.7; 2006/07: 15.9.
- Exports of goods (US$ billions): 2003/04: 66.3; 2004/05: 85.2; 2005/06: 105.2; 2006/07: 126.2; 2007/08: 155.2.
- Exports y/y percent change: 2003/04: 23.3; 2004/05: 28.5; 2005/06: 23.4; 2006/07: 20.0; 2007/08: 22.9.
- Imports of goods (US$ billions): 2003/04: 80.0; 2004/05: 118.9; 2005/06: 157.0; 2006/07: 192.0; 2007/08: 241.4.
- Imports y/y percent change: 2003/04: 24.1; 2004/05: 48.6; 2005/06: 32.0; 2006/07: 22.3; 2007/08: 25.7.
- Net oil imports (US$ billions): 2003/04: 17.0; 2004/05: 22.9; 2005/06: 32.3; 2006/07: 41.3; 2007/08: 48.9.
- Current account balance (US$ billions): 2003/04: 14.1; 2004/05: -2.5; 2005/06: -9.2; 2006/07: -11.1; 2007/08: -16.1.
- Current account balance (in percent of GDP): 2003/04: 2.3; 2004/05: -0.4; 2005/06: -1.1; 2006/07: -1.2; 2007/08: -1.4.
- Foreign direct investment, net (US$ billions): 2003/04: 2.4; 2004/05: 3.7; 2005/06: 4.7; 2006/07: 8.9; 2007/08: 10.6.
- Portfolio investment, net (equity and debt) (US$ billions): 2003/04: 11.4; 2004/05: 9.3; 2005/06: 12.5; 2006/07: 7.1; 2007/08: 33.4.
- Overall balance (US$ billions): 2003/04: 31.4; 2004/05: 26.2; 2005/06: 15.1; 2006/07: 36.6; 2007/08: 82.9.
- Gross reserves (US$ billions end-period): 2003/04: 113.0; 2004/05: 141.5; 2005/06: 151.6; 2006/07: 199.2; 2007/08: 290.3.
- Gross reserves (In months of imports): 2003/04: 9.2; 2004/05: 8.7; 2005/06: 7.6; 2006/07: 8.1; 2007/08: 9.9.
- External debt (percent of GDP, end-period): 2003/04: 18.5; 2004/05: 19.1; 2005/06: 17.1; 2006/07: 17.2; 2007/08: 17.4.
- Short-term debt (of which) (percent of GDP): 2003/04: 1.8; 2004/05: 3.1; 2005/06: 2.0; 2006/07: 2.2; 2007/08: 3.0.
- Ratio of gross reserves to short-term debt (end-period): 2003/04: 10.7; 2004/05: 6.5; 2005/06: 9.5; 2006/07: 10.5; 2007/08: 11.9.
- Gross reserves to broad money (percent; end-period): 2003/04: 24.6; 2004/05: 27.5; 2005/06: 24.8; 2006/07: 26.3.
- Debt service ratio: 2003/04: 16.0; 2004/05: 6.0; 2005/06: 9.7; 2006/07: 5.1; 2007/08: 5.1.
- Real effective exchange rate (y/y percent change, period average): 2003/04: 1.0; 2004/05: 2.2; 2005/06: 4.4; 2006/07: -2.2.
- Exchange rate (rupee/US$, end-period): 2003/04: 43.6; 2004/05: 43.7; 2005/06: 44.6; 2006/07: 43.5.
- Memorandum item — Off-budget subsidy related bonds (percent of GDP): 2003/04: 0.0; 2004/05: 0.0; 2005/06: 0.3; 2006/07: 1.0; 2007/08: 1.2.

*Public Information Notice (PIN) No. 08/09 — IMF Executive Board Concludes 2007 Article IV Consultation with India (February 4, 2008).*

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