## _cr09187 — IMF Staff Report Excerpts (India, 2008–09) ## Source details **Canonical URL:** [_cr09187 — IMF Staff Report Excerpts (India, 2008–09)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09187.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09187.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09187.pdf.json) --- ### I. Macroeconomic outlook, projections, and key risks - Growth: - Past five years average growth: 8¾ percent. - Staff projections: 6¼ percent in 2008/09 and 5¼ percent in 2009/10. - Authorities’ view: expected 2008/09 growth at 7 percent; RBI cut its GDP forecast to 7 percent for 2008/09. - Nonagricultural growth projected to fall by 4 percentage points. - Inflation and prices: - Headline WPI: almost 13 percent (y/y) in August 2008; below 6 percent by December 2008; 4.4 percent (y/y) at end-January 2009. - Staff expectation: inflation to drop to below 3 percent (y/y) by March 2009 and to an average 2 percent in 2009/10. - Statement by RBI: reduced forecast for headline inflation (WPI) for end-March to below 3 percent (y/y), from 7 percent previously. - External sector: - Current account deficit: about 3 percent of GDP in 2008/09; narrows to 1½ percent of GDP in 2009/10. - Capital flows: H1 2008/09 capital inflows US$20 billion (3½ percent of GDP). Portfolio outflows April–December US$9 billion; portfolio outflows of over $4 billion in October alone. Portfolio registered a US$11 billion outflow until December 2008; net outflow ~US$1 billion in January. - Reserves: fell from US$315 billion (May 2008 peak) to US$255 billion (January 2, 2008) and to US$248 billion as of January 23, 2009; alternate report US$252 billion as of February 6, 2009. - Rupee: 23 percent depreciation versus the U.S. dollar in 2008 (11 percent since end-August); nominal effective exchange rate depreciated by over 14 percent in 2008; real effective depreciation reported as about 10 percent in another section. - Uncertainty and risks: - Unusually large forecast uncertainty; significant downside risks from a protracted drought of credit and anemic world growth. - Upside risk: larger impact on growth from stimulus measures. - Elections due by May 2009 may add policy uncertainty. - Feedback loops highlighted: - Corporate distress → higher delinquencies → weaker bank capital → lower credit growth → deeper corporate stress. - Slower growth → lower tax revenues → worse fiscal position → higher interest rates and risk premium → squeeze on corporate profits. ### II. Authorities’ stance and policy priorities - Overarching priorities (authorities and staff agreement): - (i) Ensure adequate financing to the real economy while protecting financial stability. - (ii) Facilitate corporate restructuring so viable firms emerge stronger and unviable ones are efficiently resolved. - Authorities emphasized: - Shock transmission mainly via trade channels; domestic demand remains relatively strong. - Policy must be flexible but disciplined; government involvement should be partnered with private sector and include upfront exit strategies for extraordinary measures. - Greater room for fiscal stimulus argued by authorities; staff recommended conservatism given public debt around 80 percent of GDP. - Fiscal guidance: - Limited fiscal room; public debt about 80 percent of GDP. - Use fiscal space for high priority infrastructure and bank recapitalization. - Staff recommended anchoring medium-term adjustment in a fiscal rules framework centered on a debt target and comprehensive expenditure reforms. ### III. Monetary, liquidity, and exchange rate policy — actions and recommended options - RBI measures adopted since late-2008 (selected): - Repo rate cut by 350 bps to 5½ percent; reverse repo rate cut by 200 bps to 4 percent. - Cash reserve ratio (CRR) cut by 400 bps to 5 percent. - Statutory liquidity requirement (SLR) cut by 100 bps to 24 percent of NDTL (other references: SLR reduced by 1½ percentage points for banks using term repo facility). - Repurchase of market stabilization bonds: About 0.3 percent of GDP re-purchased since end-September. - Term repo facility: 14-day repo; Rs 600 billion (1.1 percent of GDP) available through June 2009. - Refinance facilities: For banks up to 1 percent of NDTL (0.6 percent of GDP) up to 90 days through June 2009; additional facilities 0.3 percent of GDP through March 2010 for SIDB, NHB, and EXIM Bank. - FX swaps for banks with foreign branches/subsidiaries up to three months through June 2009. - Special purpose vehicle to buy up to Rs 250 billion (0.5 percent of GDP) in investment grade paper from NBFCs. - Further policy options recommended by staff: - More room for interest rate cuts given the shift from inflation to growth risks; policy rates could be cut further. - Use repurchase of market stabilization bonds, further lowering CRR and SLR, make subsidy-related bonds repo-eligible, introduce longer-term repo facilities, increase amounts under special refinance facility, and consider broadening collateral at the repo window (with safeguards). - Exchange rate: manage flexibly while conserving reserves; let exchange rate take part of adjustment given limited balance-sheet sensitivity to exchange risk relative to interest rate risk. - If FX pressures intensify: broaden FX swaps, hold regular FX auctions open to all counterparties with pre-announced amounts. ### IV. Financial system assessment, risks, and stabilization measures - Headline metrics and stress-test findings: - Average regulatory CAR reported around 12½–13 percent; tier 1 close to 9 percent (data refer to September 2008). - Credit-to-deposits (CD) ratio at 74 percent; SLR about 24 percent. - Staff stress tests: capitalization of systemically important banks does not drop below regulatory CAR minimum (9 percent) if impaired loans rise to twice current gross NPA ratio of 2½ percent. - Staff noted historical precedent of NPAs rising 200–300 percent in severe crises. - Market signals and vulnerabilities: - Bank equity prices fell sharply; CDS spreads and one-year EDFs spiked mid-September then eased but remained elevated. - Mutual funds experienced nearly 15 percent of assets redemptions in September 2008; NBFC borrowing costs rose dramatically. - Foreign-currency exposure: FX debt estimated at 20–30 percent of total corporate debt; external liabilities to BIS reporting banks US$51 billion at end-June 2008. - Key policy recommendations: - Multifactor stress tests to identify capital needs and account for real-financial feedback loops. - Avoid masking bad assets; promote early loss recognition and transparent disclosure (including open disclosure of unhedged FX exposures and derivatives). - Identify capital needs and recapitalize banks early; consider government-assisted recapitalization conditional on restructuring targets. - Provide incentives for early loss recognition (e.g., special accounts to absorb revaluation losses up to a limited size). - Facilitate disposal of impaired assets: ease foreign investment restrictions in ARCs; give nonbank secured creditors same rights as bank secured creditors under SARFAESI. - Consider government-assisted refinance and credit guarantees with transparent risk pricing; examples cited: Hong Kong SAR and U.K. programs. - Prudential and regulatory measures taken: - Regulatory forbearance: special asset classification regimes extended to facilitate restructurings in specified categories. - Provisioning requirements reduced for some standard assets to 0.4 percent. - Risk weights reduced to 100 percent for commercial real estate assets, claims on select NBFCs, and asset financing companies. - Staff warned that regulatory forbearance can undermine confidence if it masks capital shortfalls. ### V. Corporate sector restructuring and legal/institutional reforms - Corporate distress and diagnostics: - Corporate profit growth fell to 9 percent (y/y) in April–June 2008 from about 25 percent in 2007; July–September preliminary results weaker; December advance corporate tax payments fell 22 percent. - Corporate balance sheets were healthy as of March 2008 but deteriorating thereafter due to higher commodity prices, interest rates, and rupee depreciation. - Near-term refinancing need of Indian corporations estimated at US$14 billion in 2009 (JP Morgan). - Policy guidance: - Prefer corporate debt and operational restructuring over direct public sector intervention in specific firms or sectors. - Implement Rajan Report recommendations to improve bankruptcy law and out-of-court restructuring mechanisms. - Passage of the Companies Bill would be a major positive step. - Strengthen incentives for operational restructuring and reduce incentives for mere rescheduling under the Corporate Debt Restructuring framework. - Improve functioning of ARCs and enhance recovery mechanisms. ### VI. Fiscal developments, constraints, and medium-term debt outlook - Near-term fiscal deterioration and measures: - Central government deficit (authority definition) projected: -7.1 percent of GDP in 2008/09 (staff augmented figure -5.7 percent in 2009/10 projected). - Two supplementary budgets approved additional on-budget spending of 2.7 percent of GDP, including stimulus packages (0.6 percent of GDP) and subsidy-related bonds of 1.6 percent of GDP. - Budget measures: central VAT cut by 4 ppts (cost 0.2 percent of GDP); targeted spending ~0.4 percent of GDP; public sector bank recapitalization over next two years 0.4 percent of GDP; IIFCL authorized to raise Rs 400 billion (0.8 percent of GDP) over 18 months. - 2008/09 subsidy bill at about 3⅔ percent of GDP; subsidy-related bond issuance noted as 1.3 percent of GDP in 2008/09 (memorandum). - Fiscal rules and medium-term guidance: - Staff: fiscal consolidation remains key; public finances an "Achilles’ heel"; proposed successor fiscal rule would include explicit debt target and nominal expenditure growth rules. - Authorities: supportive of medium-term reform but noncommittal pending Thirteenth Finance Commission recommendations. - Staff baseline: general government deficit nearly 10 percent of GDP in 2008/09; debt reduction would resume only in 2010/11. - Medium-term public debt projections (public sector debt, percent of GDP): - 2007: 80.5; 2008: 80.6; 2009: 82.7; 2010: 82.9; 2011: 81.0; 2012: 78.2; 2013: 75.0. - Baseline: general government deficit would fall to 5.1 percent of GDP by 2013/14 from nearly 10 percent of GDP in 2008/09. - Sensitivity and risk scenarios: - Protracted slowdown (real GDP growth averaging 5 percent): debt-to-GDP ratio would rise over the medium term. - A 10 percent of GDP shock to contingent liabilities would raise the debt ratio sharply to 93 percent of GDP (one scenario). - Gross financing need (percent of GDP): 2008: 8.9; 2009: 9.1; 2010: 7.7; 2013: 5.2. - Selected fiscal indicators (central government deficit, percent of GDP, authority data series): - -4.1 (2004/05); -4.7 (2005/06); -4.4 (2006/07); -3.4 (2007/08); -7.1 (2008/09); -5.7 (2009/10). - General government debt (percent of GDP): 86.5 (2004/05); 84.2 (2005/06); 80.6 (2006/07); 80.1 (2007/08); 80.7 (2008/09); 82.9 (2009/10). ### VII. Crisis preparedness, external liquidity, and contingency options - Contingent FX/liquidity measures: - Broaden FX swaps with other central banks; examples cited: Korea, Brazil, Hungary. - Avail of IMF Short-Term Liquidity Facility (SLF): India would have access up to SDR20.8 billion. - Consider guarantees on banks’ new debt or explicit blanket guarantees for extreme events. - Crisis preparedness recommendations: - Strengthen cross-institutional coordination; consider an interagency task force. - Conduct crisis preparedness exercises to speed decision making and review intervention frameworks. - Authorities’ operational readiness and views: - RBI established new liquidity monitoring frameworks for rupee and developing one for FX. - RBI judged liquidity-boosting steps effective; stood ready to adopt further measures (lower CRR, lower SLR, increase refinance, broaden collateral under safeguards). - Authorities emphasized the importance of sunset provisions and an exit strategy for exceptional measures. ### VIII. Selected key quantitative tables and indicators (preserved source values) - Growth (real, y/y percent change): - 2004/05: 7.5; 2005/06: 9.4; 2006/07: 9.6; 2007/08: 9.0; 2008/09: 6.3; 2009/10 (Proj.): 5.3. - Wholesale prices (period average, y/y percent change): - 2004/05: 6.5; 2005/06: 4.4; 2006/07: 5.4; 2007/08: 4.7; 2008/09: 8.8; 2009/10 (Proj.): 1.9. - Current account balance (US$ billions): - 2004/05: -2.5; 2005/06: -9.9; 2006/07: -9.6; 2007/08: -17.0; 2008/09: -35.1; 2009/10 (Proj.): -18.6. - In percent of GDP: 2008/09: -3.0; 2009/10 (Proj.): -1.5. - Reserves (US$ billions, end-period): - 2004/05: 141.5; 2005/06: 151.6; 2006/07: 199.2; 2007/08: 309.7; 2008/09: 246.8; 2009/10 (Proj.): 243.5. - Public sector debt (baseline, percent of GDP series excerpt): - 2007: 80.5; 2008: 80.6; 2009: 82.7; 2010: 82.9; 2011: 81.0; 2012: 78.2; 2013: 75.0. - Macro assumptions (selected): - Real GDP growth: 2008: 7.3; 2009: 5.1; 2010: 6.5; 2011: 7.5; 2012: 7.8; 2013: 8.0. - Inflation rate (GDP deflator): 2008: 7.5; 2009: 4.7; 2010: 3.3; 2011: 3.6; 2012: 3.8; 2013: 3.8. - Average nominal interest rate on public debt: 2008: 7.7; 2009: 7.2; 2010: 7.5; 2011: 7.7; 2012: 7.7; 2013: 7.7. *IMF staff report excerpts from the content unit _cr09187.* ### 1. Measures Adopted in Response to the Crisis since September 2008 ................................10 ### 1. Measures Adopted in Response to the Crisis since September 2008 ................................10 ### I. Staff appraisal and summary — macroeconomic outlook and key risks - Growth projections and drivers: - Past five years average growth: 8¾ percent. - Projected growth: 6¼ percent in 2008/09 and 5¼ percent in 2009/10. - Investment is driving the slowdown; stimulus measures and a good harvest should support consumption. - External and price outlook: - Current account deficit: about 3 percent of GDP in 2008/09; narrows to 1½ percent of GDP in 2009/10 aided by lower oil prices. - Inflation: anticipated to drop to below 3 percent by March 2009 and to an average of 2 percent in 2009/10. - Uncertainty and risks: - Unusually large forecast uncertainty with significant downside risks from a protracted drought of credit and anemic world growth. - Upside risk: larger impact on growth from the stimulus measures. ### II. Policy response — overall assessment and priorities - Authorities’ actions: - RBI reversed policy stance quickly: reductions in interest rates, the cash reserve ratio (CRR), and the statutory liquidity requirement (SLR); stepped up open market operations. - Continued capital account liberalization and reiterated commitment to financial sector reforms. - Policy guidance: - Response should remain flexible but disciplined. - With public debt at 80 percent of GDP, monetary and structural policies should carry the weight of the response; limited fiscal room should be focused on high priority infrastructure investment and banking system recapitalization. - Two main priorities: - (i) Ensuring adequate financing to the real economy while protecting financial stability. - (ii) Facilitating corporate restructuring so viable firms emerge stronger and unviable ones are quickly dealt with. - Trade policy: - Protectionist trade measures should be resisted. ### III. Keeping credit flowing while preserving financial stability — measures and recommendations - Monetary and liquidity policy: - More room for interest rate cuts and liquidity provision given shift from inflation to growth risks. - Real interest rates based on expected inflation remain higher than a few months ago; policy rates could be cut further. - RBI measures addressed the acute liquidity shortage in late 2008; further reductions in the CRR and repurchasing market stabilization bonds can be used if liquidity crunch resurfaces. - If insufficient, consider broadening collateral at the RBI’s repo window and providing liquidity over longer horizons. - Exchange rate policy: - Exchange rate should be managed flexibly while conserving reserves for limited provision of foreign exchange to relieve external financing concerns. - Let the exchange rate take the brunt of adjustment; banks’ and corporates’ balance sheets appear more sensitive to interest rate than exchange rate risk. - Financial system assessment: - By headline indicators, India’s financial system compares favorably internationally, but rising credit risk and liquidity pressures are putting it under strain. - Banks are well capitalized and have low nonperforming assets (NPAs); current downturn likely to lead to a substantial increase in NPAs. - Nonbank financial institutions have shown signs of stress. - Key actions to restore credit flow: - Multifactor stress tests to identify capital needs, accounting for feedback loops between real and financial sectors. - Avoid masking bad asset problems and true capital positions. - Provide incentives for early loss recognition. - Identify capital needs and recapitalize banks early. - Enhance frameworks to dispose efficiently of impaired assets and promote corporate restructuring. - Disclose information on unhedged foreign exchange exposures and derivatives to allay market concerns (example cited: Mexico). - Government-assisted options: - Government-assisted refinance and credit guarantees could spur bank lending, building on existing refinance schemes aimed at infrastructure, provided transparency and appropriate assessment and pricing of risks. - Examples of explicit risk sharing: Hong Kong SAR and U.K. credit guarantee programs. - Structural reforms to diversify corporate funding: - Develop corporate bond market as recommended by the Parekh, Patil and Rajan committees. - Further capital account liberalization (e.g., lifting all interest rate caps and minimum maturity requirements). - Improve banking system efficiency. - Preparedness: - Strengthen cross-institutional coordination and review intervention frameworks. - Consider facilities to supplement international reserves. ### IV. Corporate sector restructuring — emphasis and reforms - Preferred approach: - Address rise in corporate distress through corporate debt and operational restructuring rather than direct public sector intervention in specific firms or sectors. - Institutional/legal reforms: - Implement Rajan Report recommendations to improve bankruptcy law and enhance out-of-court restructuring mechanisms. - Passage of the Companies Bill would be a major positive step in dealing with corporate distress. ### V. Fiscal policy — constraints and recommendations - Fiscal constraints: - Public debt at about 80 percent of GDP limits fiscal room. - The stimulus implemented this year is described as sizable; further substantial expansion in the deficit risks backfiring via concerns about debt sustainability that could raise interest rates. - Use of limited fiscal room: - Conserve for high quality infrastructure investment and bank recapitalization if needed. - Use lower commodity prices as an opportunity to reform the fuel subsidy system to signal commitment to fiscal discipline. - Medium-term needs: - Fiscal consolidation remains a key priority; public finances are described as India’s Achilles’ heel. - Medium-term fiscal adjustment should be anchored in a fiscal rules framework centered on a debt target and buttressed by comprehensive expenditure reforms. ### VI. Context and recent developments — crisis transmission and domestic conditions - Background: - India achieved growth of 8¾ percent on average during 2003/04–2007/08 with a significant reduction in poverty; surge in investment financed by rising private and public savings and increasingly foreign capital. - Recent cyclical developments: - GDP growth softened to 7.8 percent (y/y) in April–September, pulled down mainly by weaker investment and private consumption. - High-frequency indicators for October–December suggest a sharp slowdown; leading indicators signal deeper and broader-based weaknesses. - Inflation dynamics: - Headline WPI surged to almost 13 percent (y/y) in August 2008, but dropped to below 6 percent by December. - Core inflation momentum is dissipating rapidly. - External position and capital flows: - Oil import bill rose by over 50 percent (y/y); current account deficit widened to 3¾ percent of GDP in April–September from 1½ percent of GDP in 2007/08. - Capital inflows in H1 2008/09 fell to US$20 billion (3½ percent of GDP), less than half of those in the same period a year earlier. - External commercial borrowing (ECB) disbursements in April–September were less than half of their 2007/08 levels. - Portfolio outflows amounted to US$9 billion in April–December, with an outflow of over $4 billion in October alone. - Asset markets and reserves: - Stock market decline led by foreign investors’ sales; P/E ratios broadly in line with emerging markets average. - Property prices reported falling, especially commercial and high-end segments. - Currency: 23 percent depreciation versus the U.S. dollar in 2008 (11 percent since end-August); nominal effective exchange rate depreciated by over 14 percent in 2008. - FX reserves fell from a historical peak of US$315 billion in May 2008 to US$255 billion (January 2, 2008), with a US$39 billion drop in October alone (half due to valuation losses). - Money market and credit conditions: - Central bank measures eased liquidity pressures since October, but credit conditions remain tight. - Overnight rates have come down in line with policy rates; TED, overnight index swaps, and commercial paper spreads eased only slightly. - Bank credit growth accelerated through October (partly reflecting shift of corporate demand to domestic banks), then decelerated sharply; growth negative on a month-on-month, seasonally adjusted basis. - Financing from nonbank financial institutions constrained by redemption pressures and poor asset performance. - Corporate finances: - Corporate profit growth weakened as costs rose (profit after tax and interest expense to gross profit trends noted). *IMF staff report excerpt: "I. STAFF APPRAISAL AND SUMMARY" and subsequent sections from _cr09187.* ### 8. After several years of rapid ### _cr09187 - 8. After several years of rapid ### Corporate sector performance and vulnerabilities - After several years of rapid expansion, buoyant profits, and improving balance sheets, India’s corporate performance is deteriorating appreciably. - Indian corporates’ balance sheets were healthy as of March 2008. - Commodity prices and interest rates pushed up firms’ costs and squeezed margins in 2008. - Some importers and firms with large foreign exchange liabilities—incurred partly to finance overseas acquisitions—are suffering losses from the rupee depreciation. - Corporate profit growth fell to 9 percent (y/y) in the April–June quarter from about 25 percent in 2007. - Preliminary results for the July–September quarter were weaker. - The 22 percent fall in the December advance corporate tax payments is noted as a negative signal for the profit outlook. ### Measures adopted in response to the crisis since September 2008 (summarized) - Measures to increase rupee liquidity: - Repo rate cut by 350 bps to 5½ percent; reverse repo rate cut by 200 bps to 4 percent. - Cash reserve ratio (CRR) cut by 400 bps to 5 percent. - Statutory liquidity requirement (SLR) cut by 100 bps to 24 percent of net demand and time liabilities (NDTL). - Repurchase of market stabilization bonds: About 0.3 percent of GDP re-purchased since end-September. - Term repo facility: 14-day repo facility; Rs 600 billion (1.1 percent of GDP) available, at the repo rate, through June 2009. SLR reduced by 1½ percentage points for banks using this facility. - Refinance facilities: For banks up to 1 percent of NDTL (0.6 percent of GDP), at repo rate, up to 90 days, through June 2009. Additional facilities (0.3 percent of GDP, terms as above, through March 2010) for SIDB, NHB, and EXIM Bank. Limit on RBI’s export credit refinance facility raised from 15 to 50 percent of bank’s outstanding export credit. - Other measures: Select oil bonds allowed as collateral in RBI repos. Special purpose vehicle to buy up to Rs 250 billion (0.5 percent of GDP) in investment grade paper from NBFCs. - Measures to increase FX liquidity: - FX swaps for Indian banks with foreign branches or subsidiaries to access FX swaps, up to three months, through June 2009; reactivation of RBI’s special facility for conversion of oil bonds into FX. - Measures to increase credit delivery: - Trade credit: Period of entitlement for concessional rates on rupee export credits increased. - Priority sector lending: Bank loans to HFCs for small housing loans classified as priority. Benefits for SMEs under the Credit Guarantee Scheme enhanced (coverage amount doubled, and guarantee cover increased from to 50-85 percent). - Regulatory forbearance: Extension of special regulatory regime on asset classification to commercial real estate and undersecured working capital term loans; special regime extended to second restructuring of all qualifying loans (though not to commercial real estate), and to housing loans with maturity above 10 years (with additional risk weight of 25 percentage points at time of restructuring). - Provisioning requirements: For standard assets reduced to a standard level of 0.4 percent for real estate, personal loans, capital markets, and select NBFCs. - Risk weights: Reduced to 100 percent for commercial real estate assets, claims on select NBFCs, and asset financing companies. - Other measures: Credit targets for public sector banks increased for January-March 2009. Public sector banks to provide a line of credit to NBFCs for purchase of commercial vehicles. - Measures to encourage capital inflows: - Trade credit: All-in-cost ceiling raised by 75–125 bps, depending on maturity. - Portfolio investment: Removal of curbs on foreign issuance of equity derivatives (P-notes). Limit on FII holdings of corporate bonds raised from $3 billion to $15 billion, and of government bonds from $3 billion to $5 billion. Restriction on allocation of FII investments across equity and debt lifted. - External commercial borrowing (ECB): Increase in borrowing limits per company and for the economy as a whole (from $22 billion to $35 billion). All-in cost ceiling removed for ECBs under the approval route (through June 2009) and raised for ECBs under the automatic route. Sectoral restrictions on ECBs relaxed. - Nonresident Indian deposits: Cap on interest rates increased by 175 bps. - Other measures: Limit on bank borrowing from overseas branches raised from 25 percent to 50 percent of unimpaired Tier I capital or US$10 mn, whichever is higher. - Fiscal measures: - Tax: Central VAT cut by 4 ppts (excluding petroleum products; cost of 0.2 percent of GDP). Reinstatement of import duties on selected products. Accelerated depreciation of 50 percent for vehicles purchased in January-March 2009. - Spending: 0.4 percent of GDP for housing, infrastructure, irrigation, textiles, rural employment, and social assistance schemes. Limit on market borrowing by states to finance capital expenditure raised by 0.5 percent of states’ GDP. - Promotion of exports: Interest subsidy of 2 percent introduced for export credit for labor intensive exports (until March 2009). Enhancement of duty drawback benefits. - Public sector bank recapitalization: over next two years, 0.4 percent of GDP. - Off-budgetary measures: India Infrastructure Finance Company Limited authorized to raise (in debt financing) Rs 400 billion (0.8 percent of GDP) over the next 18 months. ### Financial market developments - Markets are taking a negative view of India’s financial institutions’ health, mirroring global trends. - Banks’ share prices fell sharply; CDS spreads and default probabilities rose dramatically despite more positive assessments by bank analysts and credit rating agencies. - A large private bank experienced a modest deposit run in late September that was quickly contained after official reassurances. - Third quarter results still point to relatively robust profit growth for most banks, but NPAs are rising. - Mutual funds faced significant redemptions (nearly 15 percent of assets in September), mainly due to corporates’ withdrawals; the situation stabilized recently. - NBFCs are reported to have seen a dramatic increase in borrowing costs. ### Fiscal position and public finances - Budget performance deteriorated substantially in 2008. - During April–November 2008, tax revenues grew by 15 percent (y/y), but collections slowed significantly in recent months. - Spending rose rapidly driven by a soaring subsidy bill, an agricultural loan write off, a 21 percent civil servant wage increase, and the strong off-take of a rural employment scheme (NREG). - Two supplementary budgets (announced in October and December) approved additional on-budget spending of 2.7 percent of GDP including to fund the stimulus packages (0.6 percent of GDP), and subsidy-related bonds of 1.6 percent of GDP. - The deficit is set to exceed the budget target by a substantial amount. - As of March 2008, public debt was 80 percent of GDP, roughly unchanged from end-2007. - Note: These subsidy-related bonds are not included in the authorities’ definition of the central government budget deficit, while they are included in the staff’s definition. ### Outlook, projections, and risks - Growth projections: - From 9 percent in 2007/08, growth is projected at 6¼ percent in 2008/09 and 5¼ percent in 2009/10. - Nonagricultural growth is projected to fall by 4 percentage points. - The envisaged slowdown is sharper than during the 2001 global recession (nonagricultural growth slowed from 7.8 percent in 1999/2000 to 5.9 percent in 2000/01). - Inflation: - Inflation is anticipated to drop to below 3 percent y/y by March 2009 and to an average 2 percent in 2009/10. - Balance of payments: - The current account deficit is projected at below 3 percent of GDP in 2008/09, before narrowing to 1½ percent of GDP in 2009/10. - Portfolio and debt capital flows are unlikely to recover appreciably at least until late 2009. - FDI flows beyond projects already in the pipeline are expected to slow and are unlikely to pick up before recovery in advanced economies materializes. - Uncertainty and risks: - The margin of uncertainty surrounding forecasts is unusually large with significant downside risks. - Main risks stem from global spillovers: a protracted drought of credit and anemic world growth could stunt investment, exports, and growth; consumption could be hit if job losses mount and consumer credit dries up. - Policy trade-offs could become difficult to manage given uncertainty; elections due by May 2009 could add policy uncertainty. - Main source of upside risk: a larger than expected impact of stimulus measures. - Feedback loops: - Corporate difficulties can increase delinquencies on bank loans, undermining financial stability, causing capital deficiencies and lower credit growth, leading to further corporate stress. - Slower growth could depress foreign investor sentiment and capital flows, lower tax revenues, worsen the fiscal position, drive up interest rates and India’s risk premium, and further squeeze corporate profits. - Long-term view: - Once the downturn is overcome, India’s long-term fundamentals—demographic advantage, well-developed institutions, and large potential domestic demand—should reassert themselves and be seen favorably by investors relative to countries more dependent on external demand. ### Spillover channels of the global financial crisis to India (Box 2 key points) - Channels affecting India: - Lower investment and growth from reduced availability of financing, higher funding costs, and deteriorating sentiment. - By 2007/08 the share of Indian corporates’ funding from external sources had risen to 25 percent; equity issuance accounted for an additional 10 percent. - Some firms and sectors face dollar funding problems: foreigners hold about US$53 billion in shares, a third of the free float; some large Indian firms face significant near-term FX refinancing pressures. - The amount of foreign borrowing (bonds and loans) by Indian banks and corporates falling due in 2009 is the third largest among emerging markets. - Net asset position of Indian banks and corporates vis-à-vis BIS reporting banks deteriorated rapidly and became negative. - Availability of trade credits was sharply reduced in fall 2008. - Credit quality could deteriorate substantially, affecting banks (especially SMEs and real estate firms). - FX debt is estimated to amount to 20–30 percent of total corporate debt; continued depreciation would hit unhedged firms and banks’ exposure. - Risk-mitigating factors: - Low levels of external debt and strong reserve coverage: gross external financing requirement and total external debt are low and more than covered by reserves (50 and 75 percent of reserves, respectively). - Leverage of nonfinancial firms, though increased recently, is in line with regional peers. - Limited spillovers through trade: a 1 percent slowdown in global growth is estimated to trim only 0.3 percentage point from India’s growth. - Declining commodity prices should lower inflation, narrow the current account deficit, and limit fiscal burden of oil subsidies: a US$10 decline in the oil price reduces the current account deficit by 0.4 percent of GDP and the cost of oil subsidies by 0.6 percent of GDP. - Near-term refinancing need: - The expected near-term refinancing need of Indian corporations is estimated at US$14 billion in 2009 (JP Morgan, based on international bond and loan issuance data). *Summary derived from the IMF content unit _cr09187 - 8. After several years of rapid* ### 17. The authorities agreed that India is experiencing knock-on effects of the global ### 17. The authorities agreed that India is experiencing knock-on effects of the global ### Authorities’ overall assessment - Authorities agreed India is experiencing knock-on effects of the global crisis but considered the staff’s outlook too pessimistic. - They judged the transmission to be mainly via trade channels and contrasted India’s experience with advanced economies: “the contagion spread from the financial to the real sector, while in India, the slowdown in the real sector was affecting the financial sector, which in turn has a second-order impact on the real sector”. - Expected 2008/09 growth at 7 percent. - Emphasized strength of domestic demand boosted by fiscal stimulus and substantial investment in infrastructure; argued investment had been financed predominantly via domestic savings. - Authorities were cautiously optimistic but agreed the main sources of risks were external. ### Policy discussion framing and priorities - Policymaking should be flexible but disciplined given uncharted territory and many “unknown unknowns.” - Medium-term reform agenda priorities should guide crisis response; government involvement should be in partnership with the private sector and, if extraordinary measures are adopted, accompanied by an upfront exit strategy. - With little fiscal room, priorities are: - (i) ensuring adequate financing to the real economy while protecting financial stability; and - (ii) facilitating corporate restructuring so viable companies emerge stronger and unviable companies can be efficiently resolved. ### Authorities’ stance on policy trade-offs - Authorities viewed precise roadmaps as impossible; measures would be partly reactive and require flexibility and pragmatism. - They did not share staff’s view that enhancing corporate restructuring mechanisms was central at this juncture and saw greater room for fiscal stimulus. - Agreed the major challenge was maintaining flow of credit while maintaining credit quality. ### Monetary policy, liquidity operations, and exchange rate policy — actions and effects - In 2008, monetary policy shifted from disinflation to supporting growth and financial stability as market conditions tightened. - Policy actions taken by the RBI (exact measures as reported): - policy rate and the CRR each raised by 125 bps between May and July (pre-tightening period). - CRR cut by 400 bps beginning in late October. - policy rate cut by 350 bps beginning in late October. - SLR reduced (amounts not restated here). - Despite intervention, liquidity pressures persisted until early November; decline in intervention plus additional liquidity measures eased pressures thereafter. - Staff noted further balance of payments outflows could reemerge liquidity strains quickly and threaten solvency. - Markets expect the RBI to ease monetary policy further in the coming months. ### Financing conditions and credit flows (key figures preserved) - Financing conditions remained tight; overall financing to firms appears to have contracted despite substitution of domestic credit for other corporate funding. - Banks became more reluctant to extend credit, especially to sectors with rapid prior lending expansion (real estate, SMEs, nonbank financial corporations, consumers). - Prime lending rates (PLR) reported in ranges: - PLR now in the range of 8–10 percent in real terms based on expected inflation. - The PLR reported by the RBI averaged 12–14 percent in November, but some private banks have reported PLRs of 14–17 percent. - Nonbank financing for industry has fallen sharply (table summary in source): - Bank credit: Change year-on-year 2007/08 to 2008/09: 44 2604 16236.8 (as presented in the source table). - Flow from nonbanks to corporates: 1,198 667 -531 -44.3 (as presented). - Domestic capital issues (bond and equity): 200 119 -81 -40.5 (as presented). - Issues of commercial paper: 159 216 57 35.6 (as presented). - ADR/GDR: 112 47 -65 -58.3 (as presented). - External commercial borrowing: 727 286 -442 -60.7 (as presented). - Total: 1,640 1,272 -368 -22.5 (as presented). - Staff expected tight financing conditions to persist into 2009 due to slowing deposit growth, lack of revival in nonbank/foreign/domestic capital markets, and rising concerns about corporate sector health. - RBI officials noted credit growth net of the additional demand for credit resulting from reduced external financing remained around 20 percent (y/y) until end-October, but acknowledged a noticeable decline in credit demand since October. ### Policy responses and recommended options (monetary and liquidity instruments) - Further interest rate cuts seen as room for action given very sharp decline in inflation; despite a 350 bps cut since October, real policy rate (based on projected inflation) had risen. - Potential benefits of further rate cuts: - Signal about inflation outlook. - Reduce cost of funds and debt service costs for government. - Lower reverse repo rate to reduce incentives for banks to deposit funds at the RBI. - Limited impact on capital flows/exchange rate expected; interest rate differentials had widened in favor of India. - RBI measures to boost liquidity already taken were welcomed; additional tools available if liquidity tightens: - Repurchase of market stabilization bonds. - Further lowering the CRR and SLR. - Make subsidy-related bonds eligible for repos with the RBI. - Introduce a longer-term (say 1 month) repo facility available to all counterparties. - Increase amounts under the 90-day special refinance facility and announce its extension until at least end-2009. - If still insufficient, consider extending eligibility of collateral at the repo window to corporate bonds and commercial paper with safeguards (minimum credit rating and appropriate discount). - Staff noted government should fund its entire borrowing requirement through regular government securities, rather than issuing special-purpose bonds. ### Exchange rate stance and foreign exchange operations - Large FX intervention until November exacerbated domestic liquidity pressures and resulted in a large loss in reserves. - Allowing the exchange rate to find a floor was proposed as a way to create conditions for exchange rate expectations to incentivize capital inflows; downside risks to banks/corporates likely limited because: - Banks’ FX exposure is subject to strict limits. - Corporates’ exposure to exchange rate risk appears low (foreign exchange debt estimated at 20–30 percent of corporate debt). - The rupee in 2008: - depreciated over 14 percent in nominal effective terms and 11 percent in real effective terms, and is broadly in line with its long-term average. - Reserves and adequacy metrics noted: - India’s reserves cover more than 70 percent of non-FDI external liabilities. - Reserves represent only about 30 percent of domestic financial liabilities (M3). - Suggested FX liquidity measures: - Broadened use of FX swaps (RBI had recently introduced swaps for banks with foreign branches or subsidiaries). - Hold regular FX auctions open to all RBI counterparties, announcing the total amount available over a specified period at the outset (amount committed should be meaningfully large but constrained by reserve adequacy). ### Cross-country policy comparisons (select measures reported in Box 3) - Domestic liquidity provision examples: - Hong Kong SAR: longer-term liquidity raised from 1 to 3 months. - Korea: expanded collateral for repos (bank bonds, guaranteed mortgage-backed securities, MBS). - Philippines: expanded collateral for domestic repos (to include FX sovereign debt). - Russia, Japan: various expansions of repo collateral and counterparties; extended long-term liquidity. - FX liquidity provision examples: - Brazil: $20 bn central bank credit line for corporates with FX debt and $10 bn for exporters; auctions of 1-month USD liquidity lines. - Korea: $5 billion Ex-Im Bank credit line; $55 billion BOK credit line for trade finance. - Turkey: daily dollar auctions. - Facilities to supplement international reserves: - Korea, Brazil, Mexico, Singapore: FX swaps with US Fed. - Hungary: FX swap with the ECB (€5 bn). - Credit guarantees and bank recapitalization measures in several countries listed (examples include Japan, Korea, UK, Brazil, Russia). ### Authorities’ views and operational plans (RBI perspective) - RBI judged its liquidity-boosting steps effective as interbank rate declined to within the policy rate corridor. - New refinance facilities introduced for exporters, housing finance companies, and SMEs were helping alleviate sectoral stress and reduced need to expand repoable collateral. - Some new and expanded liquidity facilities had not been fully utilized; banks were depositing excess liquidity in RBI overnight facility and had unused collateral to access the repo facility, especially after recent buildup in government securities holdings. - RBI saw little evidence of unmet credit demand and considered slowing credit growth to be primarily demand-driven. - RBI indicated willingness to adopt additional measures if needed and has since reduced interest rates and the CRR. - Additional options flagged by RBI if required: - Lowering the CRR further. - Lowering the SLR with consideration for prudential importance. - Increasing refinance availability to financial institutions. - Rely on banks as primary channels of credit intermediation, including to nonbank financial institutions, given banks remain financially robust. - Broadening collateral accepted at the repo window might be an option but corporate bond acceptance limited by lack of a robust secondary market and reliable pricing information. - Authorities highlighted importance of an exit strategy from exceptional crisis measures; many measures included explicit sunset provisions. *Based on the IMF staff report excerpts and authorities’ views contained in the provided content.* ### 30. The RBI reaffirmed that India pursues a flexible exchange rate policy, ### _cr09187 - 30. The RBI reaffirmed that India pursues a flexible exchange rate policy, ### Exchange rate policy - The RBI reaffirmed that India pursues a flexible exchange rate policy, intervening only to smooth volatility. - Authorities highlighted the large depreciation of the rupee against the U.S. dollar in recent months. - The authorities were skeptical about the staff’s recommendation of letting the exchange rate find a floor, arguing that in times of financial volatility, the floor has no significance. ### Financial system context and emerging strains - Headline indicators: India’s financial system compares favorably internationally, but rising credit risk and liquidity pressures are putting it under strain. - Indian banks characteristics: - Appear well-capitalized, relatively liquid, and have low NPA ratios and only limited exposure to structured credit products and troubled financial institutions. - Rapid domestic credit expansion and a sharp increase in foreign liabilities have increased vulnerability to slowing economic activity and global deleveraging. - Corporate sector downturn (including real estate) is of particular concern; risks concentrated in a few institutions. - Information gaps (off-balance sheet derivative positions, foreign borrowing mismatches and covenants) complicate assessment and call for further data dissemination, analysis of asset quality, and stress testing. ### Box 4 — Financial stability risks (key findings) - Market indicators: - CDS spreads for Indian banks jumped sharply in mid-September, eased since November, but remain elevated and comparable to Indonesian and Korean banks. - Moody’s KMV one-year expected default frequencies (EDFs) spiked, but are lower than default probabilities implied by CDS spreads. - Capitalization and funding: - Average capital adequacy ratio (CAR) is 12½ percent, with tier 1 capital close to 9 percent. (Data refer to September 2008.) - Credit-to-deposits (CD) ratio at 74 percent. - A 24 percent SLR held mostly in cash and government securities provides a cushion. - Credit risk: - Staff stress tests: capitalization of systemically important banks does not drop below the regulatory CAR minimum (9 percent) if impaired loans rise to twice the current gross NPA ratio of 2½ percent. - Historical precedent: some countries during the Asian crisis saw NPAs increase as much as 200-300 percent. - Sectoral exposure: industry ~40 percent of total bank credit (roughly a quarter to small firms); property sector ~19 percent of bank credit (majority housing loans). - Liquidity risk: - External liabilities to BIS reporting banks: US$51billion at end-June 2008 (about 5 percent of total assets, double end-2006 level). - Foreign currency loans to residents rose from 16.2 percent of total foreign assets in March 2001 to 47.8 percent in December 2007. - Largest share of external liabilities: nonresident deposits (27 percent). - Other exposures and risks: - Total exposure to five troubled global institutions reported at US$1 billion (0.1 percent of system’s assets). - Authorities estimate mark-to-market FX derivatives losses at $5.5 billion. - Equity exposure limited to less than 40 percent of net worth; margins of 50 percent on loans secured against shares may be insufficient during high equity volatility. - Data and disclosure gaps hinder conclusive assessment; call for further data, analysis, and stress testing. ### Recent regulatory easing - RBI eased prudential guidelines for loans: - Provisioning norms for sectors previously subject to higher standards (real estate, personal loans, exposures to capital markets) reduced to the rate prevailing for most other loans. - Risk weights on exposures previously subject to a higher risk weight also reduced. - Commercial real estate loans made eligible for special treatment under prudential regulations for restructured loans so that even after restructuring loans can continue to be classified as "standard". - Standard accounts (except exposures to commercial real estate, capital markets, and personal loans) undergoing a second restructuring no longer need to have their loan classification downgraded. ### Policy response — identification, disclosure, and stress testing - Calls for: - Careful identification and disclosure of systemic risks. - Detailed analysis of bank asset quality and off-balance sheet structures. - Mark-to-market accounting to avoid masking asset quality problems. - Multifactor stress tests for extreme events, particularly credit and liquidity shocks, allowing for feedback loops between financial and nonfinancial sectors. - Dissemination of data on open foreign exchange exposures and derivative positions of financial institutions and corporates. - Strengthening monitoring mechanisms for foreign and other wholesale borrowing. - Dissemination of findings through a regular financial stability report. - Note: The insurance regulator’s decision to direct life insurers to furnish data on the performance of their funds is cited as a positive step. ### Policy response — early loss recognition, recapitalization, and market measures - Key recommended steps: - Avoid masking underlying capital positions: regulatory forbearance on asset classification (e.g., allowing restructured assets not to be classified as NPAs) undermines confidence and may defer bad asset recognition. - Provide incentives for early loss recognition: allow banks to absorb losses arising from the difference between the book and new net present value of restructured assets in a special account limited in size (say up to 1 percent of risk-weighted assets), not immediately set off against regulatory capital; amortize accounting losses over time or through capital raised later. - Consider making public money available for recapitalization conditional on restructuring targets. - Identify capital needs and recapitalize banks: - RBI should quickly estimate likely increase in NPAs and possible need for additional capital. - Authorities announced intention to raise capital of some public banks to 12 percent of risk weighted assets, and pledged spending of 0.4 percent of GDP for this purpose. - The proposed increase should be adequate to face an increase in NPAs of up to 200 percent, but may not be sufficient for a more severe deterioration. - If additional recapitalization needed, private money should be the first option given limited fiscal space. - Suggested reforms: remove 10 percent cap on single investors’ voting rights and reduce the 51 percent minimum state ownership in public banks to facilitate private participation. - If public recapitalization occurs, uphold high standards of transparency and announce a clear exit strategy. - Regulatory forbearance on the minimum CAR during the transition of recapitalization may be necessary given funding constraints. - Facilitate disposal of impaired assets: - Ease restrictions on foreign investment in asset reconstruction companies (ARCs). - Give nonbank financial secured creditors the same rights as bank secured creditors under the SARFAESI Act. ### Structural reforms and market development priorities - Cyclical and structural limitations (moderating deposit growth, high credit-to-deposit ratios, high government borrowing requirement, priority sector lending) constrain bank credit expansion. - Importance of advancing financial reform agenda to develop nonbank financing (Rajan Report) and accelerate capital account liberalization (Tarapore II Report) to support India’s growth trajectory. - Priorities: - Developing the corporate bond market: - Allow insurance companies and pension funds to invest a greater share of assets in corporate bonds. - Enact insurance and pension reform bills now in parliament. - Raise limits on FII investment in corporate bonds considerably to promote market liquidity. - Note: The limit on FII investment in corporate bonds was raised to $15 billion from $6 billion on January 2, 2009. - Further capital account liberalization: - Lift all interest rate caps and minimum maturity requirements on foreign borrowing, including trade credits. - Liberalize FDI, especially in the financial sector; ease restrictions on foreign borrowing and foreign participation in local debt securities markets; expand contracts and participants in derivatives markets. - Consider tapping multilateral development banks’ trade credits and expanding rediscount facilities for trade credits; carry out foreign exchange auctions for this specific purpose as part of foreign exchange swaps or separately. - Note: Portfolio equity investment is highly liberalized and restrictions on ECBs have been gradually eased, though ECBs remain subject to a number of restrictions and FDI to sector-specific limits and exclusions. - Improving banking system efficiency and reach: - Lower minimum government ownership in public banks and increase managerial autonomy. - Liberalize interest rates on priority-sector loans and introduce priority-sector loan certificates. - Allow greater foreign investment in banks. - Allow more consolidation in the banking sector, including by domestically incorporated subsidiaries of foreign banks. ### Government-assisted refinance, credit guarantees, and contingent liabilities - Government-assisted refinance and credit guarantees can encourage banks to extend credit if transparency and appropriate assessment and pricing of risks are ensured. - Existing channels in India: EXIM Bank, National Housing Bank, Small Industries Development Bank of India (where RBI provides refinancing), and India Infrastructure Finance Company Limited (IIFCL) issuing government-guaranteed bonds to provide refinancing for infrastructure. - Options: - Allow IIFCL to ratchet-up refinancing activities and expand support for PPPs by permitting further debt issuance. - Ensure disclosure of contingent liabilities and manage resulting fiscal risks. - Consider lifting interest rate ceilings on on-lending to reflect true credit risks or provide explicit partial guarantees for excess risk held by financial institutions. - International examples: Hong Kong SAR and the U.K. introduced credit guarantees for nonlisted companies and SMEs, respectively, with explicit risk sharing mechanisms. *IMF staff report content as provided in the source document.* ### 37. Crisis preparedness exercises would enhance the authorities’ ability to intervene ### 37. Crisis preparedness exercises would enhance the authorities’ ability to intervene ### Crisis preparedness and intervention tools - Crisis preparedness exercises should aim at: - Strengthening cross-institutional coordination. - Speeding up decision making processes. - Reviewing intervention frameworks. - An interagency task force may be helpful in this regard (examples given: Hong Kong SAR Task Force on Economic Challenges; Korea high level committee for contingency plans). - Contingent external liquidity and liquidity-mitigation measures mentioned: - Arranging foreign exchange swaps with other central banks. - Availing of the IMF’s Short-Term Liquidity Facility (SLF) should concerns about financial stability intensify or financial contagion occur. - India would have access of up to SDR20.8 billion under the SLF. - If bank funding situations deteriorated substantially: - Consider a guarantee on banks’ new debt (example: Korea), particularly where capital controls limit residents’ outflows. - Reserve an explicit blanket guarantee to all banks’ creditors for more extreme events. ### Authorities’ view on banking system resilience and supervisory measures - Key assessments and statistics: - Average regulatory CAR at about 13 percent, well above the 9 percent minimum (which in turn is 1 percentage point above the minimum under Basel II). - Authorities did not expect a major bank recapitalization program would be needed; a few smaller public banks may require additional capital. - In the medium term, banks generally were deemed to have sufficient headroom to maintain a 12 percent CAR despite increases in bank assets and new Basel II requirements. - Deposit insurance coverage judged adequate, covering 93 percent of the total number of accounts (international benchmark cited as 80 percent). - Supervisory and monitoring steps underway: - RBI Financial Self Assessment to be published in early 2009; it confirmed the assessment of a well capitalized system. - Detailed analysis of institutions’ assets and off-balance sheet items underway through periodic off-site and on-site inspections. - Systematic stress testing was being done; stress tests in the RBI’s self assessment had not revealed significant risks. - New liquidity monitoring framework established for rupee funds; a similar framework under development for FX liquidity. - Reporting of banks’ exposure to sensitive sectors (real estate, unsecured consumer lending, SMEs, and equities) and liquidity positions recently enhanced. - Recent reductions in provisioning requirements and risk weights to particular sectors characterized as counter-cyclical prudential measures. - Allowing restructured assets not to be classified as NPAs viewed as a temporary measure to encourage restructurings during the slowdown. - Market indicators: - Derivatives exposures largely concentrated in foreign banks operating in India. - Daily net foreign exchange open positions limits were strictly enforced. - Sharp deterioration in banks’ market performance (equity prices and CDS spreads) noted by staff; RBI viewed these as poor indicators of credit risk perception and available only for a few banks. - Insolvency and restructuring framework: - Authorities satisfied with insolvency framework functioning. - Corporate Debt Restructuring framework and SARFAESI Act viewed as having worked well, facilitating debt restructuring and improving recovery rates. - RBI granted certificates of registration to five new ARCs during 2008, bringing the total to eleven. ### Corporate sector risks and policy guidance - Background findings: - Corporate balance sheets appeared healthy through early 2008, but deterioration in financial and economic conditions likely heightening vulnerabilities. - Staff analysis suggested the deterioration is likely to have more than doubled the share of companies facing difficulties in servicing their debt (defined as firms with earnings below interest expenses). - Exceptional equity volatility and steep fall in equity prices increased the probability of distress. - Policy recommendations and priorities: - Avoid direct government intervention in specific companies or sectors due to efficiency and governance risks; instead, concentrate public financial support on providing financial institutions the resources needed to keep credit flowing. - Ensure insolvency framework readiness to handle a potentially large rise in corporate distress: - Implement Rajan Report recommendations to improve bankruptcy law and enhance out-of-court restructuring mechanisms. - Passage of the Companies Bill would be a major step forward. - Strengthen incentives for operational restructuring and reduce incentives for pure rescheduling under India’s Corporate Debt Restructuring framework. - Improve functioning of ARCs and enhance incentives to renegotiate debts for financial institutions to facilitate speedier resolution and higher recovery rates. - Authorities’ perspective: - Authorities expressed a more sanguine outlook; expected corporate difficulties to be contained at the level of a normal business cycle given firms’ recent strong performance. - Authorities believed existing restructuring frameworks were working well and reiterated they did not plan to introduce trade restrictions. ### Fiscal policy: constraints, measures, and reform agenda - Recent fiscal deterioration and projections: - After five years of fiscal consolidation, public finances deteriorated markedly in 2008/09. - 2008/09 Budget originally targeted a 2.5 percent of GDP central government deficit (2.8 percent in 2007/08). - 2008/09 central government budget deficit is now projected to reach 7 percent of GDP, including subsidy-related bonds. - States’ deficit projected to widen to about 2¾ percent of GDP. - Resulting general government deficit of almost 10 percent of GDP. - 2008/09 subsidy bill at 3⅔ percent of GDP. - Discretionary fiscal measures and space for stimulus: - Staff’s estimate of discretionary fiscal measures provided in the budget and two supplementary budgets amounts to about 3 percent GDP. - High deficit and debt close to 80 percent of GDP noted as constraining further fiscal expansion. - Limited fiscal space best reserved for measures to jumpstart high quality infrastructure investment and strengthen the financial system. - Guidance if further stimulus is considered: - Any further fiscal stimulus should be accompanied by reforms ensuring medium-term fiscal sustainability. - Set out a medium-term debt target and announce credible accompanying reforms to boost confidence in commitment to fiscal discipline when market conditions stabilize. - Stimulus should be timely, take into account implementation constraints to avoid governance lapses, and could focus on: - Accelerating already planned infrastructure projects. - Increasing the public component of PPPs. - Expanding well-targeted social programs to raise purchasing power of the poor (high propensity to consume). - Tax cuts judged likely ineffective given a narrow personal income tax base and weakened corporate profits. - Near-term budget guidance for 2009/10: - Getting back to FRBMA targets not feasible; next year’s budget should strive to reduce the central government deficit. - Lower oil prices estimated to reduce the 2009/10 subsidy bill by 2 percentage points of GDP. - Advisable not to offset fully savings on the subsidy bill with additional discretionary spending measures. - Next year’s budget should bring all spending on-budget to improve transparency and outline a concrete strategy for returning to a sustainable fiscal position in the Medium-Term Fiscal Policy Statement. - Subsidy reform and medium-term fiscal framework: - Lower commodity prices present an opportunity to reform the subsidy system and signal commitment to expenditure reform. - Chaturvedi Committee recommendations cited: eliminate regressive subsidies on petroleum and diesel, phase out the LPG subsidy, and introduce market-based pricing to align domestic prices with international levels. - Improve targeting for subsidies on kerosene, food and fertilizers; strengthen delivery mechanisms (pilot smart cards and plans for unique identification numbers noted as welcome steps). - Medium-term fiscal adjustment should be anchored in a fiscal rules framework centered on a debt target: - A successor to the FRBMA could expand coverage of public sector fiscal operations and include an explicit medium-term debt target combined with consistent annual nominal expenditure growth rules. - Complement subsidy reform with expenditure-efficiency improvements (output-based budgeting, improved service delivery). - Introduction of a goods and service tax seen as an important milestone to strengthen revenue collection and streamline indirect taxes. - Authorities’ views and plans: - Authorities reiterated commitment to fiscal consolidation as a prerequisite for sustained growth but emphasized that this was not the time for fiscal rectitude given prevailing conditions. - Authorities acknowledged that the overall central government fiscal and current deficit for 2008/09 will exceed budget estimates due to the rise in commodity prices and related subsidy pressures. *Source: IMF staff report excerpt — “37. Crisis preparedness exercises would enhance the authorities’ ability to intervene”* ### Chapter IV of the accompanying Selected Issues Paper discusses India’s experience with fiscal rules and proposes ### _cr09187 - Chapter IV of the accompanying Selected Issues Paper discusses India’s experience with fiscal rules and proposes ### Fiscal outturn and near-term fiscal stance - Staff projected 2008/09 fiscal outturn for the states, but the authorities disagreed, arguing that states’ revenue has remained buoyant and that the usual lag in the introduction of the pay increases at the state level would limit expenditure pressures. (paragraph 37) - For the remainder of the year, the government will focus on: - pruning unproductive expenditure, and - monitoring the FRBMA targets closely. - The authorities do not envisage the need for further measures in the current fiscal year. (paragraph 37) ### Authorities’ assessment of recent fiscal expansion and liquidity effects - The authorities argued that the fiscal consolidation of the last five years, and the concomitant reduction in public debt, have created room for the current fiscal expansion. (paragraph 56) - They asserted that the increase in government borrowing was being largely offset by the repurchase of market stabilization bonds, minimizing the impact of government spending on overall liquidity and credit available to the private sector. (paragraph 56) ### Preferred composition of further fiscal stimulus - The authorities agreed with staff’s suggestions on the form that any further fiscal stimulus should take: - acceleration of spending on infrastructure projects that have already been launched, - higher spending on easily scalable targeted social programs (such as NREG, housing for the poor, social assistance programs), and - a limited role for tax measures. - They also agreed that implementation capacity constraints had to be taken into account. (paragraph 56) ### Outlook for fiscal rules and next year’s budget - The authorities concurred that a return to the FRBMA targets was unrealistic for next year’s budget. The slowdown in economic growth will likely necessitate continued fiscal stimulus. (paragraph 57) - A significant ramp up in priority spending is in the works, including funds for the recapitalization of public sector banks. (paragraph 57) - Details on the broad outline of the 2009/10 Budget and the expected fiscal stance were not available, as a full budget reflecting the policy agenda of the newly elected government would be prepared only after the government is formed, likely as late as July. (paragraph 57) ### Structural reforms and medium-term consolidation measures - The authorities agreed that reforms are necessary to secure lasting consolidation and signal the government’s commitment to fiscal discipline. (paragraph 58) - Specific measures and reform directions under consideration: - reducing the subsidy bill and exploring reform options, as evidenced by the introduction of a pilot smart card scheme, - continued focus on judicious spending of plan funds and expenditure management, with limited scope for further rationalization of centrally sponsored schemes, and - revenue-side gains through ongoing compliance improvements and base-broadening on both direct and indirect taxes. (paragraph 58) - While there are signs that the fuel subsidy reform might be gaining support, the timing of such a politically difficult reform is unclear. (paragraph 58) *Source: _cr09187 - Chapter IV of the accompanying Selected Issues Paper* ### 59. The authorities viewed the FRBMA as having been very useful in instilling fiscal ### _cr09187 - 59. The authorities viewed the FRBMA as having been very useful in instilling fiscal discipline. ### FRBMA: role and authorities' view - The authorities viewed the FRBMA as having been "very useful in instilling fiscal discipline." - They pointed to its role in sensitizing ministries and departments and acting as a catalyst for fiscal consolidation at the state level. - The Thirteenth Finance Commission, tasked with assessing the need for a successor to the FRBMA, "has not yet issued its recommendations." - Given that commission's pending work, "the authorities were noncommittal on the staff’s proposal for a potential successor rule which includes an explicit debt target and nominal expenditure growth rules." ### Fiscal situation and implications (excerpted indicators and projections) - The trend of fiscal consolidation will be reversed in FY 2008/09. - Achieving the FRBMA target of no current deficit in 2009/10 "will likely be infeasible." - Under the baseline scenario, debt reduction would resume only in 2010/11. - India's fiscal position is described as "one of the weakest among the emerging economies." - Public debt remains high. Key fiscal figures and projections (preserve source values exactly): - Central government deficit (percent of GDP): -4.1 (2004/05), -4.7 (2005/06), -4.4 (2006/07), -3.4 (2007/08), -7.1 (2008/09), -5.7 (2009/10). - General government deficit (percent of GDP): -7.3 (2004/05), -7.3 (2005/06), -6.3 (2006/07), -5.8 (2007/08), -9.9 (2008/09), -8.8 (2009/10). - General government debt: 86.5 (2004/05), 84.2 (2005/06), 80.6 (2006/07), 80.1 (2007/08), 80.7 (2008/09), 82.9 (2009/10). - Current balance (percent of GDP, staff baseline and projections shown elsewhere): Current budget path and FRBMA roadmap comparisons are presented, with statements that the FRBMA target of no current deficit in 2009/10 is likely infeasible. Selected central government operations (amounts in billions of rupees and percent of GDP): - Total revenue and grants (Rs. billion): 3,204 (2004/05), 3,622 (2005/06), 4,500 (2006/07), 5,424 (2007/08), 5,912 (2008/09), 6,214 (2009/10 proj.), 5,961 (2007/08 staff proj. row also reported). - Total expenditure and net lending (Rs. billion): 4,506 (2004/05), 5,102 (2005/06), 5,926 (2006/07), 6,934 (2007/08), 7,210 (2008/09), 7,637 (2009/10 proj.), 9,122 (2008/09 staff row). - Interest payments (Rs. billion): 1,269 (2004/05), 1,326 (2005/06), 1,503 (2006/07), 1,590 (2007/08), 1,715 (2008/09), 1,908 (2009/10 proj.), 1,912 (2008/09 staff row). - Subsidies (Rs. billion): 460 (2004/05), 475 (2005/06), 571 (2006/07), 543 (2007/08), 711 (2008/09), 714 (2009/10 proj.), 1,279 (2008/09 staff row). - Overall balance (percent of GDP, authority definition): -4.0 (2004/05), -4.1 (2005/06), -3.4 (2006/07), -3.3 (2007/08), -2.8 (2008/09), -2.5 (2009/10 proj.), -5.7 (2008/09 staff augmented). Memorandum items: - Subsidy-related bond issuance (percent of GDP): 0.0 (2004/05), 0.5 (2005/06), 1.0 (2006/07), 0.6 (2007/08), 1.3 (2008/09), 0.3 (2009/10 proj.). - Primary balance (percent of GDP): -0.1 (2004/05), -0.4 (2005/06), 0.2 (2006/07), 0.2 (2007/08), 0.9 (2008/09), 0.9 (2009/10 proj.), -2.3 (2008/09 staff augmented). ### Staff proposal and policy considerations - Staff proposed a potential successor rule to the FRBMA that "includes an explicit debt target and nominal expenditure growth rules." - Authorities were noncommittal to that staff proposal pending the Thirteenth Finance Commission recommendations. - Contextual fiscal pressures noted in the document that affect feasibility of targets: - Fiscal measures and a soaring subsidy bill weigh on government finances. - Fiscal stimulus supporting consumption, but growth is slowing driven by investment. - Under the baseline scenario, debt reduction would resume only in 2010/11. ### Scenarios and timing - Thirteenth Finance Commission recommendations are outstanding and determine receptiveness to successor fiscal rules. - Short-run projection: reversal of fiscal consolidation in FY 2008/09; infeasibility of no current deficit by 2009/10 under FRBMA target. - Medium-run projection: debt reduction to resume in 2010/11 under staff baseline. *Source: _cr09187 - excerpt from IMF Staff Report for the 2008 Article IV Consultation — informational annex (page/paragraph 59 and accompanying fiscal tables).* ### ANNEX I: INDIA—MEDIUM-TERM PUBLIC DEBT SUSTAINABILITY ANALYSIS ### ANNEX I: INDIA—MEDIUM-TERM PUBLIC DEBT SUSTAINABILITY ANALYSIS ### A. The Baseline Scenario - Staff assumptions: - After a significant dip in 2009/10, economic growth is forecast to rise gradually to potential (8 percent) as global conditions improve and progress is made on structural reforms (see Table 6). - Inflation is projected to remain contained. - Despite continued fiscal stimulus, the general government deficit is expected to decline marginally in 2009/10 as lower commodity prices lighten the subsidy bill and the effect of the Sixth Pay Commission wage hike wears off. - Other working assumptions include: - Oil bonds. After 2008/09, the government is assumed to issue oil bonds to the state-owned petroleum companies only to cover the subsidy cost of kerosene. - Other off-budget bond issuance. After 2008/09, the government is assumed not to issue further bonds to the Food Corporation of India or the fertilizer companies as these expenses are brought on-budget. - Debt path: - Under the baseline scenario, the general government deficit would fall to *Source: ANNEX I: INDIA—MEDIUM-TERM PUBLIC DEBT SUSTAINABILITY ANALYSIS* ### 5.1 percent of GDP by 2013/14 from nearly 10 percent of GDP in 2008/09. Over the same ### _cr09187 - 5.1 percent of GDP by 2013/14 from nearly 10 percent of GDP in 2008/09. Over the same ### Public debt outlook and baseline projections - Gross public debt is projected to decline to 74 percent of GDP from 80 percent of GDP in 2007/08, although it is projected to rise in 2008/09 and 2009/10 to a peak of 83 percent of GDP. - Public sector debt (baseline, in percent of GDP): 2003: 87.3; 2004: 87.2; 2005: 85.2; 2006: 82.0; 2007: 80.5; 2008: 80.6; 2009: 82.7; 2010: 82.9; 2011: 81.0; 2012: 78.2; 2013: 75.0. - Foreign-currency denominated share of public sector debt (o/w foreign-currency denominated, in percent of GDP): 2003: 7.4; 2004: 6.7; 2005: 5.9; 2006: 5.3; 2007: 5.1; 2008: 5.3; 2009: 5.3; 2010: 5.1; 2011: 4.9; 2012: 4.7; 2013: 4.4. - Change in public sector debt (year-on-year, in percent of GDP): 2003: 2.4; 2004: -0.1; 2005: -2.1; 2006: -3.2; 2007: -1.4; 2008: 0.0; 2009: 2.1; 2010: 0.2; 2011: -1.9; 2012: -2.8; 2013: -3.2. - Identified debt-creating flows (4+7+12, in percent of GDP): 2003: 0.3; 2004: -3.0; 2005: -2.6; 2006: -3.8; 2007: -4.2; 2008: 0.1; 2009: 1.5; 2010: 0.1; 2011: -2.0; 2012: -2.9; 2013: -3.3. - Primary deficit (in percent of GDP): 2003: 3.0; 2004: 1.5; 2005: 1.6; 2006: 1.1; 2007: 0.2; 2008: 3.8; 2009: 3.5; 2010: 2.1; 2011: 0.7; 2012: 0.2; 2013: -0.2. - Revenue and grants (in percent of GDP): 2003: 18.7; 2004: 19.4; 2005: 19.7; 2006: 20.9; 2007: 22.7; 2008: 21.7; 2009: 21.2; 2010: 21.5; 2011: 22.0; 2012: 22.6; 2013: 23.0. - Primary (noninterest) expenditure (in percent of GDP): 2003: 21.7; 2004: 20.9; 2005: 21.3; 2006: 22.0; 2007: 23.0; 2008: 25.5; 2009: 24.7; 2010: 23.6; 2011: 22.8; 2012: 22.7; 2013: 22.9. - Automatic debt dynamics (in percent of GDP): 2003: -2.4; 2004: -4.6; 2005: -4.6; 2006: -5.7; 2007: -5.3; 2008: -5.4; 2009: -2.0; 2010: -2.0; 2011: -2.8; 2012: -3.1; 2013: -3.1. - Contribution from interest rate/growth differential (in percent of GDP): 2003: -1.9; 2004: -4.3; 2005: -4.8; 2006: -5.6; 2007: -4.8; 2008: -5.4; 2009: -2.0; 2010: -2.0; 2011: -2.8; 2012: -3.1; 2013: -3.1. - Of which contribution from real interest rate (in percent of GDP): 2003: 3.3; 2004: 1.8; 2005: 2.2; 2006: 1.7; 2007: 1.9; 2008: -0.3; 2009: 1.7; 2010: 2.9; 2011: 2.8; 2012: 2.6; 2013: 2.5. - Of which contribution from real GDP growth (in percent of GDP): 2003: -5.2; 2004: -6.1; 2005: -7.0; 2006: -7.3; 2007: -6.7; 2008: -5.1; 2009: -3.8; 2010: -4.9; 2011: -5.6; 2012: -5.7; 2013: -5.6. - Residual, including asset changes (2-3, in percent of GDP): 2003: 2.2; 2004: 2.9; 2005: 0.5; 2006: 0.6; 2007: 2.8; 2008: 0.0; 2009: 0.6; 2010: 0.1; 2011: 0.1; 2012: 0.1; 2013: 0.1. - Public sector debt-to-revenue ratio (in percent): 2003: 466.2; 2004: 449.3; 2005: 431.7; 2006: 392.2; 2007: 354.6; 2008: 371.8; 2009: 390.4; 2010: 385.7; 2011: 367.7; 2012: 346.3; 2013: 325.4. - Gross financing need (in percent of GDP): 2003: 9.4; 2004: 7.7; 2005: 7.3; 2006: 6.5; 2007: 5.9; 2008: 8.9; 2009: 9.1; 2010: 7.7; 2011: 6.4; 2012: 5.7; 2013: 5.2. - Gross financing need (in billions of U.S. dollars): 2003: 53.8; 2004: 51.9; 2005: 57.2; 2006: 57.5; 2007: 65.0; 2008: 107.9; 2009: 113.1; 2010: 103.9; 2011: 94.7; 2012: 92.6; 2013: 92.6. ### FRBMA target and fiscal commitments - FRBMA targets: achievement of current balance by the central government, targeted for 2009/10 under the FRBMA, is not expected within the next 5 years. - Reasons cited: expected ramp-up of plan spending to support growth in 2009/10, and the government’s commitments on account of the agricultural debt write-off. ### Sensitivity analysis and risks - After an initial rise, a gradual decline in the debt-to-GDP ratio would occur under various shocks, including a scenario where the growth-interest rate differential rises above its historical average or the currency experiences a sharp depreciation. - Under a return to historical averages for the primary balance, real GDP growth, and real interest rates, the debt ratio would rise over the medium term. - Debt path is highly sensitive to growth assumptions: - Protracted slowdown scenario with real GDP growth averaging 5 percent: ratio of debt to GDP would rise over the medium term. - Contingent liabilities shock: a 10 percent of GDP shock to contingent liabilities would sharply raise the debt ratio to 93 percent of GDP, though it would resume its decline after the initial spike. - Shocks modeled (as described in figures and notes): - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator). ### External debt dynamics and risks - Baseline external debt (in percent of GDP): 2004/05: 19.0; 2005/06: 17.1; 2006/07: 18.7; 2007/08: 19.2; 2008/09: 19.5; 2009/10: 18.7; 2010/11: 19.5; 2011/12: 20.1; 2012/13: 20.6; 2013/14: 21.1. - Change in external debt (in percent of GDP): 2004/05: 0.4; 2005/06: -1.9; 2006/07: 1.6; 2007/08: 0.5; 2008/09: 0.3; 2009/10: -0.9; 2010/11: 0.8; 2011/12: 0.6; 2012/13: 0.5; 2013/14: 0.5. - Identified external debt-creating flows (4+8+9, in percent of GDP): 2004/05: -4.1; 2005/06: -3.2; 2006/07: -2.7; 2007/08: -6.1; 2008/09: 1.0; 2009/10: -0.4; 2010/11: -1.7; 2011/12: -1.6; 2012/13: -1.5; 2013/14: -1.6. - Current account deficit, excluding interest payments (in percent of GDP): 2004/05: -0.3; 2005/06: 0.6; 2006/07: 0.5; 2007/08: 0.7; 2008/09: 2.1; 2009/10: 0.8; 2010/11: 1.4; 2011/12: 1.3; 2012/13: 1.3; 2013/14: 1.3. - Net nondebt creating capital inflows (negative, in percent of GDP): 2004/05: -1.9; 2005/06: -1.9; 2006/07: -1.7; 2007/08: -3.8; 2008/09: -0.7; 2009/10: -0.9; 2010/11: -2.6; 2011/12: -2.6; 2012/13: -2.5; 2013/14: -2.5. - External debt-to-exports ratio (in percent): 2004/05: 103.5; 2005/06: 84.8; 2006/07: 83.9; 2007/08: 90.5; 2008/09: 83.6; 2009/10: 91.2; 2010/11: 93.4; 2011/12: 93.3; 2012/13: 92.4; 2013/14: 91.7. - Gross external financing need (in billions of U.S. dollars): 2004/05: 44.2; 2005/06: 74.7; 2006/07: 71.9; 2007/08: 94.5; 2008/09: 134.6; 2009/10: 120.3; 2010/11: 140.7; 2011/12: 163.6; 2012/13: 184.3; 2013/14: 205.7. - Gross external financing need (in percent of GDP): 2004/05: 6.3; 2005/06: 9.2; 2006/07: 7.8; 2007/08: 8.1; 2008/09: 11.5; 2009/10: 9.4; 2010/11: 10.2; 2011/12: 10.8; 2012/13: 11.1; 2013/14: 11.2. - External debt stress tests and shocks noted: - Interest rate shock, growth shock, non-interest current account shock, combined shock, and one-time 30 percent real depreciation are analyzed in the bound tests. - Baseline and scenario averages reported in figure boxes (e.g., Baseline: 5.0; Scenario: 5.2; Historical: 4.3 for one panel). ### Key macroeconomic assumptions underlying baseline (selected series) - Real GDP growth (in percent): 2003: 6.9; 2004: 7.9; 2005: 9.1; 2006: 9.8; 2007: 9.3; 2008: 7.3; 2009: 5.1; 2010: 6.5; 2011: 7.5; 2012: 7.8; 2013: 8.0. - Average nominal interest rate on public debt (in percent): 2003: 8.4; 2004: 8.1; 2005: 7.6; 2006: 7.6; 2007: 7.8; 2008: 7.7; 2009: 7.2; 2010: 7.5; 2011: 7.7; 2012: 7.7; 2013: 7.7. - Average real interest rate (nominal rate minus change in GDP deflator, in percent): 2003: 4.6; 2004: 2.8; 2005: 3.2; 2006: 2.7; 2007: 3.1; 2008: 0.2; 2009: 2.6; 2010: 4.1; 2011: 4.1; 2012: 3.9; 2013: 3.9. - Inflation rate (GDP deflator, in percent): 2003: 3.8; 2004: 5.3; 2005: 4.4; 2006: 4.9; 2007: 4.7; 2008: 7.5; 2009: 4.7; 2010: 3.3; 2011: 3.6; 2012: 3.8; 2013: 3.8. - Growth of real primary spending (deflated by GDP deflator, in percent): 2003: 7.5; 2004: 4.0; 2005: 11.2; 2006: 13.1; 2007: 14.3; 2008: 19.0; 2009: 2.0; 2010: 1.7; 2011: 3.7; 2012: 7.7; 2013: 8.7. ### Scenarios and alternative projections - Scenario with key variables at their historical averages (public sector debt, in percent of GDP): 2008: 80.6; 2009: 81.2; 2010: 81.4; 2011: 81.5; 2012: 81.7; 2013: 81.8. - Scenario with no policy change (constant primary balance) in 2008-2013 (public sector debt, in percent of GDP): 2008: 80.6; 2009: 80.2; 2010: 80.8; 2011: 80.6; 2012: 80.1; 2013: 79.4. ### IMF relations, technical assistance, and World Bank engagement (select items) - IMF membership status: Joined 12/27/45; Article VIII. - Quota (SDR Million % Quota): Quota: 4,158.20 (100.00); Fund holdings of currency: 3,630.29 (87.30); Reserve position in Fund: 527.94 (12.70). - SDR Department (SDR Million % Allocation): Net cumulative allocation: 681.17 (100.00); Holdings: 1.78 (0.26). - Outstanding Purchases and Loans: None. - Financial arrangements (historical): Stand-By 10/31/1991–06/30/1993: Approved 1,656.00, Drawn 1,656.00; Stand-By 01/18/1991–04/17/1991: Approved 551.93, Drawn 551.93; EFF 11/09/1981–05/01/1984: Approved 5,000.00, Drawn 3,900.00. - Projected obligations to Fund (SDR million): Charges/interest (Forthcoming): 2009: 5.98; 2010: 5.62; 2011: 5.62; 2012: 5.62; 2013: 5.62; Total same figures. - Exchange rate arrangement: Since March 1, 1993, the Indian rupee has floated; classified as managed floating with no pre-announced path. - Technical assistance (selected): Government securities market 2/94 and follow-up 7/96; Foreign exchange market 2/95; Expenditure control 5/95; Public expenditure management 8/95 and follow-up 5/96; SDDS and statistics 12/96; Balance of payments statistics 12/97 and 9/05; State level fiscal database and debt register 11/04; Pilot study on public private partnerships 12/04; AML/CFT 5/08 and 10/08. - World Bank Group: Bank FY2008 lending totaled $2.15 billion (down from $3.75 billion in FY2007); IFC commitment in Bank FY2008: $1.05 billion. - WBG Country Strategy (CAS) for India 2009-2012 envisages total proposed lending program of US$14 billion for next three years: US$9.6 billion from IBRD and US$4.4 billion (SDR 2.982 billion equivalent) from IDA. - World Bank Group objectives: scale up development impact, help halve poverty by 2015, focus on infrastructure and the seven poorest states, retain reform and performance-based approach for state lending, adjustment lending ~10 percent of total IBRD/IDA lending. *Source: Fund staff estimates and IMF country report content provided in the supplied document.* ### ANNEX V: INDIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK ### ANNEX V: INDIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK ### AsDB financial operations in India - AsDB operations in India began in 1986. - Cumulative public sector loan commitments totaled $19.2 billion as of 31 December 2008 for 112 loans. - Additional private sector loans (without government guarantee) amounted to $1.6 billion on a cumulative basis. - Total loan commitments on a cumulative basis amount to $20.8 billion. - Funds have been provided from the Bank’s ordinary capital resources (OCR). - AsDB has approved equity investments amounting to $0.2 billion. ### Tabulated AsDB activity (selected aggregate figures, as of 31 December 2008) - Total OCR commitments: 19,154.9 (millions of U.S. dollars) - Total Equity: 242.3 (millions of U.S. dollars) - Total Disbursements: 11,521.0 (millions of U.S. dollars) - Source: Asian Development Bank. ### Proposed India Country Partnership Strategy (CPS) 2009–12 — strategic pillars and focus - Four strategic pillars: - (i) Support for the process of inclusive and environmentally sustainable growth; - (ii) Catalyzing investment through the use of innovative business and financing modalities; - (iii) Strengthening the results orientation of project design and implementation and emphasizing knowledge solutions; - (iv) Support for regional cooperation. - Sectoral focus during the CPS period: - Transport: national highways, state roads, rural roads. - Energy: power sector reforms, strengthening transmission and distribution system, hydropower generation, improvement in energy efficiency. - Urban: water supply and sanitation, waste management, urban transport, municipal reforms. - Agriculture and natural resource management: irrigation. - The strategy will also support thematic concerns: environmental sustainability, private sector development and private sector operations, governance and capacity building, gender equity, knowledge solutions, and partnerships. --- ### ANNEX VI: INDIA––STATISTICAL ISSUES ### Overview and SDDS observance - Macroeconomic statistics are adequate for surveillance, but weaknesses remain in timeliness and coverage of certain series. - India subscribed to the Special Data Dissemination Standards (SDDS) on December 27, 1996 and started posting metadata on October 30, 1997. - India is currently in observance of the SDDS, using flexibility options for timeliness of data on general government operations and on the periodicity and timeliness of labor market data. - The data module of the ROSC (IMF Country Report No. 04/96) was published in April 2004. ### National accounts - The Central Statistical Organization (CSO) reduced the dissemination lag for quarterly releases from three to two months. - CSO released a new series of national accounts with base year 1999–2000 in February 2006. - Estimates of value added in constant prices for public administration and defense may be biased upwards because they are based on the government’s wage bill (with arrears counted in the year paid) deflated by the Wholesale Price Index (WPI). ### Price statistics - Consumer price indices (CPIs) use weights over ten years old and do not fully capture price developments. - Since January 2006, the Labour Bureau has published a revised CPI for industrial workers with a 2001 base year. - A Working Group is revising the current producer price index to a new base. - Presently, there are four CPIs (industrial workers, urban and nonmanual employees, agricultural laborers, rural laborers); CPIs are published with a lag of about one month. - A WPI (1993/94=100) is published weekly with a lag of two weeks and is subject to large revisions, especially in periods of rising inflation. - Representativeness concerns arise from price collection from a relatively small sample of products and infrequent updating of weights. ### External sector statistics - Concepts and definitions are broadly in line with BPM5, but RBI presentation does not strictly follow BPM5. - Trade data have quality, valuation, timing, and coverage problems; trade prices, volumes, and composition are not regularly available timely. - Only trade credit extended for more than 180 days is included in the balance of payments (and IIP and external debt data); trade credit is often less than 180 days in most countries. - Bilateral data on services exports to the United States and other developed countries are manifold higher than counterpart services imports published by those countries. - External debt statistics: available quarterly with a one quarter lag. - Short-term external debt in debt statistics is presented on an original maturity basis; short-term maturity attribution on a residual maturity basis is available only annually (and excludes residual maturity of medium- and long-term nonresident Indian accounts). - IIP statistics cover BPM5-prescribed sectors and annual data are disseminated within six months of the reference period. - Coverage of direct investment positions is hampered by the absence of appropriate legal or institutional authority. - India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS in December 2001. - More up-to-date information on variables such as total foreign reserves, foreign currency assets, gold, and SDRs are available weekly as part of a weekly statistical supplement on the RBI web site. ### Monetary and financial statistics - The RBI web site and RBI Bulletin publish a wide array of monetary and financial statistics: reserve money and components, RBI’s survey, monetary survey, liquidity aggregates (outstanding amounts), interest rates, exchange rates, foreign reserves, and results of government securities auctions. - Frequency and quality of data dissemination have improved substantially in recent years. ### Conformity with MFSM and outstanding deviations - Concepts and definitions used by RBI are in broad conformity with the Monetary and Financial Statistics Manual (MFSM). - Deviations from MFSM: - Resident sector data do not provide sufficient information on the sectoral distribution of domestic credit; current sectorization subdivides the resident nonbank sector into (i) central government; (ii) state government; and (iii) the commercial sector (including other financial corporations, public and other nonfinancial corporations, and other resident sectors). - Commercial banks add accrued interest to credit and deposit positions on a quarterly basis only (instead of the prescribed monthly basis). ### Progress on reporting and SRFs - RBI reports monetary data for IFS regularly. - Since October 2006, RBI initiated electronic reporting of monetary data, improving on the previous paper-based reporting. - India has submitted to STA test data (starting from December 2001) on the Standardized Report Forms (SRFs) developed to implement MFSM methodology. - STA is working with authorities to resolve outstanding data issues on SRF development. ### Fiscal operations - Ministry of Finance (MoF) posts selected central government monthly fiscal data and quarterly debt data on its web site. - No monthly fiscal performance data are available at the state level; annual data are available only with an 8-month to 10-month lag. - Consolidated local government operations information is unavailable. - Data on functional and economic classification of expenditures are available with considerable lag. - Presentation of fiscal accounts could be more analytically useful (e.g., classification between developmental/nondevelopmental and plan/nonplan obscures economic nature and impact). - MoF reports central government data (on a cash basis) for publication in the Government Finance Statistics Yearbook (latest reported data correspond to 2006). - Some limited general government data reported for 2002. ### India — Table of Common Indicators Required for Surveillance (as of January 7, 2009) — selected rows - Exchange rates: Date of latest observation 01/7/09; Date received 01/7/09; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the monetary authorities 4/: Date of latest observation 12/26/08; Date received 01/2/09; Frequency W; Frequency of Reporting W; Frequency of Publication W. - Reserve/base money: Date of latest observation 12/26/08; Date received 01/2/09; Frequency W; Frequency of Reporting W; Frequency of Publication W; Data Quality–Methodological soundness: O, O, LO, LO; Data Quality–Accuracy and reliability: O, O, O, O, O. - Broad money: Date of latest observation 12/19/08; Date received 01/2/09; Frequency BW; Frequency of Reporting BW; Frequency of Publication W. - Central bank balance sheet: Date of latest observation Jun. 08; Date received 08/30/08; Frequency A; Frequency of Reporting A; Frequency of Publication A. - Consolidated balance sheet of the banking system: Date of latest observation Mar. 08; Date received 10/1/08; Frequency A; Frequency of Reporting A; Frequency of Publication A. - Interest rates 5/: Date of latest observation 01/7/09; Date received 01/7/09; Frequency D; Frequency of Reporting D; Frequency of Publication D. - Consumer price index: Date of latest observation Nov. 08; Date received 01/2/09; 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 7/: Date of latest observation Mar. 08; Date received 10/01/08; Frequency A; Frequency of Reporting A; Frequency of Publication A; Data Quality–Methodological soundness: LNO, LO, O, O; Data Quality–Accuracy and reliability: O, O, O, O, LO. - Revenue, expenditure, balance and composition of financing – Central Government: Date of latest observation Nov. 08; Date received 01/2/09; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Stocks of central government and central government-guaranteed debt 8/: Date of latest observation Mar. 08; Date received 10/01/08; Frequency A; Frequency of Reporting A; Frequency of Publication A. - External current account balance: Date of latest observation Jul-Sep. 08; Date received 01/5/09; 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 Jul-Sep. 08; Date received 01/5/09; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of latest observation Jul-Sep. 08; Date received 12/18/08; 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 Jul-Sep. 08; Date received 01/5/09; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - Footnotes excerpt (numbering preserved): - 1/ Daily (D), Weekly (W), Biweekly (BW), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA). - 2/ Reflects the assessment provided in the data ROSC (published on April 2, 2004, and based on the findings of the mission that took place during May 13–30, 2002)... - 3/ Same as footnote 7, except referring to international standards concerning source data... - 4/ Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 5/ Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 6/ Foreign, domestic bank, and domestic nonbank financing. - 7/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state governments. - 8/ Including currency and maturity composition. --- ### Statement by the IMF Staff Representative on India — February 6, 2009 ### New information since staff report (summary) - Information contained does not alter the thrust of the staff appraisal. ### Economic and financial developments (selected points) - Indicators of economic activity remained soft. - Exports (dollar terms) contracted by 1 percent y/y in December (better than the 11 percent contraction in October-November). - Government announced preliminary shipment data indicating January exports will likely decline by 22 percent. - Commerce ministry expects exports to fall in 2009/10. - Manufacturing sector PMI (ABN Amro) indicated continued contractions in output, new orders, and employment in January, although at a slower pace than in December. - Inflation: - WPI inflation decelerated to an average 5.5 percent (y/y) during the first three weeks of January compared to 5.9 percent (y/y) in December. - The three-month moving average of WPI changes remained negative. - Consumer price inflation (industrial workers) decelerated but remained high at 9.7 percent (y/y) in December. - Tax collections and fiscal: - During April-December, tax collections rose only 5 percent (y/y), compared to 26 percent (y/y) for April-September. - With expenditure rising faster than projected, further market borrowing will likely be announced in February. - Prime Minister’s Economic Advisory Council forecast the 2008/09 general government fiscal deficit (including subsidy-related bonds) at about 10 percent of GDP (same as staff projection). - Credit and banks: - Growth of non-food credit to the private sector slowed to 23 percent y/y in mid-January and was negative in seasonally adjusted, month-on-month terms. - Lending by ownership in 2008: total lending rose by 21 percent; private banks’ lending slowed to 12 percent; foreign banks to 17 percent; public sector banks rose to 29 percent. - Commercial lending rates remain much higher than the policy rate, though reductions are starting to occur, particularly in state-owned banks. - Corporate and bank performance: - Bank earnings for Sep–Dec 2008 quarter: SBI consolidated profits increased by 51 percent; ICICI by 3.4 percent (both exceeded market expectations but were below the same period last year). - CDS spreads on these banks declined by about 30-80 basis points compared to end-December. - Corporate profits sample (~2,400 companies): after-tax profits declined by 8 percent y/y in the June-September quarter; signs of continued weakness for Oct–Dec quarter. - Financial markets: - Equity market declined about 5 percent during January. - Rupee/U.S. dollar rate held steady at about 49. - Commercial paper rates eased somewhat. - Government securities yield curve steepened with long yields rising in recent weeks by about 50-100 bps. - Portfolio investment registered net outflows of about $1 billion in January. - Reserves fell by $2.8 billion to US$248 billion as of January 23, 2009 compared to end-December. ### Policy developments - Reserve Bank of India (RBI) decisions and outlook: - RBI kept monetary policy on hold at its quarterly policy meeting on January 27. - RBI cut its GDP growth forecast to 7 percent for 2008/09 (from the 7½-8 percent range announced at the last quarterly meeting). - RBI reduced its forecast for headline inflation (WPI) for end-March to below 3 percent (y/y), from 7 percent previously. - RBI noted CPI inflation has yet to moderate and that liquidity in the financial system is already ample; noted delays in transmission from policy to commercial bank rates. - RBI indicated desire to keep some measures in reserve and readiness to act if situation worsens. - RBI extended its facility for banks to onlend to mutual funds, non-bank financial corporations, and housing finance companies from June to September 2009. - Fuel price cuts: - On January 29, the government reduced prices of gasoline, diesel, and LPG by an average 8 percent. - Direct impact of these cuts on WPI inflation is estimated at about 0.4 percentage point. - At present gasoline and diesel prices are in line with international comparators; LPG and kerosene prices remain about 60 and 120 percent higher, respectively, than international prices. - Government stance on bailouts: - Government announced it will not bail out private companies; financial institutions (regulated) treated differently from private companies producing goods or services in competitive markets. *Source: _cr09187 - ANNEX V: INDIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK* ### 11. On January 23, 2009, the authorities announced a 6-month ban on imports of ### _cr09187 - 11. On January 23, 2009, the authorities announced a 6-month ban on imports of ### Background and growth outlook - After five years with average growth of 8¾ percent, India’s economy is slowing. - The Central Statistical Organization released advanced estimates for 2008/09 (April-March) real GDP growth of 7.1 percent (February 9, 2009). - Fund staff project: - 2008/09 growth to moderate to 6¼ percent. - 2009/10 growth to further slow to 5¼ percent. - Corporate investment—major recent growth driver—is expected to slow due to weakening profitability and confidence, and tightening financing conditions from foreign and nonbank sources. - Policy measures to stimulate the economy and a good harvest should support domestic demand. - The forecast uncertainty is unusually large, with significant downside risks; main upside risk is a larger-than-anticipated impact of already-implemented stimulus measures. ### Inflation outlook - Headline inflation (Wholesale Price Index) rose to nearly 13 percent (y/y) in August 2008 then dropped to 4.4 percent (y/y) at the end of January 2009. - With waning commodity prices and slackening demand, inflation is expected to fall to 3 percent (y/y) by March 2009 and to 2 percent on average in 2009/10. ### External sector and current account - The current account deficit is projected at about 3 percent of GDP in 2008/09, primarily due to a markedly higher oil import bill. - For 2009/10, the current account deficit is forecast to narrow to 1½ percent of GDP, reflecting lower oil prices and weaker domestic demand. - Capital flows and reserves: - After a record of 9.2 percent of GDP in 2007/08, capital inflows are expected to decline in 2008/09. - Until December 2008 portfolio investment recorded a US$11 billion outflow. - Reserves declined from a historic peak of US$315 billion in May 2008 to US$252 billion as of February 6, 2009, but remain adequate relative to gross financing requirements and imports. ### Exchange rate, markets, and financial conditions - In 2008: - The stock market index declined by over 50 percent. - The rupee depreciated 23 percent versus the U.S. dollar and 13 percent in nominal effective terms. - The real effective exchange rate depreciated by 10 percent and is in line with its equilibrium value. - In early 2009 the rupee and stock market stabilized somewhat. - Reserve Bank of India (RBI) policy measures included cutting policy rates, lowering the cash reserve ratio and the statutory liquidity ratio, and easing controls on capital inflows. - These measures eased domestic liquidity pressures and brought down interbank rates significantly. - However: - TED and commercial paper spreads remain elevated. - Commercial lending rates have fallen much less than policy rates, so real interest rates have actually increased in recent months. - Credit growth remains relatively high, partly reflecting a switch of corporate funding to banks. ### Financial system resilience and vulnerabilities - Banks appear well-capitalized, relatively liquid, and have low non-performing assets (NPA) ratios. - Increased foreign liabilities combined with rapid domestic credit expansion have raised banks’ vulnerability to global deleveraging and slower activity. - Consequences observed: bank share prices have fallen sharply; CDS spreads and default probabilities have risen. - Mutual funds faced significant redemptions in September 2008; other nonbank financial institutions face marked increases in borrowing costs. - Directors encouraged preventive actions: identification of potential bank re-capitalization needs; measures to promote early loss recognition, full disclosure of bad assets, and filling information gaps. - Directors urged continuation of reforms to deepen and strengthen the financial sector, develop the corporate bond market, and improve banking efficiency. ### Fiscal position and policy stance - Fiscal developments: - 2008/09 central government deficit projected at about 7 percent of GDP, including 1¼ percent of subsidy-related bond issuance. - General government deficit forecast to rise to nearly 10 percent of GDP. - Public debt remains elevated at about 80 percent of GDP. - 2009/10 interim budget (February 16, 2009) targets reducing the central government headline deficit by ½ percentage point of GDP. - Directors’ fiscal guidance: - Use limited fiscal space only for high-quality infrastructure, poverty-related spending, and bank recapitalization if needed. - Any further short-term stimulus should be combined with fiscal reforms to safeguard medium-term debt sustainability. - Take advantage of falling international fuel prices to move expeditiously with fuel subsidy reform while ensuring a well-targeted social safety net. - Medium-term fiscal consolidation remains a priority and should be anchored in a fiscal rules framework; authorities are considering a strengthened successor framework when the existing one expires in 2009-10. - New framework should be backed by comprehensive expenditure reforms and measures to broaden the tax base. ### Executive Board assessment and policy recommendations - Directors commended India’s strong recent performance and noted India confronts the crisis from a position of strength. - Agreed short-run policy objective: sustain liquidity and credit flows. - Monetary and structural policies should carry most of adjustment burden given high public debt-GDP ratio. - Directors welcomed RBI’s easing and many saw scope for further monetary easing given projected inflation decline and need to sustain bank credit; others preferred a wait-and-see stance due to uncertainty. - Directors supported flexible exchange rate policy to aid adjustment; stressed interventions should ensure sufficient domestic liquidity and conserve international reserves. - Some Directors cautioned against allowing the exchange rate to find a floor if depreciation pressures re-emerge, due to overshooting risk. - Directors supported gradual, cautious capital account liberalization to ease external financing constraints and welcomed commitment to trade liberalization. - Directors encouraged reforms to strengthen corporate governance and corporate restructuring frameworks to mitigate potential corporate distress and improve the investment climate. ### Key statistics and projections (as presented) - GDP growth (real, y/y percent change): - 2004/05: 7.5 - 2005/06: 9.4 - 2006/07: 9.6 - 2007/08: 9.0 - 2008/09: 6.3 - 2009/10 (Proj.): 5.3 - Wholesale prices (y/y percent change, period average): - 2004/05: 6.5 - 2005/06: 4.4 - 2006/07: 5.4 - 2007/08: 4.7 - 2008/09: 8.8 - 2009/10 (Proj.): 1.9 - Central government deficit (percent of GDP): - 2004/05: -4.1 - 2005/06: -4.7 - 2006/07: -4.4 - 2007/08: -3.4 - 2008/09: -7.1 - 2009/10 (Proj.): -5.7 - General government deficit (percent of GDP): - 2004/05: -7.3 - 2005/06: -7.3 - 2006/07: -6.3 - 2007/08: -5.8 - 2008/09: -9.9 - 2009/10 (Proj.): -8.8 - General government debt (percent of GDP): - 2004/05: 86.5 - 2005/06: 84.2 - 2006/07: 80.6 - 2007/08: 80.1 - 2008/09: 80.7 - 2009/10 (Proj.): 82.9 - Current account balance (US$ billions): - 2004/05: -2.5 - 2005/06: -9.9 - 2006/07: -9.6 - 2007/08: -17.0 - 2008/09: -35.1 - 2009/10 (Proj.): -18.6 - (In percent of GDP): 2008/09: -3.0; 2009/10 (Proj.): -1.5 - Merchandise exports (US$ billions): - 2004/05: 85.2 - 2005/06: 105.2 - 2006/07: 128.9 - 2007/08: 166.2 - 2008/09: 186.4 - 2009/10 (Proj.): 169.0 - Merchandise imports (US$ billions): - 2004/05: 118.9 - 2005/06: 157.1 - 2006/07: 190.7 - 2007/08: 257.8 - 2008/09: 298.0 - 2009/10 (Proj.): 265.5 - Net oil imports (US$ billions): - 2004/05: 22.9 - 2005/06: 32.3 - 2006/07: 38.3 - 2007/08: 52.2 - 2008/09: 60.0 - 2009/10 (Proj.): 38.6 - Gross reserves (US$ billions, end-period): - 2004/05: 141.5 - 2005/06: 151.6 - 2006/07: 199.2 - 2007/08: 309.7 - 2008/09: 246.8 - 2009/10 (Proj.): 243.5 - Ratio of gross reserves to short-term debt (end-period): - 2004/05: 4.4 - 2005/06: 5.6 - 2006/07: 5.7 - 2007/08: 3.6 - 2008/09: 2.8 - 2009/10 (Proj.): 2.4 - Memorandum: Subsidy related bond issuance (percent of GDP): - 2004/05: 0.0 - 2005/06: 0.5 - 2006/07: 1.0 - 2007/08: 0.6 - 2008/09: 1.3 - 2009/10 (Proj.): 0.3 *Statement by Adarsh Kishore, Executive Director for India, Michael D. Patra, Senior Advisor to Executive Director and Partha Ray, Advisor to Executive Director; IMF Executive Board concluded the 2008 Article IV consultation with India on February 6, 2009.* ### 1. The set of staff papers gives an assessment of the outlook for the Indian economy and ### 1. The set of staff papers gives an assessment of the outlook for the Indian economy and ### The Real Economy and the Outlook for Growth - India has moved closer to its potential growth, "clocking 8.8 per cent per annum on average over the last five years." - Recent growth has been driven largely by domestic consumption and investment, even as the share of net exports rose. - Economy is not immune to the global crisis; outlook is "overcast by heightened uncertainty." - Authorities emphasize positive features that act as built-in stabilizers and reject the idea of decoupling. - Authorities expect real GDP during 2008-09 to grow at 7.0 per cent, "with a downward bias." - Medium-term consensus: fundamentals are strong (demographic dividend, institutional infrastructure, domestic demand, entrepreneurial spirit, rise in productivity, untapped growth potential) and will return India to high growth once global recovery begins. ### Lead Indicators - Agricultural production in 2008-09 may be "close to or better than last year’s record production." - Industrial production slowed but was "still growing at close to 4 per cent on a year-on-year basis up to November 2008." - Factors likely to support industrial production: sustained agricultural performance, fiscal stimulus, falling global crude oil prices, softening domestic input prices of energy, cement and steel. - Services activity is moderating but expected to regain momentum; sub-sectors such as railway freight traffic and communication have begun to pick up. ### Corporate Sector - Corporate sector entered the crisis from a stronger position compared with earlier downturns due to restructuring, FDI, liberalized imports, and competitive orientation since 2003. - Post-tax profit growth was in the range of 20-40 per cent from the second half of 2002-03 up to March 2008; subsequent moderation is viewed as cyclical. - Downside risk to profitability increased, but could be partially offset by falling input prices and gradual reduction in borrowing costs. - Improvements in industrial production could lift corporate performance. ### Monetary Policy - Monetary stance shifted during 2008-09 from fighting inflation to addressing global financial crisis and downturn. - Second-phase objectives: ensure orderly domestic financial markets, prevent liquidity from becoming binding constraint, keep credit flowing to productive sectors, preserve financial stability and confidence, and maintain intermediation capacity. - Authorities largely succeeded in these objectives. ### Credit and Banking Indicators - Non-food bank credit growth (yoy) was 23.1 percent as on January 16, 2009, higher than 22.1 percent as on January 18, 2008. - Total flow of resources to commercial sector during 2008-09 so far (till January 2, 2009): Rs. 4847 billion this year as against Rs. 4995 billion last year. - Companies’ recourse to internal accruals helped bridge the gap. - Credit expansion varied across bank groups: foreign and private sector banks saw significantly lower expansion than a year ago; public sector banks more than compensated by expanding credit. ### Policy Measures (liquidity, rates, FX) - Liquidity support measures amounted to the order of 7 per cent of GDP; authorities stand ready to do more if warranted. - In January 2009 a special purpose vehicle (SPV) was set up for addressing temporary liquidity constraints of systemically important non-deposit taking non-banking financial companies. - Policy rates (repo and reverse repo under the LAF) have been cut by 350 basis points and 200 basis points respectively to historically lowest levels, accompanied by forex intervention. - Collateral quality standards were maintained by the Reserve Bank. - Forex measures included: Reserve Bank reassurance to meet forex demand-supply gaps; introduction of a forex swap facility (tenor up to three months) for Indian banks with overseas branches/subsidiaries; allowing banks to borrow under LAF for corresponding tenor at prevailing repo rate for swap funding; upward adjustment of interest rate ceilings on deposits of non-resident Indians; substantial relaxation of external commercial borrowing regime; allowing NBFCs / housing finance companies access to foreign borrowing; allowing corporates to buy back foreign currency borrowing. ### Market Outcomes of Policy - Measures restored normalcy in money and credit markets swiftly. - Bank deposit and lending rates, which firmed up up to October 2008, started easing from November 2008. - Authorities are mindful of the risk of getting locked into a liquidity trap and caution that further interest rate reductions may not be in the long-term interest of monetary policy effectiveness or growth aspirations. ### Financial Sector Issues - Soundness of the financial sector is a strength, supported by nearly two decades of calibrated reforms and adoption of global standards alongside country-specific norms. - Low exposure to structured products and complex derivatives has helped preserve system soundness. - Counter-cyclical prudential measures taken earlier (increase in risk weights and provisioning) have been scaled back consistent with dynamic provisioning. - Early detection tools have guided swift corrective actions to ease liquidity/funding stress and correct duration and asset-liability mismatches (e.g., NBFCs and mutual funds). - Authorities announced plans to recapitalize banks and stand ready for further measures if asset quality deteriorates. ### Development of Corporate Bond Market - Development is conditional on demand- and supply-side reforms. - Demand-side: pension reforms (institutional investor base) are awaiting legislative approval. - Supply-side: introduction of repo in corporate bonds recommended to enhance market liquidity; Reserve Bank indicated repos in corporate bonds would require greater public issuances and secondary market trading. - Further deepening of government securities market is vital for corporate bond market development. - Limit on Foreign Institutional Investment in corporate debt instruments has been raised recently to US $ 15 billion; limit not fully used by FIIs. ### External Sector - India’s modest current account deficit has not been contributing to global imbalances; external debt is sustainable and low. - India’s CAD widened in first half of 2008-09 ($ 22.3 billion), episodically reflecting high oil and commodity prices; private transfers and software export earnings were sustained. - Net capital flows declined amid global risk aversion, turning overall BoP marginally negative in first half of 2008-09 but comfortably financed by drawing from large international reserves. - Import growth moderated during October-November 2008 reflecting fall in international oil prices; imports expected to slow faster than exports going forward. - Portfolio outflows moderated with intermittent inflows in December 2008 and January 2009; accretion to non-residents deposits bolstering capital account. - Foreign direct investment is higher than a year ago; prospects for further pick-up in 2009 if global financial stability is restored. - Net capital flows were positive in 2008 largely financing the CAD and expected to continue in 2009. - Forex reserves held at October 2008 level with "ample cover for imports / debt-service payment for a full year." - Authorities recognize BoP risks in 2009-10 from weaker export growth and subdued capital flows; global recovery and improvement in world trade would ease external sector pressure. ### Exchange Rate - Rupee appreciated against major currencies in 2007-08 due to large capital inflows; depreciated during September and October 2008 amid extraordinary international developments and FII portfolio outflows; remained range-bound since November 2008. - Exchange rate movements described as self-equilibrating under current regime; exchange rate remains "fairly valued giving a fillip to competitiveness." - Authorities committed to managing volatility without defending any level of the exchange rate. ### Approach to Capital Account Liberalization - Authorities view capital account liberalization as a process; substantial progress made but full liberalization not supported by global evidence. - Policy follows a hierarchy: foreign investment flows largely liberalized except in strategic sectors; more prudent approach for debt-creating flows due to vulnerability from volatile, short-term, foreign-currency denominated debt. - Policy instruments retained to regulate capital flows in line with economy’s absorptive capacity and preparedness of financial markets/intermediaries. ### Fiscal Policy - Agreement with staff that fiscal position has deteriorated and is weaker than initially anticipated. - Cyclically induced discretionary fiscal measures (surge in inflation response and subsequent fiscal stimulus) account for erosion in Central public finances. - If global downturn becomes deeper/protracted (as in January 2009 WEO update), fiscal burden could increase and diffuse across general government. - Significant downside risks: possible private-sector and public-sector financial crowding out hindering recovery; limited room for fiscal maneuver given a general government deficit of close to 10 per cent of GDP and a public debt of nearly 77 per cent of GDP. - Authorities committed to deepening and broadening fiscal reforms: improving tax buoyancy, expenditure containment and targeting, and rule-based deficit management as embodied in the Fiscal Responsibility and Budget Management Act, 2003. - Public debt has "virtually no external component." ### Market Sensitivity and Staff Assessment - Authorities view staff’s outlook as driven by model-based scenarios of unlikely catastrophic risks coming together; robustness of methodology questioned. - Concern that alarmist analyses from the Fund during heightened uncertainty could risk triggering further financial instability. - Suggestion that careful review be made of what portions of such analyses are placed in the public domain and that methodologies be applied evenhandedly across countries and regions. ### Epilogue - The unprecedented global crisis warrants unconventional policy responses to address "unknown unknowns." - Authorities will "continue to maintain vigil, monitor domestic and global developments and take swift and effective action to minimize the impact of the crisis and restore the economy to its potential growth path." *IMF staff/authorities assessment as presented in the supplied content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09187.pdf_