## 1. Millennium Development Goals, 1990-2007 ## Source details **Canonical URL:** [1. Millennium Development Goals, 1990-2007](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1073.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1073.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1073.pdf.json) --- ### Staff appraisal and summary: key findings - India’s economy is rebounding strongly ahead of most countries; growth is approaching pre-crisis levels and leading indicators bode well for continued recovery. - Capital inflows are rising and financial markets have regained most of the lost ground. - Inflation pressures are intensifying and the fiscal position is one of the weakest among major emerging markets. - Exit from accommodative policies should start with: - a normalization of the monetary stance: conditions are ripe for a gradual withdrawal of monetary accommodation to anchor inflation expectations; more extended guidance from the Reserve Bank of India (RBI) on future inflation should also help; rupee appreciation should be the first response to capital inflows; other policy options, especially prudential measures, may be appropriate if asset price bubbles are a threat; tightening capital controls should be a last resort given the need to deepen domestic capital markets. - a reduction in the 2010/11 budget deficit: with the recovery becoming entrenched and India’s high debt, the risk of premature withdrawal of fiscal stimulus is low; introducing reforms to underpin lasting consolidation will be of paramount importance. - Medium-term outlook: real GDP growth is projected to return to 8 percent in 2010/11 with near-term risks broadly balanced; sustaining rapid long-term growth requires addressing structural bottlenecks—notably infrastructure, land acquisition, education, and judicial reforms. ### Medium-term macroeconomic framework (selected projections and levels) - Real sector (percent change): - Real GDP growth: 2007/08 9.0; 2008/09 6.7; 2009/10 6.7; 2010/11 8.0; 2011/12 7.7; 2012/13 7.8; 2013/14 8.1; 2014/15 8.1 - Real GDP growth, agriculture: 2007/08 4.9; 2008/09 1.6; 2009/10 -0.6; 2010/11 4.7; 2011/12 2.7; 2012/13 2.7; 2013/14 2.7; 2014/15 2.7 - Real GDP growth, nonagriculture: 2007/08 9.9; 2008/09 7.8; 2009/10 8.2; 2010/11 8.6; 2011/12 8.6; 2012/13 8.7; 2013/14 8.9; 2014/15 8.9 - Inflation: - period average: 2007/08 4.6; 2008/09 8.3; 2009/10 3.1; 2010/11 6.4; 2011/12 4.6; 2012/13 4.0; 2013/14 4.0; 2014/15 4.0 - end of period: 2007/08 7.7; 2008/09 0.8; 2009/10 8.1; 2010/11 5.4; 2011/12 4.0; 2012/13 4.0; 2013/14 4.0; 2014/15 4.0 - Saving and investment (in percent of GDP): - Gross domestic investment: 2007/08 39.1; 2008/09 40.0; 2009/10 39.2; 2010/11 40.3; 2011/12 41.1; 2012/13 41.9; 2013/14 42.9; 2014/15 43.9 - Gross national saving: 2007/08 37.6; 2008/09 37.4; 2009/10 37.4; 2010/11 38.2; 2011/12 39.3; 2012/13 40.2; 2013/14 41.1; 2014/15 42.3 - Current account (in percent of GDP): 2007/08 -1.3; 2008/09 -2.5; 2009/10 -1.9; 2010/11 -2.1; 2011/12 -1.8; 2012/13 -1.8; 2013/14 -1.8; 2014/15 -1.8 - Source for table: IMF staff estimates. ### Context: recovery, drivers, and near-term risks - Recovery drivers: - Prompt fiscal and monetary easing, fiscal stimulus, and return of risk appetite. - Private consumption supported by improved employment prospects in industry and services. - Investment bolstered by robust corporate profits, rising business confidence, and favorable financing conditions. - Near-term risks: - Upside: acceleration of reforms and capital inflows could spur investment. - Downside: elevated inflation and financing constraints arising from the fiscal deficit, which could stall the recovery. - Tail risks: asset price bubbles and a sudden stop in capital inflows caused by turmoil in global financial markets. - Agriculture: likely to contract by about 1 percent in 2009/10 due to drought; nonagriculture expected to strengthen. ### Authorities’ views (summarized) - Authorities see recovery well underway and project 2009/10 growth at 7-7.75 percent; Prime Minister anticipated growth at over 7 percent for 2010/11. - Authorities concerned about rising food inflation; RBI expects year-end WPI inflation of 6.5 percent with an upward bias by March 2010 and views much of the increase as supply-side linked to food prices. - Authorities view weaknesses in advanced economies, commodity price rises, and likely large capital inflows as main near-term risks. - Medium Term Fiscal Policy Statement envisages resumption of fiscal consolidation to minimize crowding out risk. ### Policies: exit strategy and key reforms - Immediate trade-offs: headline (WPI) inflation running at 10 percent sequentially, double-digit fiscal deficit, and high public debt require balancing monetary tightening and fiscal consolidation while ensuring private demand broadens to sustain growth. - Two reform priorities: - financial reform to facilitate infrastructure and investment; - fiscal reforms to free resources for public and private investment and increase efficiency of public spending. - Other structural priorities: land acquisition, education, and judicial reforms. ### Monetary and exchange rate policy: recommendations and rationale - RBI actions to date: eliminated some unconventional crisis financing facilities; re-introduced caps on cost of external borrowing; signaled intention to return to neutral monetary stance; reversed statutory liquidity ratio cut; raised provisioning requirements on commercial real estate. - Conditions ripe for normalization: - Inflation: CPI inflation in low double digits for over a year; WPI risen fast; core inflation has risen rapidly; March 2010 WPI inflation projected at 8 percent y/y with commodity prices as main risk. - Activity: PMIs for manufacturing and services expansionary since April-May 2009; employment component above neutral; nonagricultural output growth projected at around 9 percent y/y for the rest of the current fiscal year. - Recommended approach: - Withdrawal of monetary stimulus should be gradual but start soon; reduce degree of accommodation in small steps. - Sequester most excess liquidity (which averaged Rs1.1 trillion in April-December 2009) through increases in the cash reserve ratio to strengthen monetary transmission. - RBI could provide its one-year ahead inflation projection in every quarterly review to guide inflation expectations. - Rupee appreciation recommended to contain inflation, allow RBI to keep interest rates low for longer, and help manage capital inflows—rupee still below its 2008 peak, so room for appreciation without eroding competitiveness. - Sterilized intervention is costly and may encourage further inflows; prudential measures could dampen incipient asset price bubbles; capital controls should be a last resort. ### Modeling evidence (DSGE model, Appendix 6) - DSGE model features: - Dynamic stochastic general equilibrium model with macrofinancial linkages estimated with Bayesian techniques on ten key macro variables (1996–2008). - Incorporates financial accelerator and domestic/foreign currency borrowing by firms. - Monetary policy reaction function (estimated): - A 1 percent depreciation of the nominal exchange rate causes short-term interest rates to rise by 100 bps. - A 1 percentage point increase in inflation leads to a 90 bps increase in rates. - Contribution to output volatility: - Domestic demand shocks: about 30 percent. - Supply shocks: about 30 percent. - Financial shocks: 25 percent. - Foreign demand shocks: 14 percent. ### Financial system soundness and risks (summary) - Authorities’ view: system “appears sound” despite some recent deterioration in asset quality. - FSIs and stress tests: - Capital of the top 30 banks would remain above the regulatory minimum if NPAs double to 5 percent. - Only some smaller banks would need more capital if NPAs triple. - Net nonperforming loans (percent of outstanding net loans): 1.9, 1.2, 1.0, 1.1, 1.1 (selected years). - Gross nonperforming loans (percent of outstanding loans): 5.2, 3.3, 2.5, 2.4, 2.4 (selected years). - Key risks and mitigants: - Credit remains the key risk. - Authorities started strengthening public banks’ capital and financial regulation following FSB guidelines. - Recommendation: multi-factor stress tests and an independent evaluation of compliance with international standards. - RBI’s new Financial Stability Unit expected to integrate micro- and macro-prudential surveillance. - RBI planned/announced actions: - Issue guidelines to banks on enhanced stress testing by end-January 2010. - Enhance management of liquidity and interest rate risks. - Raised provisioning requirement for advances to the commercial real estate sector. - Advised banks to raise total provisioning ratio, including floating provisions, to a minimum of 70 per cent by September 2010. - Proposed minimum lock-in period of one year and minimum retention of 10 percent for securitized bank loans. ### Infrastructure financing needs, constraints, and reforms - Context: - Eleventh Five Year Plan (2007-12): sustaining 9 percent growth requires increasing infrastructure investment from around 5 percent of GDP to 9 percent of GDP by 2012. - India’s savings are relatively high (about 35 percent of GDP) but about a third is in physical assets. - Constraints on bank financing: - Banks face maturity mismatches and prudential exposure limits limiting further infrastructure lending. - Financial instruments—long-term bonds, takeout financing, securitization, and credit enhancements—are limited. - Policy/market developments: - Planned introduction of a takeout financing scheme by IIFCL and reduction in capital requirements for this instrument. - Measures to give greater flexibility to certain pension funds. - RBI guidelines on CDS and repos with corporate bonds; introduction/re-launch of interest rate and currency futures. - RBI planning to introduce plain vanilla OTC single-name CDS for corporate bonds subject to safeguards and repos of corporate bonds. - Institutional recommendations: - Secretariat to the cabinet committee on infrastructure could be assisted by a multi-disciplinary team to address financing bottlenecks. - Public institutions should be mainly catalytic to leverage private financing; monitor and manage public sector risks from such interventions. ### Corporate bond market development: impediments and policy options - Structural impediments: - Limited investor base and investment restrictions. - Absence of a benchmark yield curve. - Inadequate credit enhancement and hedging tools. - Role of domestic institutional investors: - Growing institutional investors (pension, insurance) are key to market development. - Passage of insurance and PFRDA bills expected to encourage growth. - Need to address captive roles of institutional investors in government financing and ease investment restrictions. - Role of foreign participation: - Greater foreign participation lowers yields; staff study finds no clear evidence that volatility increases. - Policy options: merge FII limits for corporate and government bonds and liberalize allocation mechanisms. - Authorities concerned merging FII limits could increase volatility. ### Distressed assets and insolvency framework - Policy measures to boost market for distressed assets: - Improve insolvency framework for non-bank finance companies. - Ease restrictions on investment in asset reconstruction companies. - Passage of the new Companies Bill would strengthen insolvency framework. ### Fiscal policy: consolidation, targets, and reforms - 2009/10 stance and outcomes: - 2008/09 general government deficit estimated at 11 percent of GDP; 2009/10 likely to end with a broadly unchanged balance. - Central government reoriented lower subsidy bill savings (about 2 percent of GDP) to social programs and infrastructure. - Tax revenue subdued reflecting indirect tax cuts. - States’ deficits likely to widen. - Authorities’ fiscal consolidation targets: - Reduce center’s deficit from a projected 7 percent of GDP in 2009/10 to 5.5 percent of GDP in 2010/11 and further to 4 percent of GDP in 2011/12. - Staff recommendation: - Adopt a medium-term fiscal framework anchored in an explicit debt target complemented by expenditure rules. - Suggested debt target: 60-65 percent of GDP by 2015/16 from 78 percent in 2008/09. - Use expenditure ceilings derived from an over-the-cycle deficit consistent with the debt target. - Role of reforms: - Subsidy reform critical to durable deficit reduction; planned revenue reforms (Direct Tax Code, GST) will contribute. - Draft Direct Tax Code would broaden the tax base while lowering rates. - GST will streamline indirect taxes; GST not likely by April 2010. - Faster privatization could provide one-off resources but cannot substitute for adjustment. - Fiscal projections and indicators (selected): - Central government deficit (percent of GDP): -4.6; -4.4; -3.3; -8.0; -7.5; -6.1 (selected years). - General government deficit (percent of GDP): -7.2; -6.3; -4.7; -11.0; -11.1; -9.4 (selected years). - General government debt: 84.0; 80.8; 78.3; 78.2; 80.7; 80.6 (selected years). - Public sector debt: 2008/09 = 78.2 percent of GDP; 2009/10 = 81.7 percent of GDP; 2014/15 = 72.3 percent of GDP (staff baseline and projections). - Primary balance (percent of GDP): -0.4; 0.2; 0.9; 0.9; -2.6; -3.0; -3.4 (selected years). ### Millennium Development Goals: selected indicators (1990–2007) - Malnutrition prevalence, weight for age (% of children under 5): 44.4, 43.5 - Poverty headcount ratio at national poverty line (% of population): 36.0, 28.6, 27.5 - Prevalence of undernourishment (% of population): 24.0, 21.0 - Literacy rate, youth total (% of people ages 15-24): 61.9, 76.4 - Primary completion rate, total (% of relevant age group): 63.8, 74.3, 69.7, 72.4, 83.8, 85.7 - Immunization, measles (% of children ages 12-23 months): 56.0, 72.0, 51.0, 55.0, 61.0, 64.0, 67.0 - Mortality rate, infant (per 1,000 live births): 80.0, 74.0, 72.0, 66.0, 57.7 - Improved sanitation facilities (% of population with access): 14.0, 23.0, 28.0 - Improved water source (% of population with access): 71.0, 77.0, 82.0, 89.0 - GNI per capita, Atlas method (current US$): 370.0, 380.0, 420.0, 460.0, 630.0, 820.0, 950.0 - Population, total (millions): 849.5, 932.2, 982.2, 1,032.5, 1,079.7, 1,109.8, 1,124.8 - Source for these indicators: "World Development Indicators database, November 2009." ### External sector and debt sustainability (Annex II highlights) - Baseline external debt (percent of GDP): 2004/05 19.0; 2005/06 17.0; 2006/07 18.8; 2007/08 19.2; 2008/09 19.5; 2009/10 19.1; 2010/11 19.6; 2011/12 20.3; 2012/13 20.9; 2013/14 21.6; 2014/15 22.5 - Gross external financing need (US$ billions): 2004/05 34.6; 2005/06 65.9; 2006/07 62.6; 2007/08 82.3; 2008/09 116.8; 2009/10 111.9; 2010/11 127.7; 2011/12 141.2; 2012/13 162.4; 2013/14 185.1; 2014/15 208.3 - Identified external debt-creating flows (percent of GDP): 2004/05 -4.1; 2005/06 -3.2; 2006/07 -2.5; 2007/08 -6.2; 2008/09 1.1; 2009/10 -2.5; 2010/11 -1.9; 2011/12 -2.1; 2012/13 -2.3; 2013/14 -2.7; 2014/15 -2.8 - Key macro assumptions (selected): - Real GDP growth at market prices (percent): 2004/05 8.3; 2005/06 9.3; 2006/07 9.7; 2007/08 9.1; 2008/09 6.1; 2009/10 6.3; 2010/11 8.0; 2011/12 7.7; 2012/13 7.8; 2013/14 8.1; 2014/15 8.1 - Current account balance, excluding interest payments (percent of GDP): 2004/05 0.3; 2005/06 -0.6; 2006/07 -0.4; 2007/08 -0.8; 2008/09 -1.8; 2009/10 -1.4; 2010/11 -1.6; 2011/12 -0.9; 2012/13 -0.7; 2013/14 -0.6; 2014/15 -0.7 ### Statistical and data issues (selected) - India subscribes to SDDS (since December 27, 1996); uses flexibility options for timeliness of general government and labor market data. - National accounts: CSO reduced quarterly release lag from three to two months; new national accounts base year 1999–2000 released February 2006. - Price statistics: multiple CPIs with old weights; WPI (1993/94=100) published weekly with lag and subject to revisions. - External sector: balance of payments broadly in line with BPM5 but RBI presentation does not strictly follow BPM5; trade data have valuation and coverage issues. - Fiscal data: MoF posts selected central government monthly fiscal data; no monthly state-level fiscal data; classification issues (developmental/nondevelopmental, plan/nonplan) obscure economic impact. *Source: IMF staff appraisal and related chapters and annexes contained in the chapter "1. Millennium Development Goals, 1990-2007."* ### 1. Millennium Development Goals, 1990-2007 ............................................................................ ### 1. Millennium Development Goals, 1990-2007 ### Staff appraisal and summary: key findings - India’s economy is rebounding strongly ahead of most countries; growth is approaching pre-crisis levels and leading indicators bode well for continued recovery. - Capital inflows are rising and financial markets have regained most of the lost ground. - Inflation pressures are intensifying and the fiscal position is one of the weakest among major emerging markets. - Exit from accommodative policies should start with: - a normalization of the monetary stance: conditions are ripe for a gradual withdrawal of monetary accommodation to anchor inflation expectations; more extended guidance from the Reserve Bank of India (RBI) on future inflation should also help; rupee appreciation should be the first response to capital inflows; other policy options, especially prudential measures, may be appropriate if asset price bubbles are a threat; tightening capital controls should be a last resort given the need to deepen domestic capital markets. - a reduction in the 2010/11 budget deficit: with the recovery becoming entrenched and India’s high debt, the risk of premature withdrawal of fiscal stimulus is low; introducing reforms to underpin lasting consolidation will be of paramount importance. - Medium-term outlook: real GDP growth is projected to return to 8 percent in 2010/11 with near-term risks broadly balanced; sustaining rapid long-term growth requires addressing structural bottlenecks—notably infrastructure, land acquisition, education, and judicial reforms. ### Medium-term macroeconomic framework (selected projections and levels) - Real sector (percent change): - Real GDP growth: 2007/08 9.0; 2008/09 6.7; 2009/10 6.7; 2010/11 8.0; 2011/12 7.7; 2012/13 7.8; 2013/14 8.1; 2014/15 8.1 - Real GDP growth, agriculture: 2007/08 4.9; 2008/09 1.6; 2009/10 -0.6; 2010/11 4.7; 2011/12 2.7; 2012/13 2.7; 2013/14 2.7; 2014/15 2.7 - Real GDP growth, nonagriculture: 2007/08 9.9; 2008/09 7.8; 2009/10 8.2; 2010/11 8.6; 2011/12 8.6; 2012/13 8.7; 2013/14 8.9; 2014/15 8.9 - Inflation: - period average: 2007/08 4.6; 2008/09 8.3; 2009/10 3.1; 2010/11 6.4; 2011/12 4.6; 2012/13 4.0; 2013/14 4.0; 2014/15 4.0 - end of period: 2007/08 7.7; 2008/09 0.8; 2009/10 8.1; 2010/11 5.4; 2011/12 4.0; 2012/13 4.0; 2013/14 4.0; 2014/15 4.0 - Saving and investment (in percent of GDP): - Gross domestic investment: 2007/08 39.1; 2008/09 40.0; 2009/10 39.2; 2010/11 40.3; 2011/12 41.1; 2012/13 41.9; 2013/14 42.9; 2014/15 43.9 - Gross national saving: 2007/08 37.6; 2008/09 37.4; 2009/10 37.4; 2010/11 38.2; 2011/12 39.3; 2012/13 40.2; 2013/14 41.1; 2014/15 42.3 - Current account (in percent of GDP): 2007/08 -1.3; 2008/09 -2.5; 2009/10 -1.9; 2010/11 -2.1; 2011/12 -1.8; 2012/13 -1.8; 2013/14 -1.8; 2014/15 -1.8 - Source for table: IMF staff estimates. ### Context: recovery and near-term risks - India among the first to recover after the global crisis due to prompt fiscal and monetary easing, fiscal stimulus in pipeline, and return of risk appetite. - Growth projection summary: rise from 6¾ percent in 2009/10 to 8 percent in 2010/11. Agriculture likely to contract by about 1 percent in 2009/10 due to drought; nonagricultural GDP growth expected to gather momentum. - Drivers: private consumption to benefit from better employment prospects in industry and services and less uncertainty; investment boosted by robust corporate profits, rising business confidence, and favorable financing conditions. - Near-term risks: - Upside: acceleration of reforms and capital inflows could spur investment. - Downside: elevated inflation and financing constraints arising from the fiscal deficit, which could stall the recovery. - Tail risks: asset price bubbles and a sudden stop in capital inflows caused by turmoil in global financial markets. ### Authorities’ views (summarized) - Authorities see recovery well underway and project 2009/10 growth at 7-7.75 percent; Prime Minister anticipated growth at over 7 percent for 2010/11. - Authorities concerned about rising food inflation; RBI expects year-end WPI inflation of 6.5 percent with an upward bias by March 2010 and views much of the increase as supply-side linked to food prices. - Authorities view weaknesses in advanced economies, commodity price rises, and likely large capital inflows as main near-term risks. - Authorities indicate government borrowing levels have been managed without crowding out private sector so far; Medium Term Fiscal Policy Statement envisages resumption of fiscal consolidation to minimize crowding out risk. ### Policies: exit strategy and key reforms - Immediate policy trade-offs: headline (WPI) inflation running at 10 percent sequentially, double-digit fiscal deficit, and high public debt require balancing monetary tightening and fiscal consolidation while ensuring private demand broadens to sustain growth. - Two reform priorities: - financial reform to facilitate infrastructure and investment; - fiscal reforms to free resources for public and private investment and increase efficiency of public spending. - Other structural priorities: land acquisition, education, and judicial reforms. ### Monetary and exchange rate policy: recommendations and rationale - RBI actions to date: eliminated some unconventional crisis financing facilities; re-introduced caps on cost of external borrowing; signaled intention to return to neutral monetary stance; reversed statutory liquidity ratio cut; raised provisioning requirements on commercial real estate. - Conditions ripe for normalization of monetary stance: - Inflation: CPI inflation in low double digits for over a year; WPI risen fast; core inflation has risen rapidly; March 2010 WPI inflation projected at 8 percent y/y with commodity prices as main risk. - Activity: PMIs for manufacturing and services expansionary since April-May 2009; employment component above neutral; nonagricultural output growth projected at around 9 percent y/y for the rest of the current fiscal year; corporate issuance in capital markets increased substantially from low levels; credit growth is weak but may lag the recovery. - Recommended approach: - Withdrawal of monetary stimulus should be gradual but start soon; reduce degree of accommodation in small steps. - Initial steps could include sequestering most of the excess liquidity (which averaged Rs1.1 trillion in April-December 2009) through increases in the cash reserve ratio to strengthen monetary transmission. - RBI could provide its one-year ahead inflation projection in every quarterly review to guide inflation expectations. - Rupee appreciation recommended to contain inflation, allow RBI to keep interest rates low for longer, and help manage capital inflows—rupee still below its 2008 peak, so room for appreciation without eroding competitiveness. - Sterilized intervention is costly and may encourage further inflows; prudential measures could dampen incipient asset price bubbles; capital controls should be a last resort. - Modeling evidence: - A DSGE model estimated for India (see Appendix 6) indicates macroeconomic volatility would be reduced by responding more to inflation relative to the exchange rate. ### Authorities’ approach described - RBI has started exiting crisis measures and is shifting toward a more neutral monetary stance; acknowledges monetary policy cannot affect food prices, so sequencing exit to support recovery while anchoring inflation expectations is appropriate. - Exchange rate policy is largely market determined; interventions aim to reduce excessive volatility rather than manage level; authorities note appreciation would have limited impact on food prices due to limited tradability of key items. - RBI will adopt a range of measures to manage capital inflows as needed; inflows currently in line with absorptive capacity; policy options on debt flows remain a usable tool; macro-prudential measures are seen as appropriate to address incipient asset price bubbles. *Source: IMF staff appraisal and summary as contained in the chapter "1. Millennium Development Goals, 1990-2007."* ### 22. Based on the authorities’ self assessment, ### _cr1073 - 22. Based on the authorities’ self assessment, ### Financial system soundness and risks - India’s financial system “appears sound,” despite some recent deterioration in asset quality (see Appendix 7). - Financial soundness indicators compare well internationally, except for provision coverage (the RBI recently raised the requirement). - Comparison of nonperforming assets (NPAs) is complicated by forbearance; about 3 percent of loans were rescheduled since October 2008. - Staff stress-test findings: - Capital of the top 30 banks would remain above the regulatory minimum in a scenario in which NPAs double to 5 percent. - Only some smaller banks would need more capital in a more extreme scenario in which NPAs triple. - Key risks and mitigants: - Credit remains the key risk. - Authorities started strengthening public banks’ capital and financial regulation following Financial Stability Board (FSB) guidelines (liquidity risk monitoring and disclosure of off-balance sheet exposures). - Recommendation: multi-factor stress tests and an independent evaluation of compliance with international standards. - The RBI’s new Financial Stability Unit should help integrate micro- and macro-prudential surveillance. - RBI actions (as planned or announced): - Issue guidelines to banks on enhanced stress testing by end-January 2010. - Enhance management of liquidity and interest rate risks. - Raised provisioning requirement for advances to the commercial real estate sector. - Advised banks to raise total provisioning ratio, including floating provisions, to a minimum of 70 per cent by September 2010. - Proposed minimum lock-in period of one year and minimum retention of 10 percent for bank loans that are securitized. ### Infrastructure financing needs and constraints - As infrastructure investment takes off, priority is to ensure the domestic financial system keeps pace (see Appendix 8). - Savings and intermediation: - India’s savings are relatively high, but about a third is in physical assets. - Deepening the financial system and improving intermediation efficiency is critical. - Constraints on bank financing for infrastructure: - Increases in banks’ infrastructure exposure constrained by maturity mismatches and prudential exposure limits. - Financial instruments typically used in infrastructure funding—long-term bonds, takeout financing, securitization, and credit enhancements—are limited. - Policy and market instrument developments: - Planned introduction of a takeout financing scheme by India Infrastructure Finance Corporation Limited (IIFCL) and reduction in capital requirements for this instrument. - Measures to give greater flexibility to certain pension funds in their investments. - RBI guidelines on CDS and repos with corporate bonds. - Introduction/re-launch of interest rate and currency futures expands market risk management tools. - RBI planning to introduce plain vanilla OTC single-name CDS for corporate bonds subject to safeguards and repos of corporate bonds. - Stock exchanges now permitted to offer currency futures in Rupee-Euro, Rupee-Pound Sterling, Rupee-Japanese Yen (in addition to Rupee-US dollar); IRFs on 10-year government bonds re-launched in August 2009. ### Corporate bond market development: investors, foreign participation, and instruments - Structural impediments to corporate bond market growth: - Limited investor base and investment restrictions. - Absence of a benchmark yield curve. - Inadequate credit enhancement and hedging tools. - Role of domestic institutional investors: - Domestic institutional investors hold the key to corporate bond market development. - Institutional investors are growing rapidly; passage of the insurance and Pension Fund Regulatory and Development Authority bills would encourage further growth. - Need to address their role as captive sources for government financing and ease investment restrictions. - Increase supply of high grade bonds, including via suitable credit enhancements. - Role of foreign participation: - Foreign participation is vital to enhance liquidity. - Staff study: greater foreign participation lowers yields, with no clear evidence that volatility increases (see Appendix 9). - Policy options: merge FII limits for corporate and government bonds and liberalize allocation mechanisms to encourage foreign participation. - Foreign participation should help develop the sovereign yield curve, facilitating corporate debt pricing. - Additional consideration: - Liberalizing external borrowing for refinancing of infrastructure loans could attract foreign capital into infrastructure and free domestic resources. ### Public institutions and market gap filling - Institutional framework recommendations: - Secretariat to the cabinet committee on infrastructure (chaired by the Prime Minister) could be assisted by a multi-disciplinary team empowered to address infrastructure financing challenges. - This team would identify bottlenecks and coordinate relevant policymakers to create a modern framework for infrastructure financing, mindful of financial stability. - Catalytic role of public institutions: - Public institutions should be mainly catalytic to leverage private financing given large infrastructure needs. - IIFCL’s planned provision of takeout finance and credit enhancements is encouraging; other specialized public institutions could play similar roles. - Risks incurred by the public sector must be carefully monitored and managed. ### Distressed assets and insolvency framework - Need to boost market for distressed assets by: - Further improving insolvency framework for non-bank finance companies. - Easing restrictions on investment in asset reconstruction companies. - Passage of the new Companies Bill would strengthen the insolvency framework. ### Authorities’ views (financial sector and infrastructure) - Authorities’ overall assessment: - As concluded by the Report of the Committee on Financial Sector Assessment (CFSA), the authorities consider India’s financial system is sound and resilient. - Authorities deem there are no significant vulnerabilities and that the situation has further improved since the CFSA Report. - Though NPAs may increase due to the slowdown, the rise is unlikely to pose systemic risks given the strength of banks’ balance sheets. - On infrastructure financing: - Authorities maintain that current infrastructure financing needs are being met; domestic banks together with specialized financial institutions can bring projects to financial closure without undue delays. - IIFCL is working on takeout financing and credit enhancements. - Authorities do not see merging the FII limits between corporate and government bond markets as helpful. - Government of India has set up a High Level Standing Committee on Infrastructure Finance and a Cabinet Committee on Infrastructure to prioritize and expedite infrastructure investment. ### Fiscal policy: consolidation and reform - 2009/10 budget stance and outcomes: - 2009/10 budget extended expansionary stance to support recovery. - Following an estimated deficit of 11 percent of GDP in 2008/09, the general government is likely to end the current fiscal year with a broadly unchanged balance (see Appendix 10). - At the central level, savings from the lower subsidy bill (about 2 percent of GDP) have been reoriented towards social programs and infrastructure. - Tax revenue expected to remain subdued reflecting indirect tax cuts introduced during the crisis. - States’ deficits likely to widen. - Authorities’ fiscal consolidation targets: - Current goal: reduce center’s deficit from a projected 7 percent of GDP in 2009/10 to 5.5 percent of GDP in 2010/11 and further to 4 percent of GDP in 2011/12. - These targets will be helped by the falling away of one-off expenditure items and revenue buoyancy, but additional discretionary measures will likely be needed. - States will also need to curb current spending. - Staff recommendation for durable consolidation: - Adopt a medium-term fiscal framework anchored in an explicit debt target complemented by expenditure rules. - Suggested debt target: 60-65 percent of GDP by 2015/16 from 78 percent in 2008/09 (see Appendix 11). - Use expenditure ceilings derived from an over-the-cycle deficit consistent with the debt target to introduce countercyclical fiscal elements. - Role of reforms in consolidation: - Subsidy reform is critical to durable deficit reduction; planned revenue reforms will also contribute. - Draft Direct Tax Code would broaden the tax base while lowering rates. - Goods and Services Tax (GST) will streamline indirect taxes. - Over time, subsidies on products consumed predominantly by the poor could be replaced by targeted support facilitated by the Unique Identification Number. - Faster privatization could provide one-off resources but cannot substitute for adjustment. - Authorities’ views on fiscal policy: - Fiscal policy played a major role in cushioning the crisis and supporting recovery. - Central government 2009/10 fiscal deficit expected to remain within the 6.8 percent of GDP target. - Authorities emphasize consolidation is imperative; decisions on withdrawal of stimulus will not jeopardize the recovery and will incorporate the 13th Finance Commission’s recommendations. - Current plans envisage central government deficit reductions to 5.5 percent of GDP in 2010/11 and 4 percent in 2011/12 (Medium-Term Fiscal Policy Statement). - Authorities receptive to staff recommendation to anchor the fiscal framework to a medium-term debt target of about 65 percent of GDP and bring all spending above the line. - GST and Draft Direct Tax Code are seen as having enormous potential to raise economic efficiency and contribute to fiscal consolidation; GST not likely by April 2010. *Source: _cr1073 - 22. Based on the authorities’ self assessment,* ### 42. The authorities agree that a durable fiscal consolidation would focus not only on ### _cr1073 - 42. The authorities agree that a durable fiscal consolidation would focus not only on ### Fiscal consolidation and subsidy reform - The government "remains committed to reducing the subsidy bill." - Reform actions under way: - "Setting up of an expert group to examine fuel pricing." - "Proposed adoption of a nutrient-based fertilizer subsidy regime with the goal of moving to a system of direct transfers to the farmers." - Plan spending: "Renewed focus on expenditure management in order to further improve the quality of spending." ### Millennium Development Goals: selected indicators (1990–2007) - Malnutrition prevalence, weight for age (% of children under 5): 44.4, 43.5 - Poverty headcount ratio at national poverty line (% of population): 36.0, 28.6, 27.5 - Prevalence of undernourishment (% of population): 24.0, 21.0 - Literacy rate, youth total (% of people ages 15-24): 61.9, 76.4 - Primary completion rate, total (% of relevant age group): 63.8, 74.3, 69.7, 72.4, 83.8, 85.7 - Immunization, measles (% of children ages 12-23 months): 56.0, 72.0, 51.0, 55.0, 61.0, 64.0, 67.0 - Mortality rate, infant (per 1,000 live births): 80.0, 74.0, 72.0, 66.0, 57.7 - Improved sanitation facilities (% of population with access): 14.0, 23.0, 28.0 - Improved water source (% of population with access): 71.0, 77.0, 82.0, 89.0 - GNI per capita, Atlas method (current US$): 370.0, 380.0, 420.0, 460.0, 630.0, 820.0, 950.0 - Population, total (millions): 849.5, 932.2, 982.2, 1,032.5, 1,079.7, 1,109.8, 1,124.8 - Source for these indicators: "World Development Indicators database, November 2009." ### Macroeconomic performance and projections (selected) - Real GDP (y/y percent change, at factor cost): - 2005/06: 9.5 - 2006/07: 9.7 - 2007/08: 9.0 - 2008/09: 6.7 - 2009/10: 6.7 - 2010/11: 8.0 - Industrial production (y/y percent change): - 2005/06: 8.2 - 2006/07: 11.5 - 2007/08: 8.5 - 2008/09: 2.7 - Prices (y/y percent change, average): - Wholesale prices (1993/94 weights): 4.4, 5.4, 4.7, 8.3, 3.1, 6.4 - Consumer prices - industrial workers (2001 weights): 4.4, 6.7, 6.2, 9.1, 11.2, 8.8 - Saving and investment (percent of GDP): - Gross saving: 34.3, 35.8, 37.6, 37.4, 37.5, 38.2 - Gross investment: 35.5, 36.9, 39.1, 40.0, 39.4, 40.4 - Fiscal position (percent of GDP): - Central government deficit: -4.6, -4.4, -3.3, -8.0, -7.5, -6.1 - General government deficit: -7.2, -6.3, -4.7, -11.0, -11.1, -9.4 - General government debt: 84.0, 80.8, 78.3, 78.2, 80.7, 80.6 - Money and credit (y/y percent change, end-period): - Broad money: 21.2, 21.5, 20.9, 18.8, 18.7 - Credit to commercial sector: 32.2, 25.8, 20.9, 17.0, 11.8 - Financial indicators (percent, end-period): - 91-day treasury bill yield: 6.1, 8.0, 7.2, 5.0, 3.3 - 10-year government bond yield: 7.5, 8.0, 7.9, 7.0, 7.2 ### External sector and reserves - Current account balance (US$ billions): -9.9, -9.6, -15.7, -28.7, -23.8, -29.0 - Current account balance (in percent of GDP): -1.2, -1.0, -1.3, -2.5, -1.9, -2.1 - Merchandise exports (US$ billions): 105.2, 128.9, 166.2, 189.0, 157.3, 192.1 - y/y percent change: 23.4, 22.6, 28.9, 13.7, -16.7, 22.1 - Merchandise imports (US$ billions): 157.1, 190.7, 257.6, 307.7, 270.5, 324.6 - y/y percent change: 32.1, 21.4, 35.1, 19.4, -12.1, 20.0 - Net oil imports (US$ billions): 32.3, 38.3, 54.8, 62.7, 51.6, 59.2 - Foreign direct investment, net (US$ billions): 3.0, 7.7, 15.9, 17.5, 15.9, 17.4 - Portfolio investment, net (US$ billions): 12.5, 7.1, 27.4, -14.0, 26.1, 19.9 - Gross reserves (end-period, US$ billions): 151.6, 199.2, 309.7, 252.0, 301.5, 329.2 - In months of imports: 7.7, 7.7, 10.3, 9.3, 9.5, 9.3 - External debt (percent of GDP, end-period): 17.0, 18.8, 19.2, 19.9, 19.3, 20.1 - Overall balance (US$ billions): 15.1, 36.6, 92.2, -20.1, 34.0, 27.7 ### Central government operations and budget aggregates (selected) - Total revenue and grants (in billions of rupees): 3,622; 4,500; 5,920; 6,214; 5,625; 6,348; 6,121 (various years) - Net tax revenue (in billions of rupees): 2,718; 3,532; 4,413; 5,090; 4,495; 4,767; 4,690 - Gross tax revenue (in billions of rupees): 3,662; 4,735; 5,931; 6,877; 6,097; 6,411; 6,296 - Of which corporate tax: 1,013; 1,443; 1,929; 2,264; 2,138; 2,567; 2,568 - Of which income tax: 560; 751; 1,026; 1,383; 1,244; 1,129; 1,130 - Of which excise taxes: 1,112; 1,176; 1,236; 1,379; 1,087; 1,065; 1,065 - Of which customs duties: 651; 863; 1,041; 1,189; 998; 980; 864 - Total expenditure and net lending (in billions of rupees): 5,102; 5,926; 7,189; 7,637; 8,926; 10,369; 10,376 - Current expenditure (in billions of rupees): 4,545; 5,302; 6,101; 6,766; 8,096; 9,175; 9,227 - Interest payments (in billions of rupees): 1,326; 1,503; 1,710; 1,908; 1,905; 2,255; 2,255 - Wages and salaries (in billions of rupees): 373; 398; 441; 518; 738; 851; 918 - Subsidies (in billions of rupees): 475; 571; 709; 714; 1,291; 1,113; 1,178 - Capital expenditure and net lending (in billions of rupees): 557; 624; 1,088; 871; 831; 1,194; 1,149 - Overall balance (in billions of rupees): -1,480; -1,426; -1,269; -1,423; -3,301; -4,021; -4,255 - Overall balance (percent of GDP): -4.1; -3.5; -2.7; -2.7; -6.2; -6.9; -7.2 - Financing (in billions of rupees): 1,480; 1,426; 1,269; 1,423; 3,301; 4,021; 4,255 - External (net): 758; 593; 110; 110; 160; 160 - Domestic (net): 1,405; 1,341; 1,176; 1,313; 3,191; 3,861; 4,094 - Memorandum items: - Primary balance (percent of GDP): -0.4; 0.2; 0.9; 0.9; -2.6; -3.0; -3.4 - Central government debt (percent of GDP): 63.0; 61.5; 60.1; 57.7; 58.9; 59.7; 61.2 - Subsidy-related bonds (percent of GDP): 0.5; 1.0; 0.6; 1.8; 0.3; 0.4 ### Monetary, banking, and financial sector indicators - Reserve money (in billions of rupees, end-period examples): 5,731; 7,090; 8,691; 9,880; 9,491; 9,652; 9,703 - Net foreign assets of RBI (in billions of rupees, end-period examples): 6,730; 8,662; 12,377; 12,801; 12,634; 13,135; 12,972 - Broad money (M3, in billions of rupees, end-period examples): 27,295; 33,161; 40,105; 47,640; 49,344; 50,958; 51,553 - Currency with public (in billions of rupees): 4,131; 4,829; 5,697; 6,664; 6,908; 6,934; 7,130 - Deposits (in billions of rupees): 23,096; 28,257; 34,356; 40,921; 42,340; 43,983; 44,384 - Net domestic assets (in billions of rupees): 20,034; 24,029; 27,138; 34,118; 36,201; 37,314; 38,073 - Domestic credit (in billions of rupees): 24,596; 29,676; 34,263; 42,905; 44,019; 14,439; 14,381 - Net credit to government (in billions of rupees): 7,666; 8,376; 8,508; 12,772; 13,963; 14,596; 14,521 - Credit to commercial sector (in billions of rupees): 16,930; 21,301; 25,756; 30,133; 30,056; -157; -140 - Contribution to broad money growth (twelve-month percent change): Broad money (M3): 21.2, 21.5, 20.9, 18.8, 20.1, 19.0, 18.3 ### Financial system soundness (selected, 2004/05–2008/09) - Risk-weighted capital adequacy ratio (CAR): 12.8, 12.3, 12.3, 13.0, 13.2 - Public sector banks: 12.9, 12.2, 12.4, 12.5, 12.3 - New Private Sector Banks: 12.1, 12.6, 12.0, 14.4, 15.1 - Foreign banks: 14.0, 13.0, 12.4, 13.0, 15.1 - Net nonperforming loans (percent of outstanding net loans): 1.9, 1.2, 1.0, 1.1, 1.1 - Public sector banks: 2.0, 1.3, 1.1, 1.1, 1.0 - Old Private Sector Banks: 2.7, 1.7, 1.0, 0.7, 0.9 - Gross nonperforming loans (percent of outstanding loans): 5.2, 3.3, 2.5, 2.4, 2.4 - Public sector banks: 5.5, 3.6, 2.7, 2.3, 2.1 - Net profit (+)/loss (-) of commercial banks (percent of total assets): 0.9, 0.9, 0.9, 1.0, 1.0 - Balance sheet structure: - Loan/deposit ratio: 62.6, 70.1, 73.5, 74.6, 73.9 - Investment in government securities/deposit ratio: 38.0, 31.9, 28.0, 27.9, 28.7 - Lending to sensitive sectors (percent of loans and advances): - Real estate: 12.7, 17.2, 18.8, 18.4, 17.5 - Capital market: 1.4, 1.5, 1.8, 2.5, 1.8 ### Longer-run macro framework and projections (2005/06–2013/14, selected) - Real GDP growth projections (percent change): - 2011/12: 7.7 - 2012/13: 7.8 - 2013/14: 8.1 - Wholesale prices (period average, percent change) projected: 4.6, 4.0, 4.0 (later years) - Gross saving (percent of GDP) projected to rise to: 39.3, 40.2, 41.1 - Gross investment (percent of GDP) projected: 40.3, 41.1, 41.9, 42.9 - General government balance - augmented (percent of GDP) projected to improve from -11.0 to -5.5 over the period - Gross reserves (US$ billions, end-period projections): 361.2, 400.5, 452.5 - Total external debt (percent of GDP) projections: 20.8, 21.5, 22.2 - Memorandum off-budget subsidy related bond issuance (percent of GDP): 0.5, 1.0, 0.6, 1.8, 0.3, 0.4 *Source: IMF staff document text and tables provided in the content unit.* ### Appendix 1. India’s Recovery in Perspective ### Appendix 1. India’s Recovery in Perspective ### Overview - India’s economy has rebounded strongly and the recovery is described as well-entrenched. - Unlike other major economies where indicators moved sideways in the past couple of months, India shows a sustained pickup in activity since June 2009. ### Current indicators and recent performance - Industrial production has gathered pace rapidly since the beginning of 2009/10. - Cement production and consumer durables sales have increased substantially, signaling a recovery of private domestic demand. - Exports remain below last year’s levels but have rebounded strongly in sequential terms: in 3-month moving average saar, exports grew by 97 percent in September. - Equity portfolio inflows have increased markedly, with the stock market index having soared by 80 percent since March. - The rupee has appreciated by nearly 10 percent against the U.S. dollar. - Along with China and Indonesia, Indian equity prices have outperformed other major Asian economies. - Valuation ratios have rebounded, including for cyclical stocks, pointing to a domestic demand driven recovery. ### Forward-looking indicators - The OECD’s leading indicator (LI) index for India has continued to rise, approaching pre-crisis levels in September; the level of the index is 7 percent higher than the trough recorded in January 2009. - India’s overall PMI has stabilized at a level above the expansionary threshold since May. - The business expectations component of the services PMI has improved considerably since June. - The export orders PMI indicates that export growth momentum is likely to persist. - Employment PMIs for both manufacturing and services are in expansionary territory, pointing to a strengthening of private consumption. - Based on historical correlations, the manufacturing and services PMI indicate that the industry and services sectors are on track to return to close to pre-crisis growth rates in 2009Q4. ### Implications - Momentum among key indicators places India among the strongest recoveries globally over the recent period covered. - The combination of rising domestic demand indicators, improving forward-looking signals (LI, PMI components), and returning capital inflows supports expectations of a continued recovery driven primarily by domestic demand. *Source: IMF staff — Appendix 1. India’s Recovery in Perspective* ### Appendix 6. Technical Note on DSGE Model ### Appendix 6. Technical Note on DSGE Model ### DSGE model design and estimation - Staff developed a dynamic stochastic general equilibrium (DSGE) model with macrofinancial linkages for India. - The model is estimated on ten key macroeconomic variables from 1996 to 2008 using Bayesian estimation techniques. - The model incorporates the financial accelerator mechanism in a setting where firms can borrow in domestic and foreign currency. - Motivation: the increased reliance of Indian corporates on financing external to the firm suggests that the financial accelerator might play an important role in the propagation of shocks. ### Fit, parameter estimates, and comparative performance - The model yields plausible estimates for the parameters of interest. - The estimated elasticity of corporates’ external finance premium is in line with studies for other EMs. - Tests suggest the model provides a good fit, especially with the inclusion of a financial accelerator. - The model outperforms empirical Bayesian VARs, providing further support for its use for policy analysis. ### Monetary policy reaction function (estimated) - Estimates suggest the Reserve Bank of India (RBI) places a relatively high weight on stabilizing the rate of depreciation of the nominal exchange rate and inflation. - Quantified responses: - A 1 percent depreciation of the nominal exchange rate causes short-term interest rates to rise by 100 bps. - A 1 percentage point increase in inflation leads to a 90 bps increase in rates. ### Impulse responses and role of the financial accelerator - Impulse response functions confirm the importance of the financial accelerator. - Contractionary monetary policy shock effects include: - Decline in domestic demand. - Appreciating exchange rate. - High interest rates and low inflation increase real borrowing cost for corporates, decreasing investment and capital. - Falling price of capital reduces corporates’ net worth (the value of their collateral), raising the cost of borrowing further and putting additional pressure on output. - Shock to corporates’ risk premia: - Reduces investment and capital. - Via the financial accelerator, increases the cost of borrowing even further. ### Contribution of shocks to output volatility - Domestic demand shocks: about 30 percent of output volatility. - Supply shocks: about 30 percent of output volatility. - Financial shocks: 25 percent of output volatility. - Foreign demand shocks: 14 percent of output volatility. *Source: Appendix 6. Technical Note on DSGE Model (from the provided content).* ### Financial soundness indicators and banking sector assessment - Authorities’ assessment: CFSA (March 2009) concluded India’s financial system was sound; NPAs could increase during the slowdown but not likely to pose systemic risks; compliance with most standards and codes with gaps in bankruptcy proceedings implementation. - International comparison of FSIs and market indicators: - Indian banks have an average CAR of 13 percent (tier-one capital at 9 percent). - The government has embarked on a program to boost the capital of public banks to 12 percent. - NPAs are at 2.3 percent of total assets; comparison complicated by restructuring allowed in October 2008-June 2009 under which 2.9 percent of loans were rescheduled. - Moody’s and Crisil anticipate gross NPAs will rise to around 5 percent by March 2011, similar to the staff’s baseline. - Provision coverage is low; RBI has instructed banks to raise it to 70 percent by September 2010. - Profitability is broadly in line with other EM and is holding up well. - Market indicators: sovereign 5-Year CDS spreads, expected default frequencies (EDF) for major banks, and other market metrics painted a relatively healthy picture in late 2009. ### Stress testing and capitalization outcomes - Staff stress tests indicate: - If NPAs double relative to March 2009 levels, the average and median capitalization of the banking system remains above the minimum CAR of 9 percent. - A 200 percent increase in NPAs would push a number of weaker public and smaller private banks below the minimum CAR. - Assumptions and methodology: - The impact of higher default rates on CAR is estimated by assuming impaired loans are provisioned up to 70 percent, and reducing risk-weighted assets and capital at a rate equivalent to the increase of the NPA ratio. - Top 30 banks by asset size as of March 2009 are considered; balance sheet information for fiscal year ending 2008/09 is used; simple average used across bank categories. - Basel-related changes: - Changes discussed to the Basel capital regulations (focus on unimpaired tier 1 capital and linkage to leverage) are not likely to require additional capital as Indian banks’ share of hybrid capital and leverage ratios are moderate by international comparisons. ### Nonbank institutions and liquidity concerns - Mutual funds experienced significant redemptions during the crisis but later witnessed large inflows especially from commercial banks. - Inflows from banks have been to fixed maturity plans seeking yield and tax arbitrage given high level of excess reserves, raising concerns of liquidity risk if banks withdraw deposits abruptly. - NBFCs, reliant on wholesale funding, are again expanding assets, albeit at much reduced rates compared to pre-crisis. ### Staff recommendations on financial stability surveillance - Staff broadly shares authorities’ assessment but recommends more severe stress tests. - Credit remains the main risk to financial stability. - The RBI’s increase in provisioning coverage is welcome given India’s low level. - In line with authorities’ approach in previous cyclical upswings, higher provisioning on all real estate and equity exposures could be considered if signs of asset bubbles emerge. - To deepen financial stability assessment, staff recommends more extreme stress tests for combined shocks based on a more integrated approach to macro-financial risks; this could be incorporated in guidelines on stress testing scheduled to be issued in January 2010. - The RBI’s continued efforts to strengthen financial stability are welcome: - The new Financial Stability Unit could help achieve a more integrated view of financial stability. - The Financial Stability Report will provide more high frequency information and could fill information gaps regarding financial institutions’ FX and derivatives exposures, and real estate indicators. *Source: Appendix 7. Financial Stability of the Indian Banking System (from the provided content).* ### Financial market developments (summarized observations) - Indian equity markets have outperformed most emerging markets in the period shown. - Resulted in lower external spreads for corporates. - Government yields have risen, but domestic credit yields have returned to pre-crisis levels. - Rebound led by a strong rebound in portfolio equity flows. - Sovereign credit conditions have normalized in line with declining global risk aversion, spurring domestic debt issuance. - Charts and indicators referenced include SENSEX, MSCI EM, S&P indices (Jan 2, 2007=100), corporate bonds and commercial paper issuance in billions of rupees, 3M CP spread and 10Y government bond yields, net FII inflows in billions of U.S. dollars, and CEMBI Broad India Blended Spread. *Source: Financial Market Developments (from the provided content).* ### Infrastructure financing and financial sector reform priorities - Context and target: - Reforms to the institutional framework for infrastructure financing will be critical for achieving authorities’ growth targets over the medium to long term. - Eleventh Five Year Plan (2007-12): sustaining a growth rate of 9 percent requires increasing infrastructure investment from around 5 percent of GDP to 9 percent of GDP by 2012. - India’s savings are 35 percent of GDP but partly locked up in physical assets (GOI 2007). - High public debt and fiscal deficit constrain large-scale public-financed infrastructure projects, necessitating greater reliance on private and public-private partnerships. - Financial system challenges for infrastructure financing: - Infrastructure financing requires long-term funds, varied risk-return characteristics, and large and lumpy disbursements. - India’s financial system remains dominated by banks and is not particularly well suited for infrastructure financing; corporate bond markets remain relatively underdeveloped. - Increasing bank, pension, and insurance penetration will help mobilize long-term savings in the long run, but access to external finance (foreign equity capital and long-term debt finance) is likely necessary in the short run (GOI 2007). - Banks’ limited ability to finance additional infrastructure: - A significant share of banks’ assets, roughly corresponding to the size of their long-term liabilities, is reportedly already invested in infrastructure. - Banks would face considerable asset-liability mismatch if they were to expand exposure to the sector much further. *Source: Appendix 8. Financial Sector Reforms: A Focus on Infrastructure Financing (from the provided content).* ### introduction of a ### introduction of a ### Takeout financing and external commercial borrowing (ECB) - Takeout financing by the India Infrastructure Financing Corporation (IIFCL) and the RBI’s reduction in capital requirements for this type of financing could help banks alleviate asset-liability mismatch (Subbarao 2009), but the availability of takeout financing in the country is very limited. - End-use restrictions on external commercial borrowing (ECB) prohibit post-implementation refinancing by foreign investors and hold back development of the takeout financing market. - A sufficiently developed foreign exchange (forward and derivative) market is needed for long-term foreign borrowing to be hedged; the successful introduction of exchange rate futures is noted as welcome. ### Bank maturity mismatches (select statistics as of end-March 2009) - Deposits: - Up to 1 year: 45.7; 48.3; 48.3; 63.8 (by bank group) - Over 1 year and up to 5 years: 35.7; 46.8; 39.3; 32.7 - Over 5 years: 18.7; 4.9; 7.6; 3.5 - Borrowings: - Up to 1 year: 70.8; 76.7; 44.3; 84.8 - Over 1 year and up to 5 years: 27.5; 13.5; 50.1; 15.2 - Over 5 years: 1.7; 9.8; 5.5; 0 - Loans and Advances: - Up to 1 year: 39.1; 40.8; 32.4; 55.8 - Over 1 year and up to 5 years: 43.4; 47.8; 49.5; 34.2 - Over 5 years: 17.5; 11.4; 18.1; 10 - Investments: - Up to 1 year: 22.8; 37.2; 46.3; 69 - Over 1 year and up to 5 years: 30.4; 18.2; 30.5; 24.8 - Over 5 years: 46.8; 44.7; 23.2; 6.2 - (Table heading: India: Bank Group-wise Maturity Profile of Select Liabilities/Assets) ### Development of the corporate bond market — main impediments - Despite recent increases in issuance and measures to promote development, India’s corporate bond market remains small compared to other EMs. - Long-term impediments that should be removed: - Lack of liquidity in the government bond (G-Sec) market and absence of a benchmark yield curve. - Limited third-party credit enhancement and hedging tools to mitigate credit risk and interest rate risk. - Poor and lengthy enforcement laws for default proceedings. - Limited participation by domestic institutional investors. - Specific issues and policy-relevant observations: - Government securities (G-Secs): - Liquidity remains low due to lack of benchmark issues and prevalence of buy-and-hold investors. - Banks face a 25 percent statutory liquid ratio (SLR) held mostly in G-Secs. - Institutional investors are mandated to hold a large share of their assets in G-Secs until maturity, hindering active trading. - Foreign institutional investors (FIIs) are allowed to hold only a very small share of outstanding G-Secs. - Artificially high returns on postal and small-scale saving schemes limit retail attractiveness of G-Secs. - Credit enhancements: - Corporate bond issuance dominated by AA or above; little appetite for A or below where most private infrastructure projects fall. - Third-party credit enhancements or credit guarantees (bond insurance) could enable lower rated issues. Consideration is being given to IIFCL providing such instruments, but one institution is unlikely to meet the country’s requirements. - Credit and liquidity risks: - RBI’s proposal to introduce onshore single-name Credit Default Swaps (CDS) should improve ability to trade credit risk, conditional on minimum market liquidity and participation of FIIs. - Draft guidelines on repos in corporate bonds may enhance liquidity but authorities would allow this only once fair pricing is available. - Interest rate risks: - Interest rate futures (IRFs) on a 10-year G-sec were re-launched in August 2009; authorized institutions may trade IRFs for hedging and proprietary purposes. - Incentives to hedge remain limited by banks’ ability to hold G-Secs up to the SLR limit in the banking book without mark-to-market accounting and limited liquidity of underlying G-Secs. - Securitization: - RBI’s proposed lock-in and minimum retention criteria for securitization exposures should address concerns about “Originate to Distribute” models. - Retention requirements should be tailored to securitization type and underlying assets. - Revisions to the Basel II framework will require careful consideration. - Distressed assets and insolvency: - Boost market for distressed assets by: (i) giving NBFCs same rights as banks under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act; (ii) easing restrictions on single investor controlling stake in ARCs and on FDI in ARCs; (iii) creating a central registry of security interests. - Passage of the new Companies Bill would consolidate fora for rehabilitation and liquidation and bring insolvency framework closer to international best practices. - Further improvements could consider cross-border insolvency mechanisms, greater role for unsecured creditors, allowing debtor-in-possession financing, and modernizing personal insolvency framework. - Foreign investor participation: - Authorities increased the limit on foreign participation in the corporate bond market from $3 to $15 billion, but limits not fully utilized. - Reasons cited: market too small and illiquid, lack of benchmark yield curve, lack of transparency in FII allocation mechanism. - Authorities could consider merging existing limits with those for the government bond market (currently $5 billion); authorities remain concerned this could increase volatility. - Staff study of 10 major EMs found greater foreign participation lowered yields but effect on volatility was mixed (reduced volatility in Mexico, Malaysia, Turkey; increased in Korea; no relationship in several others). ### Role of institutional investors - International experience: - Domestic institutional investors (pension funds, insurance companies, mutual funds) play a key role in corporate bond market development. - In Latin America (Chile, Mexico) growth in corporate bonds outstanding closely tied to growth of pension fund AUM. - India-specific observations and numbers: - New Pension System (NPS): - Expanded to include unorganized sector workers in 2009; has enormous potential to mobilize long-term savings. - In 2008: total NPS assets at about Rs 33 billion. - NPS currently covers about 600,000 government employees and 3,000 non-public sector workers. - Expansion of NPS and the proposed Pension Fund Regulatory and Development Authority (PFRDA) bill should lead to greater demand for corporate bonds as NPS investment options and guidelines are less restrictive than Employees’ Provident Fund Organization (EPFO) regulations. - For the time being most pension and provident fund AUM are under EPFO, which does not invest in corporate bonds. - Insurance sector: - Increasing life insurance penetration would raise demand for corporate bonds. - Proposed Insurance Bill amendment raises foreign ownership limit in insurance companies from 26 to 49 percent. - LIC has over 70 percent market share and holds 22 percent of the stock of government securities. - IRDA 2008 investment guidelines require insurance companies to invest not less than 15 percent of their investments in infrastructure and social sectors, with minimum tenor of 10 years and credit rating of ‘AA’ for investments in debt paper—conditions that would exclude most infrastructure SPVs’ debt paper. - Investment guidelines for life and non-life specify not less than 50 percent of assets should be in government or approved securities, effectively rendering nearly 50 percent of assets to be invested in public sector debt due to restrictions on approved securities. - Mutual funds and fixed maturity plans: - Sharp increase in AUMs of fixed maturity plan mutual funds could provide important demand for corporate paper. - Need for analysis of scope for tax and regulatory arbitrage among pension, insurance, and mutual fund sectors to support sound growth. ### Empirical finding on foreign participation and yields (panel study summary) - Panel data estimates (panel of 10 EMs for 2000Q1-2009Q1) indicate: - Foreign participation reduces long-term local currency bond yields in EMs. - A 1 percent increase in the share of foreign investors in the government bond market is associated with 6 bps lower yields, on average. - Volatility: - No clear evidence that foreign investors increase interest rate volatility across countries. - GARCH analysis for monthly data from 2000 shows greater foreign participation significantly increases yield volatility in one country (Korea), decreases it in a few others (Hungary, Malaysia, Mexico, Turkey), and is insignificant in most other cases. *Italic: Source — _cr1073 - introduction of a (PDF chapter/section).* ### Appendix 10. Fiscal Issues ### Appendix 10. Fiscal Issues ### Background and recent deterioration - The 2008/09 general government fiscal deficit, inclusive of subsidy-related bond issuance, widened to 11 percent of GDP, from 4.7 percent of GDP in 2007/08. - India’s public finances continue to be under strain due to: spending measures introduced prior to the global crisis, a soaring subsidy bill, fiscal stimulus packages in response to the crisis, and a cyclical downturn in tax revenue. ### Short-term outlook and fiscal stance - General government deficit in 2009/10: likely remain unchanged at about 11 percent of GDP. - Central government (2009/10 budget): - Deficit target: 6.8 percent of GDP. - Staff estimate: central government’s deficit target for this year may exceed the budget target marginally (by 0.2 percent of GDP) due to potential underperformance of indirect tax revenue. - Tax policy: cuts of 6 percentage points in excise and 2 percentage points in service tax rates expected to keep tax revenue subdued. - Subsidy-related bond issuance projected at 0.3 percent of GDP. - States: - Combined states’ deficit projected at 3.7 percent of GDP in 2009/10, up from an estimate of 3.1 percent of GDP in 2008/09. - States implementing 6th Pay Commission recommendations and using higher borrowing limits to raise capital spending; growth in own revenue and transfers remains lackluster. ### Fiscal consolidation targets and feasibility - Government targets: - Reduce central government budget deficit to 5.5 percent of GDP in 2010/11 from a projected 7 percent in the current year. - Announced target to reduce deficit to 4 percent of GDP in 2011/12. - Assessment of feasibility: - Reduction to 5.5 percent of GDP in 2010/11 aided by: - Falling out of some expenditure (Sixth Pay Commission arrears and lower outlays for the agricultural loan waiver, about 0.5 percent of GDP). - Revenue buoyancy estimated at 0.4 percent of GDP. - Additional discretionary measures likely needed, such as rolling back the crisis tax cuts. - Reduction to 4 percent of GDP in 2011/12 unlikely without expenditure measures and implementation of planned tax reforms. ### International spillovers - International spillovers of India’s fiscal consolidation are likely small. - Lowering the deficit could be expansionary for India. - International impact may be positive because investment is more import-intensive than government consumption. ### Medium-term fiscal reforms — revenue-side - Two major tax reforms under preparation, designed to broaden the tax base while lowering rates; planned to be revenue neutral but expected to yield efficiency gains and improve compliance. - Direct Tax Code: - Broadens the tax base by removing most exemptions. - Proposes reducing corporate tax rates from 33 to 25 percent. - The Direct Tax Code is currently being revised to incorporate comments and is expected to be adopted in 2011/12. - In 2008/09, revenue foregone by the central government from existing exemptions amounted to 8 percent of GDP and close to 70 percent of actual tax collection. - Goods and Services Tax (GST): - Will have federal and state components and will subsume various indirect central and state taxes. - Expected effects: reduce cascading of indirect taxes, harmonize tax rates and exemptions across states, establish comprehensive chain of set-offs, widen tax base, improve compliance, and eventually lead to lower tax burden feeding into higher direct tax collections. - If successful, estimated boost to GDP growth: 0.9-1.7 percent (Report of the Taskforce on Goods & Services Tax, 13th Finance Commission, December 15, 2009). ### Expenditure-side reforms and subsidy reform (priority) - The missing element in authorities’ plans is expenditure reform; subsidy reform is the topmost priority to ensure lasting fiscal consolidation. - Recommended subsidy reforms: - Eliminate regressive subsidies (gas, diesel, LPG). - Introduce market-based pricing mechanism for petroleum products. - Replace subsidies on products consumed predominantly by the poor (kerosene, food, fertilizer) with targeted support, facilitated by planned introduction of a unique identification number. - Expected fiscal gains: - The Central Government Subsidies Report (2004) estimates that eliminating non-essential subsidies, and better targeting food, oil and fertilizer subsidies could save up to 2.3 percent of GDP. - The reform of subsidy system would lower the subsidy bill without unduly affecting the poor. ### Public spending quality and privatization - Continued monitoring and evaluation of centrally sponsored schemes and rationalization should enhance quality of public spending and improve service delivery. - Privatization: - Faster pace of privatization of public sector companies could support fiscal consolidation but cannot replace adjustment. - Government announcement: all listed public sector undertakings (PSU) must meet a minimum 10 percent public holding requirement and all profitable PSU must be listed. - For significant debt reduction, government would need to divest some companies it now judges strategic and lower minimum government holdings in the financial sector. ### Fiscal indicators and projections (highlights) - Public debt: - India’s public debt at 78 percent of GDP in 2008/09, vs average for EM at 45 percent of GDP. - Under baseline staff projections, gross public debt would decline to 72.3 percent of GDP by 2014/15 from 78.2 percent of GDP in 2008/09, though projected to peak at 81.7 percent of GDP in 2009/10 reflecting the double-digit deficit of 2009/10. - Baseline public sector debt path (selected figures from Table I.1): - Public sector debt: 2008/09 = 78.2 percent of GDP; 2009/10 = 81.7 percent of GDP; 2014/15 = 72.3 percent of GDP. - Primary deficit (in percent of GDP): 2008/09 = 5.7; 2009/10 = 5.6; 2014/15 = 1.4. - Revenue and grants (percent of GDP): 2008/09 = 20.7; 2014/15 = 23.2. - Primary (noninterest) expenditure (percent of GDP): 2008/09 = 26.4; 2014/15 = 24.5. - Gross financing need (percent of GDP): baseline 2009/10 = 14.5; projected 2014/15 = 7.9. - Gross financing need in billions of U.S. dollars: 2008/09 = 176.5; 2009/10 = 183.6; 2014/15 = 157.5. - Key macro-fiscal assumptions underlying baseline (selected): - Real GDP growth (in percent): 2008/09 = 6.1; 2009/10 = 6.4; 2010/11 = 8.0; 2014/15 = 8.1. - Average nominal interest rate on public debt (in percent): 2008/09 = 7.7; 2009/10 = 7.9; 2014/15 = 7.5. - Inflation rate (GDP deflator, in percent): 2008/09 = 6.2; 2009/10 = 3.7; 2014/15 = 3.9. ### Appendix 11 — Public Debt Target (summary) - Determining an appropriate public debt target for India is challenging; cross-country approaches yield wide ranges. - India’s public debt was 78 percent of GDP in 2008/09; relative to EM average of 45 percent of GDP. - Debt-intolerance thresholds (Reinhart et al. methodology): - Full sample: India’s threshold estimated as high as 75 percent of GDP. - Market-access sample: threshold declines to 40-45 percent of GDP. - Intertemporal solvency and sensitivity analysis: - Sensitivity analysis indicates a 60 percent debt-to-GDP ratio can be sustained under reasonable assumptions for India’s long-run primary balance and discount factor. - Scenario projections by 2015/16: - No-reform scenario: public debt could decline only marginally. - Combination of fuel subsidy reform, enhanced revenue performance, and partial privatization: could bring debt to about 62 percent of GDP by 2015/16. - Staff conclusion: - A reasonable and feasible public debt ceiling for India by 2015/16 could be in the order of 60-65 percent of GDP. - Such a ceiling would allow countercyclical fiscal policy, provide headroom for large contingent liabilities, and bolster credibility of fiscal framework despite being above the EM average. ### Debt sustainability and scenario sensitivities - Public debt dynamics are sensitive to: - Primary balance developments (no-policy-change scenario with constant primary balance would lead to unsustainable debt path). - Growth assumptions (a protracted slowdown with real GDP growth averaging 5 percent would raise the debt-to-GDP ratio). - Interest-rate/growth differential and exchange rate shocks. - Bound tests and stress scenarios (Figure I.1 summary): - Individual shocks modeled as permanent one-half standard deviation shocks (and alternative shock specifications noted in the report). - Combined shocks, contingent liabilities, real depreciation scenarios raise debt ratios relative to baseline. - Baseline vs. no-policy-change scenario (Table I.1): - Baseline public sector debt 2009/10 = 81.7 percent of GDP; scenario with no policy change shows debt rising to 85.4 percent of GDP by 2014/15 in a constant primary balance scenario. *INTERNATIONAL MONETARY FUND — Staff Report for the 2009 Article IV Consultation—Informational Annex, Prepared by the Asia and Pacific Department, January 11, 2010.* ### ANNEX II: INDIA—MEDIUM-TERM EXTERNAL DEBT SUSTAINABILITY ANALYSIS ### ANNEX II: INDIA—MEDIUM-TERM EXTERNAL DEBT SUSTAINABILITY ANALYSIS ### Overview - Source: Fund staff estimates. - Figure II.1 presents external debt (in percent of GDP) and bound tests with shocks including: permanent one-half standard deviation shocks to individual variables; permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance; combined shocks; and a one-time real depreciation of 30 percent occurring in 2007/08 (note 3/). ### Baseline projections and key indicators (Table II.1, selected series) - Baseline: external debt (in percent of GDP) by year: - 2004/05: 19.0 - 2005/06: 17.0 - 2006/07: 18.8 - 2007/08: 19.2 - 2008/09: 19.5 - 2009/10: 19.1 - 2010/11: 19.6 - 2011/12: 20.3 - 2012/13: 20.9 - 2013/14: 21.6 - 2014/15: 22.5 - Change in external debt (yearly changes in percent of GDP): - 2004/05: 0.4 - 2005/06: -1.9 - 2006/07: 1.7 - 2007/08: 0.4 - 2008/09: 0.3 - 2009/10: -0.4 - 2010/11: 0.5 - 2011/12: 0.7 - 2012/13: 0.6 - 2013/14: 0.7 - 2014/15: 0.9 ### Identified external debt-creating flows (4+8+9) (in percent of GDP) - Identified external debt-creating flows by year: - 2004/05: -4.1 - 2005/06: -3.2 - 2006/07: -2.5 - 2007/08: -6.2 - 2008/09: 1.1 - 2009/10: -2.5 - 2010/11: -1.9 - 2011/12: -2.1 - 2012/13: -2.3 - 2013/14: -2.7 - 2014/15: -2.8 - Components (selected years, in percent of GDP): - Current account deficit, excluding interest payments: - 2004/05: -0.3 - 2005/06: 0.6 - 2006/07: 0.4 - 2007/08: 0.8 - 2008/09: 1.8 - 2009/10: 1.4 - 2010/11: 1.6 - 2011/12: 0.9 - 2012/13: 0.7 - 2013/14: 0.6 - 2014/15: 0.7 - Deficit in balance of goods and services: - 2004/05: 2.6 - 2005/06: 3.5 - 2006/07: 3.5 - 2007/08: 4.6 - 2008/09: 6.0 - 2009/10: 4.7 - 2010/11: 4.9 - 2011/12: 4.3 - 2012/13: 4.0 - 2013/14: 3.8 - 2014/15: 3.6 - Exports (in percent of GDP): - 2004/05: 18.3 - 2005/06: 20.1 - 2006/07: 22.2 - 2007/08: 21.9 - 2008/09: 23.9 - 2009/10: 19.7 - 2010/11: 20.2 - 2011/12: 20.7 - 2012/13: 21.2 - 2013/14: 21.9 - 2014/15: 22.7 - Imports (in percent of GDP): - 2004/05: 20.9 - 2005/06: 23.6 - 2006/07: 25.7 - 2007/08: 26.5 - 2008/09: 29.9 - 2009/10: 24.4 - 2010/11: 25.1 - 2011/12: 25.0 - 2012/13: 25.3 - 2013/14: 25.7 - 2014/15: 26.3 - Net nondebt creating capital inflows (negative): - 2004/05: -1.9 - 2005/06: -1.9 - 2006/07: -1.6 - 2007/08: -3.8 - 2008/09: -0.3 - 2009/10: -3.3 - 2010/11: -2.7 - 2011/12: -2.5 - 2012/13: -2.6 - 2013/14: -2.9 - 2014/15: -2.9 - Net foreign direct investment, equity (in percent of GDP): - 2004/05: 0.5 - 2005/06: 0.4 - 2006/07: 0.8 - 2007/08: 1.3 - 2008/09: 1.5 - 2009/10: 1.2 - 2010/11: 1.3 - 2011/12: 1.3 - 2012/13: 1.3 - 2013/14: 1.5 - 2014/15: 1.5 - Net portfolio investment, equity (in percent of GDP): - 2004/05: 1.3 - 2005/06: 1.5 - 2006/07: 0.8 - 2007/08: 2.5 - 2008/09: -1.2 - 2009/10: 2.0 - 2010/11: 1.4 - 2011/12: 1.2 - 2012/13: 1.3 - 2013/14: 1.4 - 2014/15: 1.4 ### Automatic debt dynamics and contributions (in percent of GDP) - Automatic debt dynamics (1/): - 2004/05: -1.9 - 2005/06: -1.9 - 2006/07: -1.4 - 2007/08: -3.1 - 2008/09: -0.4 - 2009/10: -0.6 - 2010/11: -0.8 - 2011/12: -0.6 - 2012/13: -0.4 - 2013/14: -0.4 - 2014/15: -0.6 - Denominator: 1+g+r+g r (yearly values): - 2004/05: 1.2 - 2005/06: 1.2 - 2006/07: 1.1 - 2007/08: 1.3 - 2008/09: 1.0 - 2009/10: 1.1 - 2010/11: 1.1 - 2011/12: 1.1 - 2012/13: 1.1 - 2013/14: 1.1 - 2014/15: 1.1 - Contribution from nominal interest rate (percent of GDP): - 2004/05: 0.7 - 2005/06: 0.6 - 2006/07: 0.6 - 2007/08: 0.7 - 2008/09: 0.8 - 2009/10: 0.5 - 2010/11: 0.6 - 2011/12: 0.8 - 2012/13: 1.0 - 2013/14: 1.1 - 2014/15: 1.0 - Contribution from real GDP growth (percent of GDP): - 2004/05: -1.3 - 2005/06: -1.5 - 2006/07: -1.5 - 2007/08: -1.3 - 2008/09: -1.2 - 2009/10: -1.1 - 2010/11: -1.4 - 2011/12: -1.4 - 2012/13: -1.4 - 2013/14: -1.5 - 2014/15: -1.6 - Contribution from price and exchange rate changes (percent of GDP) is included in automatic dynamics and projection lines (note 3/); formula and definition provided in notes. ### Residuals and other ratios - Residual, including change in gross foreign assets (2-3) (in percent of GDP): - 2004/05: 4.5 - 2005/06: 1.3 - 2006/07: 4.3 - 2007/08: 6.6 - 2008/09: -0.8 - 2009/10: 2.1 - 2010/11: 2.3 - 2011/12: 2.8 - 2012/13: 2.9 - 2013/14: 3.4 - 2014/15: 3.7 - External debt-to-exports ratio (in percent): - 2004/05: 103.5 - 2005/06: 84.8 - 2006/07: 84.5 - 2007/08: 87.7 - 2008/09: 81.6 - 2009/10: 97.1 - 2010/11: 97.1 - 2011/12: 97.9 - 2012/13: 98.4 - 2013/14: 98.7 - 2014/15: 99.3 ### Gross external financing need (defined in note 4/) (in billions of U.S. dollars and percent of GDP) - Gross external financing need (US$ billions) by year: - 2004/05: 34.6 - 2005/06: 65.9 - 2006/07: 62.6 - 2007/08: 82.3 - 2008/09: 116.8 - 2009/10: 111.9 - 2010/11: 127.7 - 2011/12: 141.2 - 2012/13: 162.4 - 2013/14: 185.1 - 2014/15: 208.3 - In percent of GDP: - 2004/05: 4.9 - 2005/06: 8.1 - 2006/07: 6.9 - 2007/08: 7.0 - 2008/09: 10.1 - 2009/10: 8.7 - 2010/11: 9.2 - 2011/12: 9.3 - 2012/13: 9.7 - 2013/14: 10.0 - 2014/15: 10.4 ### Scenario with key variables at their historical averages (note 5/) (selected values) - External debt (in percent of GDP) under historical-averages scenario (selected years shown in table): - 2004/05: 16.0 - 2005/06: 15.9 - 2006/07: 15.3 - 2007/08: 15.3 - 2008/09: 15.5 - 2009/10: 16.2 - 2010/11: 16.8 - (table shows further values and a value -2.7 in context of debt-stabilizing non-interest current account; preserve table structure in source) ### Key macroeconomic assumptions underlying baseline (selected series) - Real GDP growth at market prices (in percent): - 2004/05: 8.3 - 2005/06: 9.3 - 2006/07: 9.7 - 2007/08: 9.1 - 2008/09: 6.1 - 2009/10: 6.3 - 2010/11: 8.0 - 2011/12: 7.7 - 2012/13: 7.8 - 2013/14: 8.1 - 2014/15: 8.1 - GDP deflator in US dollars (change in percent): - 2004/05: 7.9 - 2005/06: 5.7 - 2006/07: 2.7 - 2007/08: 17.8 - 2008/09: -7.1 - 2009/10: 4.7 - 2010/11: 0.5 - 2011/12: 1.4 - 2012/13: 1.8 - 2013/14: 1.9 - 2014/15: 1.1 - Nominal external interest rate (in percent): - 2004/05: 4.2 - 2005/06: 3.9 - 2006/07: 4.0 - 2007/08: 4.8 - 2008/09: 4.0 - 2009/10: 2.9 - 2010/11: 3.4 - 2011/12: 4.6 - 2012/13: 5.7 - 2013/14: 5.8 - 2014/15: 4.8 - Growth of exports of goods and services (U.S. dollar terms, in percent): - 2004/05: 37.9 - 2005/06: 26.7 - 2006/07: 24.5 - 2007/08: 26.4 - 2008/09: 7.9 - 2009/10: -9.4 - 2010/11: 12.3 - 2011/12: 12.0 - 2012/13: 12.6 - 2013/14: 13.5 - 2014/15: 13.3 - Growth of imports of goods and services (U.S. dollar terms, in percent): - 2004/05: 51.7 - 2005/06: 30.5 - 2006/07: 22.7 - 2007/08: 32.1 - 2008/09: 11.5 - 2009/10: -10.4 - 2010/11: 12.9 - 2011/12: 8.8 - 2012/13: 10.8 - 2013/14: 12.1 - 2014/15: 11.8 - Current account balance, excluding interest payments (in percent of GDP): - 2004/05: 0.3 - 2005/06: -0.6 - 2006/07: -0.4 - 2007/08: -0.8 - 2008/09: -1.8 - 2009/10: -1.4 - 2010/11: -1.6 - 2011/12: -0.9 - 2012/13: -0.7 - 2013/14: -0.6 - 2014/15: -0.7 - Net non-debt creating capital inflows (in percent of GDP): - 2004/05: 1.9 - 2005/06: 1.9 - 2006/07: 1.6 - 2007/08: 3.8 - 2008/09: 0.3 - 2009/10: 3.3 - 2010/11: 2.7 - 2011/12: 2.5 - 2012/13: 2.6 - 2013/14: 2.9 - 2014/15: 2.9 ### Bound tests (B-series) and specific shock outcomes (selected results) - B1. Nominal interest rate at historical average plus one standard deviation: - Series values (selected): 19.5, 19.2, 19.7, 20.4, 21.0, 21.7, 22.7, -3.8 - B2. Real GDP growth at historical average minus one standard deviations: - Series values (selected): 19.5, 19.3, 19.9, 20.8, 21.7, 22.6, 23.8, -3.8 - B3. Non-interest current account at historical average minus one standard deviations: - Series values (selected): 19.5, 19.9, 21.0, 22.4, 23.7, 25.0, 26.5, -4.0 - B4. Combination of B1–B3 using 1/2 standard deviation shocks: - Series values (selected): 19.5, 19.6, 20.5, 21.6, 22.7, 23.9, 25.2, -3.9 - B5. One-time 30 percent real depreciation in 2010: - Series values (selected): 19.5, 25.6, 25.6, 26.3, 27.0, 27.8, 28.9, -5.3 ### Debt-stabilizing non-interest current account (note 6/) - Debt-stabilizing non-interest current account (long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their last projection year) appears in table context; a value shown in the table is -4.0 (and elsewhere -3.8, -3.9, -5.3 in shock contexts). Preserve these table values as presented. *Source: Fund staff estimates.* ### ANNEX VI: INDIA––STATISTICAL ISSUES ### ANNEX VI: INDIA––STATISTICAL ISSUES ### Overview - India has an elaborate system for compiling economic and financial statistics and produces a vast quantity of data covering most sectors of the economy. - India subscribed to the Special Data Dissemination Standards (SDDS) on December 27, 1996 and started posting its metadata on the Dissemination Standards Bulletin Board on October 30, 1997. - India is currently in observance of the SDDS, although it uses 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 Report on Observance of Standards and Codes (ROSC, IMF Country Report No. 04/96) was published in April 2004 and assesses data dissemination practices against SDDS and the quality of six datasets based on the Data Quality Assessment Framework (DQAF). ### National accounts and employment statistics - CSO reduced the dissemination lag for quarterly releases from three to two months and released a new national accounts series with base year 1999–2000 in February 2006. - Potential bias: 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). - Employment data limitations: - Comprehensive employment data are only available on an annual basis and with a substantial lag. - Employment data are produced only for the formal sector, which accounts for a small segment of the labor market. ### Price statistics - CPI issues: - Consumer price indices (CPIs) are based on weights that are 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 engaged in revising the current producer price index to a new base. - There are four CPIs, each based on a narrow consumption basket: industrial workers, urban and nonmanual employees, agricultural laborers, and rural laborers. - CPIs are published with a lag of about one month. - WPI characteristics: - 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 may be undermined by price collection from a relatively small sample of products and infrequent updating of weights. - Other gaps: - Real estate and housing price data are not available on a timely basis and the geographic coverage is limited. ### External sector statistics - Balance of payments: - Concepts and definitions broadly in line with BPM5, but RBI presentation does not strictly follow BPM5. - Trade data face quality, valuation, timing, and coverage problems; trade prices, volumes, and composition are not regularly available on a timely basis. - Only trade credit extended for more than 180 days is included in the balance of payments (and the IIP and external debt data); trade credit is often less than 180 days in most countries. - Bilateral services exports to the United States and other developed countries are manifold higher than counterpart services imports published by these same countries. - External debt and IIP: - External debt statistics are available quarterly with a one quarter lag. - Estimates of short-term external debt are presented on an original maturity basis; short-term maturity attribution on a residual maturity basis is only available annually (and excludes residual maturity of medium- and long-term nonresident Indian accounts). - IIP statistics cover sectors prescribed in BPM5 and annual data are disseminated within six months of the reference period. - Coverage of direct investment positions data is hampered by the absence of appropriate legal or institutional authority. - Reserves and liquidity: - India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity under the SDDS in December 2001. - More up-to-date information on variables such as total foreign reserves, foreign currency assets, gold, and SDRs is available weekly and disseminated as part of a weekly statistical supplement on the RBI web site. ### Monetary and financial statistics - RBI publications: - The RBI web site and the RBI Bulletin publish reserve money and its 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. - Conceptual conformity and deviations: - Concepts and definitions used by the RBI are in broad conformity with the MFSM, but deviations exist: - Resident sector data do not provide sufficient information on the sectoral distribution of domestic credit due to the present sectorization scheme: (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). - Reporting improvements: - RBI reports monetary data for IFS on a regular basis. - Since October 2006, RBI initiated electronic reporting of monetary data, a major improvement from 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 SRF issues. ### Fiscal operations - Ministry of Finance (MoF) dissemination: - MoF posts selected central government monthly fiscal data and quarterly debt data on its web site. - No monthly data on fiscal performance at the state level are available; annual state-level data are available only with an 8-month to 10-month lag. - Consolidated information is unavailable on local government operations. - Data on functional and economic classification of expenditures are available with considerable lag. - Presentation and classification issues: - Classification of government expenditure between developmental/nondevelopmental and plan/nonplan obscures the economic nature and impact of fiscal actions. - 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 has been reported for 2002. ### India — Table of Common Indicators Required for Surveillance (as of December 18, 2009) — selected items - Exchange rates: Date of latest observation 12/18/09; Date received 12/18/09; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 12/18/09; Date received 12/25/09; Frequency W; Frequency of Reporting W; Frequency of Publication W. - Reserve/base money: Date of latest observation 12/18/09; Date received 12/25/09; 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 12/04/09; Date received 12/25/09; Frequency BW; Frequency of Reporting BW; Frequency of Publication W. - Central bank balance sheet: Date of latest observation Mar. 09; Date received 08/27/09; Frequency A; Frequency of Reporting A; Frequency of Publication A. - Consolidated balance sheet of the banking system: Date of latest observation Mar. 09; Date received 09/15/09; Frequency A; Frequency of Reporting A; Frequency of Publication A. - Interest rates: Date of latest observation 12/18/09; Date received 12/18/09; Frequency D; Frequency of Reporting D; Frequency of Publication D. - Consumer price index: Date of latest observation Nov. 09; Date received 12/24/09; 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: Date of latest observation Mar. 09; Date received 09/15/09; 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 Oct. 09; Date received 12/01/09; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Stocks of central government and central government-guaranteed debt: Date of latest observation Mar. 09; Date received 09/15/09; Frequency A; Frequency of Reporting A; Frequency of Publication A. - External current account balance: Date of latest observation Mar–Jun. 09; Date received 10/08/09; 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 Mar–Jun. 09; Date received 10/08/09; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of latest observation Jul–Sep. 09; Date received 12/01/09; 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 Mar–Jun. 09; Date received 12/01/09; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. Notes from the table: - Frequency codes: Daily (D), Weekly (W), Biweekly (BW), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA). - Data Quality assessments reflect the ROSC published on April 2, 2004 (mission during May 13–30, 2002), using O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed). ### Statement by the IMF Staff Representative on India (January 25, 2010) - New information since the staff report does not alter the thrust of the staff appraisal. - Economic and financial developments: - Industrial production growth rose to 11.7 percent y/y in November, with consumer durables and capital goods picking up. - Export growth rose to 15 percent y/y in December. - Manufacturing PMI new orders and new export orders components rose substantially in December (both above the expansionary threshold). - Headline WPI inflation rose to 7⅓ percent y/y in December (12 percent in sequential terms, using the 3-month moving average saar), driven in part by large food price gains. - CPI inflation measures are in the 13½–17¼ percent range, given the higher weight of food in the consumption basket. - Core inflation—excluding food and energy—reached 5⅔ percent in sequential terms. - Financial conditions: Net portfolio inflows reached US$3.2 billion so far in January (compared to a monthly average of US$2 billion in March–December 2009). - Credit growth rose from below 10 percent y/y in October to 14⅓ percent y/y in December 2009. - Policy developments: - On January 14, the government announced measures to tackle rising food prices by improving availability of major agricultural products: - Release 2–3 million tons of wheat and rice in the open market above allocation under the public distribution system. - Advised states to remove the VAT on imported sugar and to enforce anti-hoarding measures. *Source: IMF staff report content provided in the annex.* ### 6. In January, the Reserve Bank of India has allowed repos in corporate debt ### 6. In January, the Reserve Bank of India has allowed repos in corporate debt ### Background and recent policy actions - In January, the Reserve Bank of India (RBI) has allowed repos in corporate debt securities and exchange trading of major currencies futures against the rupee. - India’s economy is described as one of the first in the world to recover after the global crisis, supported by prompt fiscal and monetary easing and fiscal stimulus already in the pipeline. - Growth is projected to rise from 6¾ percent in 2009/10 (April-March) to 8 percent in 2010/11. ### Growth outlook and composition - Projections and near-term outlook: - Growth: 6¾ percent in 2009/10; 8 percent in 2010/11. - Agriculture: likely to contract by about 1 percent in 2009/10 due to the drought. - Nonagricultural GDP: expected to gather momentum. - Drivers: private consumption to benefit from better employment prospects and less uncertainty; investment boosted by robust corporate profits, rising business confidence, and favorable financing conditions. - Medium-term expectation (authorities’ view): India should be back on a post-2003/04 trend growth path of 8.5 to 9 percent per annum with removal of critical policy and institutional bottlenecks. ### Risks and financial conditions - Near-term risks: - Upside: acceleration of reforms and capital inflows could spur investment. - Downside: elevated inflation and financing constraints arising from the fiscal deficit could slow the recovery. - Tail risks: asset price bubbles and a sudden stop in capital inflows from global market turmoil. - Capital flows and exchange rate management: - Directors recognized challenges in managing capital inflows and welcomed use of a range of measures. - Most Directors considered rupee appreciation would help contain inflation and manage capital inflows; a few Directors urged caution. - Sterilized intervention could reduce excessive exchange rate volatility provided it does not generate further inflows. - Prudential measures supported to address asset bubbles; tightening capital controls advised only as a last resort by several Directors. ### Monetary policy stance and recommendations - Directors commended RBI for starting the first phase of exit from monetary accommodation. - General view: conditions are ripe for progressive normalization of the monetary stance, with a preference for a gradual approach. - Advice from most Directors: a timely start to withdrawal of monetary stimulus would help anchor inflation expectations and soften impacts on long-term interest rates; longer-term guidance on future inflation from the RBI may help. ### Financial sector, infrastructure finance, and market development - Financial sector resilience: Directors noted India’s financial system has weathered the global crisis well. - Recommended actions: - Strengthen capital of public banks and financial regulation; continue higher provisioning requirements. - Strengthen financial stability assessment via multifactor stress tests and independent evaluation of compliance with international standards. - Improve mechanisms for dealing with distressed assets and the insolvency framework. - Maintain momentum of reforms to ensure the financial system provides adequate funding for infrastructure. - Develop a vibrant corporate bond market and reforms to foster greater participation by pension funds and the insurance sector in infrastructure funding. - Consider further opening the local debt market to foreign investors to enhance liquidity, with some Directors urging caution due to volatility risks. - Public institutions to play a role in establishing framework for infrastructure financing and in filling market gaps while managing public sector risks. ### Fiscal policy and consolidation - Fiscal concerns and strategy: - Directors welcomed authorities’ announcement to lower the deficit starting from the next budget. - Given recovery and India’s high debt, authorities encouraged to lay out a concrete strategy for reducing debt through durable reforms to boost credibility and foster growth. - Most Directors considered anchoring the medium-term fiscal framework with a debt target would be helpful. - Specific policy recommendations: - Phase out regressive subsidies and introduce market-based pricing for petroleum products; replace subsidies consumed predominantly by the poor with targeted support over time. - Focus on raising quality of public spending and service delivery; pursue privatization announcements. - Implement the Goods and Services Tax and the new Direct Tax Code to support fiscal consolidation. - Authorities’ fiscal plans noted: - Medium Term Fiscal Policy Statement, 2009-10: fiscal deficit declining to 5.5 percent of GDP in 2010-11 and to 4.0 percent of GDP in 2011-12. - Budget 2009-10 carried forward fiscal expansion of 4.1 per cent of GDP (over 2007-08 levels) as crisis response. ### Key quantitative indicators (selected, as presented) - Real GDP (y/y percent change, at factor cost): - 2005/06: 9.5 - 2006/07: 9.7 - 2007/08: 9.0 - 2008/09: 6.7 - 2009/10: 6.7 - 2010/11: 8.0 - Wholesale prices (y/y percent change, average): - 2005/06: 4.4 - 2006/07: 5.4 - 2007/08: 4.7 - 2008/09: 8.3 - 2009/10: 3.1 - 2010/11: 6.4 - Consumer prices - industrial workers (2001 weights, y/y percent change, average): - 2005/06: 4.4 - 2006/07: 6.7 - 2007/08: 6.2 - 2008/09: 9.1 - 2009/10: 11.2 - 2010/11: 8.8 - Saving and investment (percent of GDP): - Gross saving: 2005/06: 34.3; 2006/07: 35.8; 2007/08: 37.6; 2008/09: 37.4; 2009/10: 37.5; 2010/11: 38.2 - Gross investment: 2005/06: 35.5; 2006/07: 36.9; 2007/08: 39.1; 2008/09: 40.0; 2009/10: 39.4; 2010/11: 40.4 - Fiscal position (percent of GDP): - Central government deficit: 2005/06: -4.6; 2006/07: -4.4; 2007/08: -3.3; 2008/09: -8.0; 2009/10: -7.6; 2010/11: -6.2 - General government deficit: 2005/06: -7.2; 2006/07: -6.3; 2007/08: -4.7; 2008/09: -11.0; 2009/10: -11.2; 2010/11: -9.4 - General government debt: 2005/06: 84.0; 2006/07: 80.8; 2007/08: 78.3; 2008/09: 78.2; 2009/10: 81.7; 2010/11: 81.2 - Financial indicators: - 91-day treasury bill yield (percent, end-period): 2005/06: 6.1; 2006/07: 8.0; 2007/08: 7.2; 2008/09: 5.0; 2009/10: 3.3 - 10-year government bond yield (percent, end-period): 2005/06: 7.5; 2006/07: 8.0; 2007/08: 7.9; 2008/09: 7.0; 2009/10: 7.2 - External sector: - Merchandise exports (US$ billions): 2005/06: 105.2; 2006/07: 128.9; 2007/08: 166.2; 2008/09: 175.2; 2009/10: 145.8; 2010/11: 178.0 - Merchandise imports (US$ billions): 2005/06: 157.1; 2006/07: 190.7; 2007/08: 257.8; 2008/09: 294.6; 2009/10: 259.0; 2010/11: 310.8 - Net oil imports (US$ billions): 2005/06: 32.3; 2006/07: 38.3; 2007/08: 54.8; 2008/09: 62.7; 2009/10: 51.6; 2010/11: 59.2 - Current account balance (US$ billions): 2005/06: -9.9; 2006/07: -9.6; 2007/08: -17.0; 2008/09: -29.8; 2009/10: -24.0; 2010/11: -29.5 - Gross reserves (US$ billions, end-period): 2005/06: 151.6; 2006/07: 199.2; 2007/08: 309.7; 2008/09: 252.0; 2009/10: 300.7; 2010/11: 327.9 - Exchange rate (rupee/US$, end-period): 2005/06: 44.6; 2006/07: 43.5; 2007/08: 40.1; 2008/09: 50.7; 2009/10: 46.4 ### Executive Board assessment and key recommendations - Directors congratulated authorities on sound macroeconomic policies and decisive actions leading to early recovery. - Emphasized longer-term priorities: - Financial sector reforms to facilitate infrastructure investment. - Fiscal consolidation with a concrete debt-reduction strategy and possible anchoring of the medium-term fiscal framework with a debt target. - Encouraged completion of structural reforms: - Introduction of the Goods and Services Tax and the new Direct Tax Code. - Phasing out regressive subsidies and moving toward market-based pricing for petroleum products, with targeted support for the poor. - Continued improvement in public spending quality and service delivery; pursue privatization where announced. *Public Information Notice (PIN) No. 10/18 — IMF Executive Board Concludes 2009 Article IV Consultation with India (February 4, 2010); Statement by Arvind Virmani, Executive Director for India and Parthay Ray, Advisor to Executive Director (January 25, 2010).* ### 9. As per the latest data on India’s balance of payments (BoP) for the second quarter ### 9. As per the latest data on India’s balance of payments (BoP) for the second quarter (July-September 2009) of 2009-10 ### Balance of Payments and Trade - Exports and imports continued their declining trend in Q2 (July-September 2009) of 2009-10. - Trade deficit was lower, reflecting a larger fall in imports, especially oil imports, on account of lower oil prices. - Current account deficit in Q2 of 2009-10 was US$ 12.6 billion, almost at the same level as last year, mainly on account of lower net invisibles surplus. ### Capital Flows and Exchange Rate - During the financial year 2009-10 so far, accruals on account of foreign direct investment, deposits of non-resident Indians and portfolio investment were significantly higher compared to the previous year. - Investments of Foreign Institutional Investors increased by US $ 22.8 billion during April 1, 2009 – January 8, 2010, versus a net withdrawal of US $ 11.9 billion during the corresponding period of the previous financial year. - The Indian rupee appreciated by 11.24 percent against the US dollar as on January 8, 2010 over end-March 2009. ### Implications of Volatile Capital Flows - Volatility of capital flows and the exchange rate has attendant implications for monetary policy. - While consequences of capital inflows during 2009-10 are manageable, macro management could become more challenging as growth expectations approach trend levels (8.5 – 9 percent), potentially leading to more capital inflows. - The negative externalities arising from volatility in capital flows will need to be thought through and appropriately addressed. ### Monetary Policy Challenges - Key challenge: build-up of inflationary pressures, particularly in respect of food prices. - Sectoral price movements in December 2009 (year-on-year): - Primary articles: risen by 14.9 percent. - Fuel: rose by 4.3 percent. - Manufactures: rose by 5.2 percent. - Overall rate of inflation: - Was in negative territory during June-August 2009. - Around 1 percent in September-October 2009. - Has edged above the threshold of 5 percent which is monitored for monetary policy purposes. - Output and credit conditions: - Overall GDP growth remains well below the pre-crisis average of 8.8 percent. - Bank credit growth decelerated to around 14 percent as against around 24 percent a year ago. - Monetary policy trade-off: - Too early an exit from accommodation risks jeopardizing the recovery. - Too delayed an exit may allow current inflationary pressures to get embedded in inflation expectations. - Policy stance so far: conduct of monetary policy has been supporting the recovery while allowing supply-side management measures to work through and correct shortages in specific commodities. ### Monetary Policy Actions and Stance - October 2009 review affirmed resolve to “keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilise inflation expectations”. - Quoted statement: “....it bears emphasis that the Reserve Bank is mindful of its fundamental commitment to price stability. It will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.” - Calibrated withdrawal of accommodation has commenced, including: - Restoring of secondary reserve requirements (the Statutory Liquidity Ratio) to 25 percent (after a temporary lowering of 1 percent during the crisis). - Closure of special liquidity facilities for non-bank finance companies and mutual funds. - Increasing provisioning requirements on commercial real estate. - Generally, raising all provisioning cushions consisting of specific provisions against NPAs as well as floating provisions. ### Financial Sector and Banking - Indian banking sector demonstrated resilience during the global financial crisis. - Minimal exposure to toxic assets and benefits from counter-cyclical prudential regulations framework. - Net non-performing assets (NPA) as a ratio to net advances of commercial banks as at end March 2009 remained at last year’s level of 1.1 per cent. - Banks are well capitalized to cushion possible increases in NPAs due to: - Increase in banks’ net worth over the past ten years. - Steady reduction in NPAs. - Capital coverage for NPAs is at a prudent level. - RBI measures to arrest possible increase in non-performing loans: - Increase the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from the present level of 0.40 per cent to 1 per cent. ### Long-term Funding and Infrastructure Finance - Financing for infrastructure has attracted policymakers’ attention. - New initiatives mentioned include take-out financing and credit enhancements being worked on by the India Infrastructure Finance Company Limited (IIFCL). - Quoted statement by Prime Minister Dr. Manmohan Singh on reforms needed: - “We need to develop long-term debt markets and to deepen corporate bond markets. This in turn calls for a strong insurance and pension sub-sectors. Some of the reforms needed, especially in insurance, involve legislative changes. We have taken initiatives in this area and will strive to build the political consensus needed for these legislative actions to be completed. We need to improve futures markets for better price discovery and regulation. We also need to remove institutional hurdles to facilitate better intermediation” (Indian Prime Minister’s address at the Inauguration of India Economic Summit on November 8, 2009). *Source: _cr1073 - 9. As per the latest data on India’s balance of payments (BoP) for the second quarter (July-September 2009) of 2009-10* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1073.pdf_