## _cr1296 ## Source details **Canonical URL:** [_cr1296](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1296.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1296.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1296.pdf.json) --- ### Inflation dynamics and monetary policy - Core and headline inflation have stayed above historical averages and the RBI’s stated objectives. - Consumer price inflation has been above 7 percent for almost four years; inflation momentum is still at about 7 percent. - Structural and demand drivers of food inflation: - Rising rural incomes shifting diets toward proteins. - Large increases in agricultural support prices and indexation of rural relief wages. - Recent readings: - WPI inflation fell to 6.6 percent in January 2012. - CPI inflation dropped to 6 1/2-8 1/2 in December 2011 (mainly due to base effects on vegetable prices). - Monetary policy actions and transmission: - RBI raised policy rates by 375 basis points over the last two years before pausing. - Call money rate in real terms rose by about 500 basis points and reached nearly 2 percent in January 2012. - Policy reforms: repo rate as main policy rate; liberalizing savings deposit rates; linking small savings to market rates; base rate reform. - RBI cut cash reserve requirements by 50 basis points in January 2012 citing tighter-than-expected liquidity. - Real policy rate (deflated by WPI) has risen; bringing real repo toward historical average of 1.5-2 percent would be consistent with disinflation targets. - Policy guidance: - RBI remains vigilant on wage-price dynamics and expectations; will look for sustained moderation before lowering policy rates. - Consider giving more weight to CPI in policy formulation and publish rolling one-year ahead inflation forecasts as forward guidance. ### Fiscal situation and public finances - Fiscal deficit remains high and adds to demand pressures. - 2011/12 deficit target is likely to be exceeded by about 1 percent of GDP despite slower capital spending. - Public debt declined to 67 percent of GDP in March 2011 due to high nominal GDP growth. - With consolidation falling short of the 13th Finance Commission roadmap: - Center’s deficit likely to decline by 0.2 percent of GDP in 2011/12 versus the FC target of 0.9 percent. - General government deficit may be pushed above the forecast 8.1 percent of GDP. - Capital spending remains below FC targets; subsidies have not been contained. - Fiscal policy recommendations: - Stay the course on medium-term fiscal consolidation and resist pressures for demand stimulus. - Contain subsidies, decontrol diesel prices, rationalize fertilizer and gas subsidies, and move toward direct cash transfers under UID. - Reorient expenditure toward infrastructure and social sectors to ease supply constraints and make growth more inclusive. ### Growth, projections, and potential output - Near-term growth projections: - Growth projected at about 7 percent for 2011/12 and 2012/13. - Investment anticipated to pick up modestly from the slump recorded in 2011Q3. - Medium-term: - Potential output growth estimated at around 7.5-8 percent, assuming faster government project approvals. - Authorities expect growth to return toward trend range of 8-8½ percent in 2012/13, conditional on no materialization of global financial risks. - Inflation projections: - Inflation projected at 6¾ percent in March 2012, but to stay at around 7 percent for the rest of 2012. - RBI objectives: 4-4.5 percent near-term, and 3 percent medium-term. - External and current account: - Current account deficit projected to widen slightly to 2.8 percent of GDP. ### Risks, empirical findings, and policy implications - Key growth and inflation risks (staff assessment and Box 4): - Continued investment slowdown — Staff assessment: MEDIUM; Expected impact: HIGH. - Inflation remains high and volatile — Staff assessment: MEDIUM; Expected impact: MEDIUM to HIGH. - Renewed global financial turmoil and prolonged slowdown in advanced economies — Staff assessment: MEDIUM; Expected impact: HIGH. - Fiscal expansion without compensating measures — Staff assessment: MEDIUM; Expected impact: MEDIUM. - Empirical findings on inflation-growth trade-off (Box 5): - Studies find inflation beyond 5-6 percent is associated with lower growth in India. - Standard OLS: a 1 percentage point increase in the output gap leads to a 0.4 percentage point increase in inflation. - Implication: large disinflation costs — e.g., growth needs to be below potential by 2 percentage points for inflation to drop by 1 percentage point (assuming unchanged potential growth of 7.8 percent). - Quantile regression: cost of disinflation larger at higher inflation levels; inflation more inertial at higher levels. - Policy implications: - Continued disinflation is needed and may require output to remain below potential for an extended period. - Fiscal consolidation is needed to support disinflation and reduce crowding out. - Structural reforms to ease supply constraints, revive investment, and boost inclusive growth are necessary. ### Implementing structural reforms (investment, labor, agriculture, infrastructure) - Rationale: supply constraints bind; raising investment is essential to reverse slowdown and prevent potential growth decline. - Key reform areas and measures: - Infrastructure: - Simplify permitting procedures; make contracts more enforceable. - Facilitate land acquisition; speed up power sector reforms (coal allocation, state electricity boards’ finances, coal pricing, electricity tariffs). - Financial markets: - Deepen private sector credit and corporate bond markets; reduce predominance of government securities in portfolios. - Labor regulation: - Move toward protecting workers rather than jobs; improve workers’ skills. - Agriculture and retail: - Improve agricultural productivity (12th Plan focus) to reduce food price pressures. - FDI in multibrand retail to improve supply chains. - Trade, human capital, technology: - Trade liberalization, education, and technology access to raise export sophistication and productivity. - Inclusiveness effects: - Infrastructure and agricultural productivity improvements to raise rural incomes and market access. - Education and labor reforms to improve job prospects for a growing working age population. - Authorities’ view: - Authorities attribute slowdown also to monetary tightening, global economy, and rupee depreciation; they cite measured reform progress (interest rate liberalization, eased FDI rules, National Manufacturing Strategy, Land Acquisition and Mining Laws submitted to Parliament). ### Financial stability and financial-sector reform (FSAP findings) - FSAP findings: - Financial system broadly stable but some areas need strengthening. - NPAs rose 30 percent in the year to September 2011 to 2.8 percent of total advances; provision coverage remains low. - Hybrid structures account for a relatively high proportion of capital; concentration limits less stringent than international good practice. - Important risks: insufficient oversight of corporate risks (including FX open positions) and need for stronger consolidated supervision. - Recommendations and actions: - Tie public bank recapitalization to performance; increase inter-regulatory information sharing. - Grant supervisors greater powers to resolve nonviable entities. - Increase oversight of corporate risks and strengthen consolidated supervision. - Infrastructure financing and market development: - Need to diversify funding sources beyond banks; steps taken include raising FII limits in bonds and enabling infrastructure finance companies to buy seasoned loans and borrow abroad. - Fixed-income market reforms recommended: lower SLR, encourage bond trading and marking-to-market, relax repo collateral and CDS restrictions, ease investment guidelines for domestic institutional investors, approve PFRDA bill, improve insolvency regime and investor protection. - Broadening financial reach and inclusion: - Ease regulations increasing banks’ costs in underserved areas; allow greater role for business correspondents; promote SME financing via capital markets. ### PPP contingent liabilities (Box 6 summary) - Private finance for infrastructure: US$51 billion in 2010/11, around 2.8 percent of GDP; 12th Plan expected to call for rise to 5 percent of GDP. - India’s PPP program size: US$129 billion; contingent liabilities include annuities, termination payments, and completion obligations. - Simplified, probability-weighted estimates indicate relatively small exposures: - Maximum exposure drops from a peak of around 0.3 percent of GDP as projects under construction come online. - With a 95 percent probability, losses remain under Rs 20 billion, or 0.02 percent of GDP. - Recommendation: present contingent liabilities transparently and develop deeper authority databases for more accurate calculations. ### External vulnerabilities and risk analysis (Annexes and stress scenarios) - Transmission channels: - India vulnerable via confidence and financial channels; trade channel less dominant. - Correlation of Global GDP and India: Growth in Fixed Capital Formation: Until 2003: -0.03; Since 2003: 0.67. - External financing and exposures: - BIS-reporting banks’ claims on India are mostly cross-border and short term. - Euro zone banks’ claims on India: 3.2 percent of India’s GDP. - UK banks’ claims: 4.2 percent of India’s GDP. - US banks’ claims: 3.6 percent of India’s GDP. - Reserves and external debt: - Reserve coverage: 1.8 times the 2011 gross external financing requirement. - External debt remained about 20 percent of GDP. - Corporate and banking vulnerabilities: - Corporates have higher leverage than EM peers; corporate dollar liquidity shortages in past led to onshore borrowing and domestic strains. - FSAP stress tests: banks’ capital ratios could fall by around a third; Tier 1 could fall to 2½ percent; NPAs could rise to 7-8 percent of total advances; capitalization needs could rise to around 3½ percent of total system assets or 1¾ percent of GDP. - Annex I downside scenario (global financial turmoil and protracted slow growth): - For India, scenario generates a growth shock comparable to the GFC; long-run growth remains below pre-crisis levels in the scenario. - Empirical relationships: - A 1 percent decline in global domestic demand → 0.6 percent decline in Indian exports (trade-weighted). - A $10 fall in global oil prices → current account improves by around 0.6 percent of GDP. - Key exposures: - Around 11 percent of market capitalization held by foreigners. - Stock of external borrowing by Indian corporates ~4 percent of GDP; holdings of debt securities 2.3 percent of GDP. - Banking stress and funding: gross external financing need (US$ billions) series: 65.9; 62.6; 81.0; 114.9; 129.7; 160.6; 194.5; 224.5; 229.0; 253.0; 281.4; 311.1. - Gross external financing need (percent of GDP) series: 7.9; 6.6; 6.6; 9.5; 9.4; 10.1; 11.2; 11.8; 10.8; 10.8; 10.9; 10.9. - Policy buffers and responses: - Monetary policy can provide liquidity and cut rates if inflation allows; RBI interventions in FX limited pre-August 2011 but used to address market dislocations. - Fiscal measures should be cautious and targeted (high-multiplier items) because fiscal space is limited at current deficit/debt levels. - Structural and regulatory options: raise all-in cost spreads on external commercial borrowing, continue gradual capital flow liberalization, strengthen reserves and supervisory cooperation. ### Statistical issues (Annex IV) - Overall: macroeconomic statistics adequate for surveillance but weaknesses in timeliness and coverage persist. - SDDS observance: India subscribed on December 27, 1996 and started posting metadata on October 30, 1997; currently in observance with flexibility options for timeliness of general government operations and labor market data periodicity/timeliness. - National accounts and employment: - New national accounts base year 2004–2005; quarterly releases have a two-month lag. - Employment data available only annually and cover mainly formal sector. - Price statistics: - Four CPIs exist for narrow consumer categories; a revised national CPI unveiled early 2011. - WPI revised with 2004/05 base year. - Real estate and housing price data not timely and limited in geographic coverage. - External sector statistics: - Balance of payments broadly in line with BPM5 but RBI presentation does not strictly follow BPM5. - Trade data have quality, valuation, timing, and coverage problems. - External debt statistics quarterly with one quarter lag; short-term external debt often presented on original maturity basis. - Monetary and financial statistics: - RBI publishes wide array of monetary statistics; frequency and quality of dissemination improved. - Deviations from MFSM include resident sector sectorization and quarterly addition of accrued interest by commercial banks. - Government finance statistics: - MoF compiles GFS; central government cash flow statement reported within one month; no monthly state-level fiscal performance data. - General government data two years after reference year reported in GFSM 1986 format and reworked to GFSM 2001 by staff. - Data quality/dissemination indicators (examples preserved as in source): - Exchange Rates: Date of latest observation 01/31/12; Methodological soundness: DDD; Accuracy/reliability: DDD. - International reserve assets: Date of latest observation 01/20/12; Date received 01/30/12; Accuracy/reliability: WWW. - Consumer price index: Date of latest observation Dec. 2011; Date received 01/31/12; Methodological soundness/accuracy entries include MMMO, LNO, O, OLNO, LO, O, O, O (as presented). - External current account balance: Date of latest observation Sept. 2011; Date received 11/13/12; Methodological soundness: QQQ; Accuracy/reliability entries: LO, O, LO, OLO, O, O, O, LO (as presented). ### Key statistics and selected economic indicators (selected exact figures preserved) - Real GDP (at factor cost) growth (y/y percent change): - 2007/08: 9.3 - 2008/09: 6.7 - 2009/10: 8.4 - 2010/11: 8.4 - 2011/12: 6.8 - 2012/13 (Proj.): 7.0 - Wholesale prices (y/y percent change, average): - 2007/08: 4.7 - 2008/09: 8.1 - 2009/10: 3.8 - 2010/11: 9.6 - 2011/12: 8.7 - 2012/13 (Proj.): 7.2 - Central government deficit (percent of GDP): - 2007/08: -3.1 - 2008/09: -6.8 - 2009/10: -6.5 - 2010/11: -6.1 - 2011/12: -5.9 - 2012/13 (Proj.): -5.8 - General government debt (percent of GDP): - 2007/08: 74.6 - 2008/09: 75.4 - 2009/10: 71.3 - 2010/11: 66.7 - 2011/12: 66.2 - 2012/13 (Proj.): 65.7 - Current account balance (US$ billions): - 2007/08: -15.7 - 2008/09: -27.9 - 2009/10: -38.2 - 2010/11: -45.9 - 2011/12: -47.6 - 2012/13 (Proj.): -56.3 - Gross reserves (end-period, in billions of US$): - 2007/08: 309.7 - 2008/09: 252.0 - 2009/10: 279.1 - 2010/11: 293.1 - 2011/12: 298.6 - 2012/13 (Proj.): 315.7 - External debt (percent of GDP, end-period): - 2007/08: 18.1 - 2008/09: 18.4 - 2009/10: 19.2 - 2010/11: 17.7 - 2011/12: 19.7 - 2012/13 (Proj.): 20.7 ### Millennium Development Goals and social indicators (1990–2010) - Selected MDG indicators (as presented): - Malnutrition prevalence, weight for age (% of children under 5): 43.5 - Prevalence of undernourishment (% of population): 19.0 - Literacy rate, youth total (% of people ages 15-24): 61.9 ... 81.1 - Primary completion rate, total (% of relevant age group): 84.2 86.7 95.7 - Immunization, measles (% of children ages 12-23 months): 56.0 61.0 64.0 74.0 74.0 74.0 - Mortality rate, infant (per 1,000 live births): 83.8 ... 57.2 50.8 49.5 48.2 - Mortality rate, under-5 (per 1,000): 118.2 ... 76.5 66.8 64.7 62.7 - Contraceptive prevalence (% of women ages 15-49): 43.0 ... 56.3 54.0 - Incidence of tuberculosis (per 100,000 people): 168.0 ... 205.0 196.0 190.0 185.0 - CO2 emissions (metric tons per capita): 0.8 1.2 1.3 1.5 - Forest area (% of land area): 21.5 ... 22.8 ... 23.0 - Improved sanitation facilities (% of population with access): 18.0 ... 31.0 - Improved water source (% of population with access): 72.0 ... 88.0 - Fixed line and mobile phone subscribers (per 1,000 people): 0.6 9.1 18.6 33.8 48.7 67.2 - Internet users (per 1,000 people): ... 2.0 2.9 4.6 5.4 7.8 - Total debt service (% of exports of goods, services and income): 34.9 14.5 8.6 9.6 6.0 5.6 - General indicators (selected): - Fertility rate, total (births per woman): 4.0 3.0 2.8 2.7 2.7 - GNI per capita, Atlas method (current US$): 390.0 640.0 850.0 1,080.0 1,220.0 1,330.0 - Population, total (millions): 849.5 1,079.7 1,109.8 1,140.0 1,155.3 1,170.9 - Trade (% of GDP): 15.7 36.9 45.3 52.7 44.9 46.3 *Source: INDIA 2012 ARTICLE IV REPORT (excerpts presented in content unit _cr1296).* ### 1. Millennium Development Goals, 1990-2010 ............................................................................. ### 1. Millennium Development Goals, 1990-2010 ### Overview - The content unit title appears in the table of contents of the INDIA 2012 ARTICLE IV REPORT. - Listed location in the source: page 32. ### Scope indicated by surrounding material - The report includes detailed sections on macroeconomic indicators, balance of payments, fiscal operations, and external vulnerability that frame the broader country assessment in which the Millennium Development Goals (1990–2010) item is listed. - Adjacent boxes and annexes in the report address poverty and income inequality, corporate investment, exports, and downside external scenarios, which are thematically related to MDG outcomes. *Source: INDIA 2012 ARTICLE IV REPORT (table of contents entry for “Millennium Development Goals, 1990-2010” listed on page 32).* ### 7. Inflation is moderating, but remains ### 7. Inflation is moderating, but remains ### Inflation dynamics - Core and headline inflation have stayed above historical averages and the RBI’s stated objectives. - Pricing power in manufacturing, measured by the difference between PMI input and output prices, is still strong. - Little or no excess capacity implies inflation pressures could take time to ease. - Nominal wage growth has outpaced inflation since 2010. - Consumer price inflation, which weighs food heavily, has been above 7 percent for almost four years, contributing to upward drifting expectations. - Structural and demand drivers of food inflation: - Rising incomes, particularly in rural areas, are leading to higher food demand and shifting composition toward proteins and away from grains. - Large increases in agricultural support prices and the indexation of rural relief wages have contributed to food price pressures. - Recent inflation readings: - WPI inflation fell to 6.6 percent in January 2012. - CPI inflation dropped to 6 1/2-8 1/2 in December 2011 (mainly due to base effects on vegetable prices). - Inflation momentum is still at about 7 percent. ### Monetary policy and interest rates - RBI tightened policy by raising policy rates by 375 basis points over the last two years before pausing. - The call money rate measured in real terms, after being negative for two years, has risen by about 500 basis points and reached nearly 2 percent in January 2012. - Policy framework and transmission measures undertaken by authorities: - Establishing the repo rate as the main policy rate. - Liberalizing savings deposit rates. - Linking interest rates on small savings to market rates. - Base rate reform. - Effects of reform and market developments: - Shift to a liquidity deficit in the money market increased pass-through from the repo rate to lending rates. - Depreciation of the NEER since July (about 8 percent) has partly offset interest rate hikes. - RBI liquidity and reserve actions: - In January 2012 the RBI cut cash reserve requirements by 50 basis points citing tighter-than-expected liquidity. - RBI indicated policy rates will not be cut until inflation has moderated sustainably. - Real policy rate: - The real policy rate (deflated by WPI) has risen; the report notes bringing the real repo rate toward its historical average of 1.5-2 percent would be consistent with disinflation targets. - RBI stance: - The RBI remains vigilant on inflation, concerned about wage-price dynamics and expectations formation, and will look for sustained moderation before lowering the policy rate. - RBI will continue to use a multiple-indicator approach (WPI, CPIs, and other indicators) in policy decisions, while considering giving more weight to CPI in policy formulation. ### Fiscal situation and public finances - Fiscal deficit remains high and adds to demand pressures. - The modest decline in the deficit-to-GDP ratio in 2010/11 resulted mostly from one-off measures. - The 2011/12 deficit target is likely to be exceeded by about 1 percent of GDP, despite slower capital spending. - Midyear rise in fuel prices mitigated spending pressures, but the subsidy bill is still likely to exceed the budget by a substantial amount. - Corporate tax revenues weakened due to the slowing economy; measures to broaden services taxation were partly offset by cutting indirect taxes on fuels. - Public debt declined to 67 percent of GDP in March 2011, due to high nominal GDP growth. - With consolidation falling short of the 13th Finance Commission roadmap: - The center’s deficit is likely to decline by 0.2 percent of GDP in 2011/12, compared to the FC target of 0.9 percent. - General government deficit may be pushed above the forecast 8.1 percent of GDP. - Capital spending remains below FC targets; subsidies have not been contained. - Average interest rates on government debt have risen; announcement in September 2011 of higher government market borrowing caused a jump in long-term interest rates. - RBI open market operations have subsequently lowered yields. ### Growth, projections, and potential output - Growth projections: - Growth is projected at about 7 percent for 2011/12 and 2012/13. - Investment is anticipated to pick up modestly from the slump recorded in 2011Q3 as capital goods production indicators stabilize. - Consumption should remain robust; exports are cooling. - Over the medium term, potential output growth is estimated at around 7.5-8 percent, assuming faster government project approvals. - Inflation projections: - Inflation is projected at 6¾ percent in March 2012, but to stay at around 7 percent for the rest of 2012. - These compare to the RBI’s objectives of 4-4.5 percent near-term, and 3 percent medium-term. - External and current account: - The current account deficit is projected to widen slightly to 2.8 percent of GDP, as exports soften and oil prices remain high. - Authorities’ outlook: - Authorities estimate growth between 7-7.5 percent in 2011/12 and expect pick-up in second half of 2012/13. - Authorities expect growth to return toward the trend range of 8-8½ percent in 2012/13, provided global financial risks do not materialize. - Authorities expect inflation to reach the March 2012 projection (7.0 percent) and show further decline in 2012-13. ### Risks, empirical findings, and policy implications - Growth risks (from the staff assessment and Box 4): - Continued investment slowdown — Staff assessment: MEDIUM; Expected impact: HIGH. - Inflation remains high and volatile — Staff assessment: MEDIUM; Expected impact: MEDIUM to HIGH. - Renewed global financial turmoil and prolonged slowdown in advanced economies — Staff assessment: MEDIUM; Expected impact: HIGH. - Fiscal expansion without compensating measures — Staff assessment: MEDIUM; Expected impact: MEDIUM. - Empirical findings on inflation-growth trade-off (Box 5): - Several studies and staff analysis find inflation beyond 5-6 percent is associated with lower growth in India. - Using a backward-looking Phillips curve and quantile regression: - Standard OLS indicates a 1 percentage point increase in the output gap leads to a 0.4 percentage point increase in inflation. - This implies large disinflation costs (e.g., growth needs to be below potential by 2 percentage points for inflation to drop by 1 percentage point, assuming unchanged potential growth of 7.8 percent). - Quantile regression suggests the cost of disinflation becomes larger at higher levels of inflation and inflation is more inertial at higher levels. - Policy recommendations and considerations highlighted: - Continued disinflation is needed; inflation risks remain substantial. - Disinflation may require output to remain below potential for an extended period given persistence. - Enhance monetary policy framework to anchor expectations: - Publish rolling one-year ahead inflation forecasts as forward guidance. - Consider giving more weight to the CPI in policy formulation over WPI. - Fiscal consolidation is needed to contribute to disinflation and reduce crowding out; containment of subsidies and adherence to consolidation roadmaps are emphasized. - Structural reforms to ease supply constraints, revive investment, and boost inclusive growth are necessary to mitigate medium-term risks. *Source: INDIA 2012 ARTICLE IV REPORT (section titled "Inflation is moderating, but remains").* ### 22. Implementing structural reforms to ### 22. Implementing structural reforms to ### Rationale for reforms - Persistently high inflation shows that supply constraints are binding; to lessen these constraints and reverse the slowdown, investment must rise. - Protracted weak investment would initially lower demand and, over time, would reduce potential growth. - Demand management policies can only provide limited impetus to growth, given the high fiscal deficit and the continued need to bring inflation down. ### Key areas to reinvigorate investment - Staff research indicates ample room for India’s business environment to improve and high potential for structural reforms, with wide variations across cities implying India can learn from itself. - Enhancing clarity and predictability of regulations and accelerating approval processes is vital. - Some measures are under states’ purview and will require adjustments in states’ regulations and practices. Key reform areas and measures: - Infrastructure - Simplify permitting procedures and make contracts more enforceable. - Facilitate land acquisition and make it more predictable and equitable. - Speed up reforms in the power sector through better allocation of domestic coal, bringing state electricity boards’ finances on a sustainable footing, and reforming coal pricing and electricity tariffs. - Financial markets - Private sector credit and the corporate bond market are small relative to EMs, partly because of the predominance of government securities in financial institutions’ portfolios. - Labor regulation - India’s labor regulation is tighter than in most OECD countries and should move toward protecting workers rather than jobs; improving workers’ skills is another priority. - Agriculture and retail - Improved agricultural productivity (a focus of the 12th Plan) would reduce structural pressures on food prices. - FDI in the multibrand retail sector could help by making supply chains more efficient. - Trade, human capital, and technology - Trade liberalization, an educated workforce, and access to information flows and technology are associated with increased sophistication of exports and productivity. ### Inclusiveness effects - Improved infrastructure would enhance the rural poor’s access to markets. - The 12th Plan Approach Paper prioritizes better irrigation and seeds and removal of controls that inhibit a unified market for agricultural products to raise agricultural productivity and rural incomes. - Enhanced education would improve job prospects for India’s rapidly growing working age population. - More liberal labor regulation would facilitate job creation in the formal sector. ### Authorities’ views on structural causes and progress - Authorities believe structural issues are not an important cause of the current investment slowdown; they attribute slowdown also to monetary tightening, the slowing global economy, and rupee depreciation. - They contend progress on policies has been measured but not slower than 2004-2007. - Cited reform progress: - Interest rate liberalization completed. - FDI regulation eased. - Amendments to the law governing the Life Insurance Corporation of India to boost its capital approved. - National Manufacturing Strategy proposed to increase the share of manufacturing. - Land Acquisition and Mining Laws submitted to Parliament. - On energy, lending to state electricity boards conditioned on raising tariffs and reducing transmission and distribution losses. ### Planned measures - The 2012/13 Budget is expected to reduce investment roadblocks in infrastructure and agriculture. - Negotiations related to the GST are ongoing with recent progress. - Authorities plan to address skills mismatches and improve agricultural productivity in the 12th Plan. - Broadening the benefits of economic reform will be a priority under the 12th Plan. --- ### Financial stability and financial-sector reform (FSAP findings and implications) Findings - The FSAP concluded the financial system is broadly stable but some areas could be strengthened. - Financial system developments: - Capital ratios and return on assets are adequate. - Non performing assets (NPAs) rose 30 percent in the year to September 2011 to 2.8 percent of total advances. - Provision coverage remains low. - Hybrid structures account for a relatively high proportion of capital. - Concentration limits are considerably less stringent than international good practice. - Important risks include insufficient oversight of corporate risks (including FX open positions) and the need for stronger consolidated supervision by lead regulators. Recommendations and actions - Tie public bank recapitalization to improved performance and increase inter-regulatory information sharing. - Grant greater powers to supervisors to help resolve nonviable financial entities. - Increase oversight of corporate risks and strengthen consolidated supervision. Infrastructure financing and market development - Public banks’ lending cannot keep pace with rising needs without raising sectoral and group exposures and asset-liability mismatches. - Need to diversify funding sources beyond banks. - Recent steps taken: raised limits on foreign investment (FII) in bonds and enabled infrastructure finance companies to buy seasoned infrastructure loans and borrow abroad; uptake low due to nonfinancial and scheme design issues and insufficient bond market liquidity. Fixed-income market reforms to facilitate infrastructure funding - Lower mandatory bank holdings of public debt (the statutory liquidity ratio, SLR). - Encourage banks to trade bonds (increase share of bonds that must be marked to market). - Relax restrictions on repo collateral and CDS while continuing to raise FII debt limits. - Ease investment guidelines for domestic institutional investors and relax restrictions on credit enhancements. - Approve the Pension Fund Regulatory and Development Agency (PFRDA) bill to give impetus to the pension fund industry and promote long-term investments. - Improve the insolvency regime, increase investor protection, and develop instruments to hedge interest rate risk. Broadening financial reach and inclusion - Ease regulations that raise the cost for banks to operate in underserved areas and allow a greater role for business correspondents to extend banking services to the unbanked. - Greater SME financing requires larger corporates shifting to capital markets and more effective contract enforceability. Authorities’ views on FSAP and financial development strategy - Authorities view the FSAP as useful and largely consistent with their 2008 Financial Self-Assessment. - RBI believes concentration risks can be addressed through sectoral and group limits and that the recent rise in NPAs is transitory and compares favorably with peer emerging market economies. - Financial development initiatives noted: - Five companies have requested licenses to open infrastructure debt funds. - Issuance of tax-free infrastructure bonds facilitated. - Measures to monitor unhedged foreign currency exposure and limit corporate derivative exposures. - Financial inclusion remains a priority with regulatory incentives and use of technology. --- ### Fiscal reform: consolidation, SLR, targets, and spending efficiency Fiscal consolidation rationale - Fiscal consolidation and reforms are essential complements to structural reforms; the FC roadmap would reduce the public sector’s absorption of resources, stimulating private investment. - GST reform is expected to create a unified market across India. - Reorienting spending to infrastructure and social sectors is critical to ease supply constraints, make growth more inclusive, and reduce skill mismatches. Role of fiscal consolidation in financial markets - Reducing the deficit would allow relaxation of financial restrictions currently employed to ensure the government’s access to sufficiently low-cost finance. - The SLR requires banks to hold 24 percent of deposits in government or other approved securities. - Pension and insurance funds are subject to tight investment guidelines. - Large flow of long-term, low-risk assets has discouraged private sector long-term lending. - Authorities have gradually eased financial restrictions—savings deposit rates freed, capital controls eased, and the SLR reduced. - A lower deficit would allow these restrictions to be loosened further, supporting development of the corporate and public bond markets and lowering the cost of finance for private borrowers. Medium-term fiscal framework and targets - The medium-term FC target is broadly consistent with a budget deficit “Golden Rule”. - To reach 9 percent growth, the 12th Plan Approach Paper calls for public investment of 9-10 percent of GDP, half of which would need to be spent by the central and state governments. - The FC target of a 5 percent of GDP deficit for the general government would entail government borrowing almost exclusively for investment purposes. - Over five years, freeing diesel prices and reforming other subsidies could close about two-thirds of the gap with the baseline scenario, while bringing indirect taxes back to pre-crisis levels would close the rest. - The debt-to-GDP ratio is within easy reach of the FC target of 68 percent of GDP by 2014-15. - The authorities aim for a medium-term target of a 3 percent of GDP budget deficit for the central government. Tax and expenditure reforms - GST and the new Direct Tax Code (DTC) remain under negotiation; central government’s broadening of the base of indirect taxation to approximate the eventual GST base and agreement on the services list show progress. - The FC estimated that the GST would boost efficiency by 1½ percent of GDP. - Expenditure reforms are vital to ensure medium-term fiscal consolidation: boost spending on public investment, health, and food subsidies while containing non-priority expenditure. - Liberalization of fuel prices, especially diesel, and rationalization of fertilizer and gas subsidies are crucial, with support for the most vulnerable ensured. - Institutional reforms such as tighter escape clauses from the Fiscal Responsibility Act and an independent review mechanism for fiscal policy, as proposed by the FC, would help implementation. - Recapitalization of public banks (which constitute about ¾ of the overall system), guarantees of public insurance policies, and India’s growing PPP program will require more consistent forecasting of potential government outlays. - The poor financial position of several state electricity boards should be resolved with tariff changes and improvements in efficiency. Spending efficiency and UID - India’s Unique Identification program (UID) is expected to cover one-third of the country’s population – 400 million people – by end-2012. - Pilot projects using the UID to target social benefits have begun and could broaden the reach of government programs at lower cost. Authorities’ views on fiscal consolidation - Authorities state fiscal consolidation is well underway and medium-term targets will be met. - The debt-to-GDP ratio is within easy reach of the FC target of 68 percent of GDP by 2014-15. - The deficit consolidation path is frontloaded, leaving space during the FC period to reach the medium-term central government deficit target of 3 percent of GDP. - The 12th Plan will prioritize improving expenditure efficiency and the UID will pave the way for direct cash transfers. - Bringing down fuel and fertilizer subsidies is important but must be done cautiously. ### PPP contingent liabilities (Box 6 summary) - Private finance for infrastructure was US$51 billion in 2010/11, or around 2.8 percent of GDP; the 12th Plan is expected to call for it to rise to 5 percent of GDP. - India’s PPP program, at US$129 billion already one of the world’s largest, could grow rapidly; PPPs create contingent liabilities such as annuities, termination payments, or the need to finish a program after an investor goes bankrupt. - These risks should be presented transparently; other countries incorporate contingent liabilities or present maximum and probability-based estimates. - Simplifying assumptions and probability-weighted estimates for India’s PPP portfolio indicate relatively small exposures: - Maximum exposure drops drastically from a peak of around 0.3 percent of GDP as projects currently under construction come online and reduce potential losses. - With a 95 percent probability, losses remain under Rs 20 billion, or 0.02 percent of GDP. - More accurate calculations based on deeper authority databases would be worthwhile as programs expand. *Source: _cr1296 - 22. Implementing structural reforms to (India 2012 Article IV Report, IMF).* ### 42. Risk analysis suggests that India is ### _cr1296 - 42. Risk analysis suggests that India is ### External vulnerabilities and channels of transmission - India is vulnerable to a prolonged malaise in advanced economies through confidence and financial channels, despite being less open than most Asian EMs. - Trade channel is less dominant: consumption is fairly insulated and imports compress sharply in crises, while investment has become highly correlated with the global cycle. - Correlation of Global GDP and India: Growth in Fixed Capital Formation: - Until 2003: -0.03 - Since 2003: 0.67 - Current account and exchange rate: - Current account deficit expected to remain close to its estimated norm of 3 percent of GDP. - REER had appreciated by 10 percent in 2010 because of inflation differentials; nominal depreciation in 2011 leaves the REER broadly in line with fundamentals. - Spikes in global risk aversion can lead to larger rupee depreciation than for other regional currencies because the current account deficit is increasingly financed by external commercial borrowing and portfolio investment, raising vulnerability to sudden stops. ### Cross-border banking exposures and external financing - BIS-reporting banks’ claims on India are mostly cross-border and short term, increasing vulnerability to deleveraging. - Euro zone banks’ claims on India amount to 3.2 percent of India’s GDP. - UK banks’ claims amount to 4.2 percent of India’s GDP. - US banks’ claims amount to 3.6 percent of India’s GDP. - European banks are important providers of trade credit and major players in FX derivatives markets. - Global banks have been reducing their claims slowly and being replaced by other banks, especially from the region; abrupt deleveraging would be difficult to compensate. - Domestic banks, especially public banks, could benefit from deposit inflows replacing foreign financing. ### Reserves, external debt, and market indicators - Reserve coverage: 1.8 times the 2011 gross external financing requirement. - External debt has remained at about 20 percent of GDP. - Local indicators referenced (from text/figures): CDS corporate median, Call rate, Local USD funding premium (implied by three-month FX forwards) — used in staff analysis of funding costs and market stress. ### Corporate sector vulnerabilities - Corporates have higher leverage than EM peers and are freer to take FX positions due to less stringent capital controls on corporates than on financial institutions and individuals. - During the GFC, dollar liquidity shortages led Indian multinationals to onshore borrowing, adding to domestic strains and spiking money market rates; many firms also incurred losses from exchange rate depreciation. - Bank balance sheets are dominated by corporate lending, resulting in high concentration risks (concern noted in the FSAP). - Public banks, with lower levels of capital and provisioning, could be particularly affected by a significant deterioration in asset quality. ### Policy responses and buffers - Monetary policy: - Can move first to provide immediate relief through liquidity provision (RBI has begun doing so) and interest rate cuts, especially if a global shock is accompanied by lower oil prices that reduce inflationary pressures. - RBI interventions in FX markets were minimal since the GFC until August 2011; recent interventions align with the RBI’s stated policy of addressing severe market dislocations and FX liquidity shortages. - Recent measures to restrict banks’ net FX open positions and corporates’ onshore forward trading appear to have helped stabilize the rupee. - Fiscal policy: - Fiscal measures could help but should be taken cautiously because expansionary measures are difficult to reverse (experience after the GFC). - Available fiscal space will depend on progress on fiscal consolidation before a crisis; at current levels of the fiscal deficit and debt, fiscal room would be small. - In the event of a crisis, any fiscal expansion should be limited and focused on high-multiplier items such as indirect taxes and backlogged capital projects. - Structural and regulatory options: - Consider increasing all-in cost spreads on external commercial borrowing to ease external financing constraints. - Continue gradual liberalization of capital flows (examples in text: freeing interest rates on nonresident accounts, facilitating refinancing of external debt, allowing foreign individuals to invest in equities directly). ### Authorities’ views - Authorities agree that difficulties in advanced economies pose serious risks but stress India’s resilience: - Trade diversification and domestic sources of growth should mitigate impacts. - Managed capital account and Indian banks’ minimal exposure to Euro zone assets would limit financial spillovers. - Recent rupee depreciation is comparable to the GFC episode, but high oil prices have offset the impact on the current account. - Crisis response stance: - A coordinated response by both the RBI and the government would be warranted. - Authorities cite reserves as a line of defense while maintaining the floating exchange rate regime. - RBI affirms FX intervention remains justified to smooth volatility or address severe FX liquidity shortages. ### Staff appraisal: risks and recommended policy stance - Growth and inflation context: - Growth slowed in 2011/12 due to supply constraints, rising funding costs, and the external environment; slowdown not yet sufficient for sustained disinflation. - Given decelerating but still high inflation, keeping policy rates unchanged until inflation is clearly on a downward trend is warranted. - Over the medium term, RBI aims to lower inflation further to below 5 percent. - Fiscal policy recommendations: - Stay the course on medium-term fiscal consolidation; resist pressures for demand stimulus. - Reconstituting fiscal space is important given heightened external risks. - Prefer fiscal reforms over demand stimulus to revive investment; reorient expenditure toward capital and social spending. - Decontrol diesel prices, rationalize other fuel and fertilizer subsidies, move toward direct cash transfer under UID, and approve GST. - Structural reforms for revival and inclusiveness: - Revival of growth should come from structural reforms rather than monetary and fiscal stimulus. - Priority reforms: energy sector measures, legislation to facilitate land acquisition and mining, financial reforms to increase access to credit and diversify funding sources. - Labor market liberalization, addressing skill mismatches, and improving agricultural productivity to promote inclusive growth. - Financial sector resilience: - Continue measures to increase and improve the quality of bank capital. - Improve interregulatory cooperation and clarify supervisory responsibilities. - Develop fixed income markets to meet infrastructure financing needs while reducing financial restrictions as fiscal consolidation proceeds. - Strengthen resolution regimes, increase oversight of corporate risks, and address group concentration risks in the banking sector. - Crisis scenario: - A slowdown in global growth, especially a sudden stop in capital flows, would severely impact India due to investment’s linkage to global cycles, corporate leverage, and a less favorable external position than in 2008. - Flexible rupee would be an important buffer; scope for fiscal and monetary stimulus is more limited than in 2008. - Monetary easing could be used, contingent on domestic inflation trends. *IMF staff summary drawn from INDIA 2012 ARTICLE IV REPORT (excerpt).* ### 59. It is recommended that the next ### It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Conjunctural Developments - Growth is moderating, but inflation is still elevated. - GDP growth has moderated because of weak investment. - High frequency indicators have rebounded in recent months but still point to sluggish investment. - Corporate performance has reflected the moderation in the economy: - Gross profit/sales and After tax profit/sales shown as series (no numeric summary in source figure text). - Industrial production and consumption: - IP Consumer durables, IP Consumer non-durables, and Cement consumption shown as y/y percent change series (no numeric summary in source figure text). - Wages and inflation: - Average Daily Wage 1/ (year-over-year growth) series presented; note: "1/ wage data are not widely available and only cover small segments of the labor market. The data presented here are from the Ministry of Labor." - WPI, y/y and CPI-IW, y/y series shown; inflation measured as "WPI (In percent, annualized quarterly growth of 3mma sa)". ### Monetary and Financing Conditions - Real interest rates have risen gradually, and credit and corporate issuance have slowed. - Interest rate developments: - Series shown for Repo, Call rate, Reverse repo (In percent). - Real 3-mo Tbill rate and Nominal MCI 1/ (RHS) series presented; "1/ The MCI is based on the average of repo and reverse repo rate and the NEER." - Monetary conditions: - Monetary accommodation removed gradually and affected by the rupee depreciation in H2 2011. - Real cost of borrowing has risen; Prime lending rate and AAA corporate bond yield series presented (In percent, deflated by WPI). - Credit growth and markets: - Credit Growth: 3-mo Tbill rate and Non-food credit growth (y/y, RHS) series shown (In percent). - Stock market and exchange rate: Stock market index (March 2007=100) and Rupee/US$ (RHS) series shown. - Net FII, ECBs, and FDI (RHS) and Domestic issuance displayed in (In billions of U.S. dollars) time series. ### Fiscal Indicators - With this year’s target out of reach, returning to consolidation will be a challenge. - Rapid nominal GDP growth has brought debt down, and the government remains committed to its original consolidation plan. - Consolidation is significantly slower than in 2003-2007. - Spending and revenue: - Spending in areas targeted for cuts, particularly subsidies, has remained high, slowing the reorientation of spending. - Despite base broadening, revenue buoyancy has been low. - Under current trends the debt burden will fall only marginally in the medium term. - Selected fiscal series and projections (general government, fiscal deficit, capital expenditure, public debt): - Public Debt (paths for general government) and Capital Expenditure/Fiscal Deficit time series shown (percent of GDP, and RHS for Public Debt). - Government Balance series: Central government and State government (In percent of GDP). - Composition of Expenditure (In percent of GDP): Other current expenditure; Interest, Pensions, Subsidies and Wages; Capital expenditure & net lending. - Central Government Revenue (In percent of GDP): Direct and Indirect revenues. - Nominal Growth and Public Debt projections shown (In percent of GDP). ### External Vulnerability - External vulnerabilities have increased but remain manageable. - Trade and current account: - External demand has slowed; Trading partners import volume growth (y/y) and PMI New Export Orders (NSA, RHS) series shown. - Exports, y/y; Non-oil imports, y/y; CA/GDP (RHS) series shown (In percent). - Financing: - The gross financing requirement has risen and the composition of the current account deficit financing has worsened. - FDI/CA (RHS) and GFR/gross reserves series shown (In percent). - FII flows (portfolio) and VIX index (RHS) shown (3mma; in billions of US$). - Portfolio inflows have declined with the spike in global risk aversion. - Bank claims and contagion risk: - BIS banks’ claims on India are significant; Consolidated Foreign Claims of European and U.S. Banks on Selected Asian Economies 1/ displayed (In percent of GDP; as of 2011 Q3). - Regional Financial Institutions: Conditional probability of at least one bank in the economy would fail if a major UK bank was in distress — India included in series (values shown as time series up to Feb-12). ### Millennium Development Goals and Social Indicators (1990–2010) - Selected MDG indicators and levels (as presented): - Malnutrition prevalence, weight for age (% of children under 5): 43.5 - Prevalence of undernourishment (% of population): 19.0 - Literacy rate, youth total (% of people ages 15-24): 61.9 ... 81.1 - Primary completion rate, total (% of relevant age group): 84.2 86.7 95.7 - Immunization, measles (% of children ages 12-23 months): 56.0 61.0 64.0 74.0 74.0 74.0 - Mortality rate, infant (per 1,000 live births): 83.8 ... 57.2 50.8 49.5 48.2 - Mortality rate, under-5 (per 1,000): 118.2 ... 76.5 66.8 64.7 62.7 - Contraceptive prevalence (% of women ages 15-49): 43.0 ... 56.3 54.0 - Incidence of tuberculosis (per 100,000 people): 168.0 ... 205.0 196.0 190.0 185.0 - CO2 emissions (metric tons per capita): 0.8 1.2 1.3 1.5 - Forest area (% of land area): 21.5 ... 22.8 ... 23.0 - Improved sanitation facilities (% of population with access): 18.0 ... 31.0 - Improved water source (% of population with access): 72.0 ... 88.0 - Fixed line and mobile phone subscribers (per 1,000 people): 0.6 9.1 18.6 33.8 48.7 67.2 - Internet users (per 1,000 people): ... 2.0 2.9 4.6 5.4 7.8 - Total debt service (% of exports of goods, services and income): 34.9 14.5 8.6 9.6 6.0 5.6 - General indicators (selected): - Fertility rate, total (births per woman): 4.0 3.0 2.8 2.7 2.7 - GNI per capita, Atlas method (current US$): 390.0 640.0 850.0 1,080.0 1,220.0 1,330.0 - Population, total (millions): 849.5 1,079.7 1,109.8 1,140.0 1,155.3 1,170.9 - Trade (% of GDP): 15.7 36.9 45.3 52.7 44.9 46.3 - Source: World Bank, World Development Indicators, 2011. Note: "1/ In some cases the data are for earlier or later years than those stated." ### Key Tables and Selected Economic Indicators (highlights and exact figures) - Table 2. India: Selected Economic Indicators, 2007/08–2012/13 (selected rows) - Real GDP (at factor cost) growth (y/y percent change): - 2007/08: 9.3 - 2008/09: 6.7 - 2009/10: 8.4 - 2010/11: 8.4 - 2011/12: 6.8 - 2012/13 (Proj.): 7.0 - Wholesale prices (y/y percent change, average): - 2007/08: 4.7 - 2008/09: 8.1 - 2009/10: 3.8 - 2010/11: 9.6 - 2011/12: 8.7 - 2012/13 (Proj.): 7.2 - Consumer prices - industrial workers (2001 weights), y/y percent change (average): - 2007/08: 6.2 - 2008/09: 9.1 - 2009/10: 12.4 - 2010/11: 10.4 - 2011/12: 8.1 - 2012/13 (Proj.): 8.5 - Gross saving (percent of GDP): - 2007/08: 36.4 - 2008/09: 31.7 - 2009/10: 33.5 - 2010/11: 31.3 - 2011/12: 31.3 - 2012/13 (Proj.): 30.4 - Central government deficit (percent of GDP): - 2007/08: -3.1 - 2008/09: -6.8 - 2009/10: -6.5 - 2010/11: -6.1 - 2011/12: -5.9 - 2012/13 (Proj.): -5.8 - General government debt (percent of GDP): - 2007/08: 74.6 - 2008/09: 75.4 - 2009/10: 71.3 - 2010/11: 66.7 - 2011/12: 66.2 - 2012/13 (Proj.): 65.7 - Table 3. Balance of Payments, 2007/08–2012/13 (selected figures, in US$ billions unless noted) - Current account balance: - 2007/08: -15.7 - 2008/09: -27.9 - 2009/10: -38.2 - 2010/11: -45.9 - 2011/12: -47.6 - 2012/13 (Proj.): -56.3 - Merchandise exports: - 2007/08: 166.2 - 2008/09: 189.0 - 2009/10: 182.4 - 2010/11: 250.5 - 2011/12: 274.2 - 2012/13 (Proj.): 307.4 - Merchandise imports: - 2007/08: 257.6 - 2008/09: 308.5 - 2009/10: 300.6 - 2010/11: 381.1 - 2011/12: 428.2 - 2012/13 (Proj.): 489.1 - Foreign direct investment, net: - 2007/08: 15.9 - 2008/09: 22.4 - 2009/10: 18.0 - 2010/11: 9.4 - 2011/12: 18.8 - 2012/13 (Proj.): 22.3 - Portfolio investment, net (equity and debt): - 2007/08: 27.4 - 2008/09: -14.0 - 2009/10: 32.4 - 2010/11: 30.3 - 2011/12: 11.1 - 2012/13 (Proj.): 24.1 - Gross reserves (end-period, in billions of US$): - 2007/08: 309.7 - 2008/09: 252.0 - 2009/10: 279.1 - 2010/11: 293.1 - 2011/12: 298.6 - 2012/13 (Proj.): 315.7 - Current account balance (percent of GDP): - 2007/08: -1.3 - 2008/09: -2.3 - 2009/10: -2.8 - 2010/11: -2.7 - 2011/12: -2.8 - 2012/13 (Proj.): -3.0 - Table 4. Macroeconomic Framework, 2007/08–2015/16 (selected projections) - Real GDP growth (percent change): - 2012/13: 7.4 - 2013/14: 7.6 - 2014/15: 7.8 - Wholesale prices (period average) projections: - 2012/13: 6.4 - 2013/14: 5.4 - 2014/15: 5.4 - General government balance (percent of GDP) projections: - 2012/13: -7.6 - 2013/14: -7.4 - 2014/15: -7.2 - General government debt (percent of GDP) projections: - 2012/13: 64.5 - 2013/14: 63.7 - 2014/15: 63.0 - Table 5. Central Government Operations, 2007/08–2012/13 (selected annual levels in Rs. billion and percent of GDP) - Total revenue and grants (Rs. billion): - 2007/08: 5,919 - 2008/09: 5,576 - 2009/10: 5,938 - 2010/11: 7,098 - 2011/12: 7,731 - 2012/13 (Proj.): 9,232 - Total expenditure and net lending (Rs. billion): - 2007/08: 7,188 - 2008/09: 8,952 - 2009/10: 10,123 - 2010/11: 11,895 - 2011/12: 13,084 - 2012/13 (Proj.): 15,168 - Overall balance (IMF definition) (percent of GDP): - 2007/08: -3.1 - 2008/09: -6.8 - 2009/10: -6.5 - 2010/11: -6.1 - 2011/12: -5.9 - 2012/13 (Proj.): -5.8 - Nominal GDP (in Rs. billion): - 2007/08: 49,479 - 2008/09: 55,671 - 2009/10: 65,503 - 2010/11: 78,756 - 2011/12: 90,194 - 2012/13 (Proj.): 102,251 ### Indicators of External Vulnerability (Table 7 highlights) - Financial and external indicators (selected values and projections): - General government debt (percent of GDP): 74.6 75.4 71.3 66.7 66.2 (Projection) - Broad money (percent change, 12-month basis): 21.4 19.3 16.8 16.0 31.1 18.2 (December 2011) - Private sector credit (percent change, 12-month basis): 21.1 16.9 15.8 21.3 18.8 ... (December 2011) - 91-day T-bill yield (percent; end-period): 7.2 5.0 4.4 7.3 8.8 (January 2012) - Exports (percent change, 12-month basis in US$) (Projection): 28.9 13.7 -3.5 37.3 9.5 - Imports (percent change, 12-month basis in US$) (Projection): 35.1 19.8 -2.6 26.7 12.4 - Current account balance (percent of GDP) (Projection): -1.3 -2.3 -2.8 -2.7 -2.8 - Foreign currency reserves (billions of US$) (Projection): 309.7 252.0 279.1 293.1 298.6 (Projection) - Total short-term external debt to reserves (percent) (Projection): 27.2 32.4 32.4 32.5 39.7 45.9 - Total external debt (percent of GDP) (Projection): 18.3 18.6 18.9 17.3 19.7 - Exchange rate (per US$, period average) (January 2012): 40.3 46.0 47.4 45.6 51.0 - Stock market index (end-period) (January 2012): 15,644.4 9,708.5 17,527.8 19,445.2 17,193.6 - Foreign currency debt rating (January 2012): - Moody's Investor Services: Baa2 Baa2 Baa3 Baa3 Baa3 - Standard and Poor's: BBB- BBB- BBB- BBB- BBB- - Fitch Ratings: BBB- BBB- BBB- BBB- BBB- *Source: INDIA 2012 ARTICLE IV REPORT, International Monetary Fund.* ### ANNEX I. THE EFFECTS OF EXTERNAL DOWNSIDE ### ANNEX I. THE EFFECTS OF EXTERNAL DOWNSIDE SCENARIOS ON INDIA ### Model and Scenario Design - Simulation uses a panel unobserved components model covering 15 major economies that accounts for trade and financial linkages. - The simulation posits a renewed bout of financial turmoil in the United States and Europe followed by a protracted period of slow growth. - Advanced economies’ growth pulled below potential until 2016 due to: rising household savings rates, fiscal austerity, weak banking sector, and financial difficulties. ### Aggregate Growth Impacts - For India and other EMs, the downside scenario generates a growth shock comparable to the global financial crisis (GFC). - In the first year, the shock to growth for major EMs would be substantial; Indian growth declines similarly to Brazil and China. - Most EMs are not overheating to the same degree as in 2008; base rates of growth are lower now, so growth would fall well below potential. - Prolonged high risk aversion could push growth to lower levels than observed during the GFC. - In the long run, Brazil and India show growth rates still below pre-crisis levels even toward the end of the scenario. ### Trade and Current Account Effects - India is less exposed to global supply chain disruptions than many other Asian economies. - Empirical relationship reported: a 1 percent decline in global domestic demand (weighted by countries’ trade with India) is associated with a 0.6 percent decline in Indian exports. - A $10 fall in global oil prices would improve India’s current account deficit by around 0.6 percent of GDP. - Falling investment would reduce imports of capital goods, which account for about 60 percent of imports. ### Investment, Capital Flows, and Market Channels - Investment, particularly corporate investment, is increasingly integrated with global trends via sentiment and financial channels (corporate external borrowing and equity markets). - Foreign holdings and external exposure: - Around 11 percent of the market capitalization of India’s equity markets is held by foreigners. - Stock of external borrowing by Indian corporates is around 4 percent of GDP. - Total holdings of debt securities amount to 2.3 percent of GDP. - Falling global investor confidence could significantly affect equity prices, the rupee, and capital flows, complicating rollover of existing debt and financing new projects. - Correlation evidence: Indian equities and global uncertainty—Correlation until 2003: -0.45; Since 2003: -0.58 (chart referenced). ### Corporate Sector Vulnerabilities - Corporate leverage: debt to equity ratio in 2010 was 248 percent, above comparator countries. - More than 55 percent of total corporate debt was medium- and long-term, reducing immediate rollover risks. - CDS spreads for Indian companies have risen recently but remain below levels seen in 2008/09. - Corporates rely on foreign sources for around a quarter of financing, creating potential feedback loops between corporate vulnerabilities and external shocks. ### Banking Sector Stress and Systemic Risks - FSAP stress-test results (macroeconomic scenarios involving global financial stress) indicate: - Banks’ capital ratios could fall by around a third. - Tier 1 capital could fall to 2½ percent. - Nonperforming assets (NPAs) could rise to 7-8 percent of total advances, a significantly bigger increase than observed during the GFC. - Capitalization needs could rise to around 3½ percent of total system assets or 1¾ percent of GDP. - Global uncertainty would complicate dollar borrowing by banks and corporates and could lead to a domestic liquidity crunch, though manageable by the RBI through its improving liquidity framework. ### External Position Metrics and Funding Vulnerabilities - Net international investment position: fell from -6 percent of GDP in March 2008 to -13 percent of GDP in September 2011. - Short-term external debt rose from 27.2 to 39.7 percent of reserves between March 2008 and March 2011 (from 6.8 to 6.7 percent of GDP). - NRI deposits were relatively stable at 14.1 to 14.2 percent (and fell from 3.6 to 2.4 percent of GDP). - India’s external debt: 19.7 percent of GDP. - Forecast debt service over the next two years is higher than during the run-up to the GFC, particularly when compared to a relatively constant stock of international reserves. *Source: ANNEX I. THE EFFECTS OF EXTERNAL DOWNSIDE SCENARIOS ON INDIA (from the India 2012 Article IV Report informational annex).* ### ANNEX IV. STATISTICAL ISSUES ### ANNEX IV. STATISTICAL ISSUES ### Macroeconomic statistics: overall assessment - Macroeconomic statistics are adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series. - India produces a vast quantity of data covering most sectors of the economy through an intricate system for compiling economic and financial statistics. - 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 - periodicity and timeliness of labor market data. ### Data ROSC and assessments - The data module of the Report on Observance of Standards and Codes (ROSC, IMF Country Report No. 04/96) was published in April 2004. - The ROSC assesses India’s data dissemination practices against the SDDS requirements and assesses the quality of six datasets based on the Data Quality Assessment Framework (DQAF). ### National accounts and employment statistics - The Central Statistical Organization (CSO) releases a new series of national accounts with base year 2004–2005 and a dissemination lag for quarterly releases of two months. - Concern: 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 that they are paid) deflated by the Wholesale Price Index (WPI). - Employment data weaknesses: - Available only on an annual basis and with a substantial lag. - Cover only the formal sector, which accounts for a small segment of the labor market. ### Price statistics - Since January 2006, the Labour Bureau has published a CPI for industrial workers with a 2001 base year. - A revised CPI with new weights was unveiled in early 2011. - Currently there are four CPIs, each based on the consumption basket of a narrow category of consumers: industrial workers, urban and nonmanual employees, agricultural laborers, and rural laborers. - CPIs are published with a lag of about one month. - With the exception of the industrial workers CPI, the other indices are based on weights that are over ten years. - The WPI was recently revised and has a 2004/05 base year. - Despite recent progress, real estate and housing price data: - are not available on a timely basis; and - geographic coverage remains limited. ### External sector statistics - Concepts and definitions used to compile balance of payments statistics are broadly in line with BPM5, but the RBI presentation does not strictly follow BPM5. - Trade data have quality, valuation, timing, and coverage problems; data on trade prices, volumes, and composition are not regularly available on a timely basis. - Inclusions and coverage issues: - 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 data on services exports to the United States and other developed countries are manifold higher than counterpart services imports published by these same countries. - External debt statistics: - Available on a quarterly basis 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). - International investment position (IIP) statistics: - Cover the sectors prescribed in BPM5. - 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. - India began disseminating the Data Template on International Reserves and Foreign Currency Liquidity as prescribed under the SDDS in December 2001. - More up-to-date information on certain variables (total foreign reserves, foreign currency assets, gold, and SDRs) are available on a weekly basis and are disseminated as part of a weekly statistical supplement on the RBI web site. ### Monetary and financial statistics - The RBI web site and the RBI Bulletin publish a wide array of monetary and financial statistics, including 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. - The frequency and quality of data dissemination have improved substantially in recent years. ### Deviations from MFSM and conceptual issues - Concepts and definitions used by the RBI to compile monetary statistics are in broad conformity with the MFSM, but deviations include: - Resident sector data do not provide sufficient information on the sectoral distribution of domestic credit. Present sectorization subdivides the resident nonbank sector into (i) central government; (ii) state government; and (iii) the commercial sector (including other financial corporations, public and other nonfinancial corporations, and other resident sectors). - Commercial banks add accrued interest to credit and deposit positions on a quarterly basis only (instead of the prescribed monthly basis). ### RBI reporting improvements and STA engagement - The RBI reports monetary data for IFS on a regular basis. - Since October 2006, the RBI has initiated electronic reporting of monetary data, a major improvement from the previous paper-based reporting prone to errors and delays. - India has submitted to STA test data (starting from December 2001 data) on the Standardized Report Forms (SRFs) developed to implement MFSM methodology. - STA is working with the authorities to resolve outstanding data issues on the development of the SRFs. ### Government finance statistics (GFS) - The Ministry of Finance (MoF) is responsible for compiling and disseminating the GFS. - Timeliness and coverage: - India reports the budgetary central government cash flow statement within one month after the reference month and stock of liabilities within one quarter after the reference quarter. - STA uses these data to compile a monthly cash flow statement for publication in International Financial Statistics, following GFSM 2001 presentation, with some missing breakdowns, particularly for expenditure. - No monthly data on fiscal performance at the state level are available. - Data on the functional and economic classification of expenditures are available with considerable lag. - Presentation and comparability 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 (GFSY); the latest reported data correspond to 2010. - Two years after the reference year, the MoF reports general government data to STA in the GFSM 1986 format, which staff reworks to GFSM 2001 presentation for inclusion in the GFSY; the latest reported data correspond to 2008. - General government operations are not internationally comparable as they exclude extra-budgetary funds, local governments, and social security funds. - Under the SDDS, India disseminates annual general government data within 3 quarters after the reference year, using the timeliness flexibility option, but meets SDDS specifications for central government debt and operations. ### Data quality and dissemination indicators (as of January 31, 2012) - Selected datasets and latest observations / dissemination notes (preserved as in source table): - Exchange Rates: Date of latest observation 01/31/12; Data Quality—Methodological soundness: DDD; Data Quality—Accuracy and reliability: DDD. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 01/20/12; Date received 01/30/12; Accuracy/reliability: WWW. - Reserve/base money: Date of latest observation 01/20/12; Date received 01/30/12; Accuracy/reliability: WWW. - Broad money: Date of latest observation 01/13/12; Date received 01/30/12; Accuracy/reliability: WWW. - Central bank balance sheet: Date of latest observation Dec. 2011; Date received 01/20/12; Methodological soundness: MMM. - Consolidated balance sheet of the banking system: Date of latest observation Dec. 2011; Date received 01/20/12; Methodological soundness: MMM. - Interest rates: Date of latest observation 01/25/12; Date received 01/30/12; Methodological soundness: DDD. - Consumer price index: Date of latest observation Dec. 2011; Date received 01/31/12; Methodological soundness/accuracy entries include MMMO, LNO, O, OLNO, LO, O, O, O (as presented in source). - Revenue, expenditure, balance and composition of financing - General Government: Date of latest observation 2010/11; Date received 12/30/11; Methodological soundness: AAA; Accuracy/reliability entries: LNO, LO, O, OO, O, O, O, LO (as presented). - Revenue, expenditure, balance and composition of financing - Central Government: Date of latest observation Dec. 2011; Date received 01/31/12; Methodological soundness: MMM. - Stocks of central government and central government-guaranteed debt: Date of latest observation 2010/11; Date received 12/30/11; Methodological soundness: AAA. - External current account balance: Date of latest observation Sept. 2011; Date received 11/13/12; Methodological soundness: QQQ; Accuracy/reliability entries: LO, O, LO, OLO, O, O, O, LO (as presented). - Exports and imports of goods and services: Date of latest observation Sept. 2011; Date received 11/13/12; Methodological soundness: QQQ. - GDP/GNP: Date of latest observation Sept. 2011; Date received 11/30/11; Methodological soundness: QQQ; Accuracy/reliability entries include LNO, LNO, O, O, LO, LNO, O, O (as presented). - Gross external debt: Date of latest observation Sept. 2011; Date received 12/30/11; Methodological soundness: QQQ. - International Investment Position: Date of latest observation Mar. 2011; Date received 08/26/11; Methodological soundness: QQQ. - Memo: The table reflects the ROSC assessment published on April 2, 2004, based on a mission during May 13-30, 2002. Footnotes in the table define frequency codes and the O/LO/LNO/NO coding for methodological soundness and accuracy. *Source: ANNEX IV. STATISTICAL ISSUES, _cr1296 - ANNEX IV. STATISTICAL ISSUES* ### ANNEX II. MEDIUM-TERM EXTERNAL DEBT ### ANNEX II. MEDIUM-TERM EXTERNAL DEBT SUSTAINABILITY ANALYSIS ### Overview and baseline projections - Baseline external debt (in percent of GDP): 21.6 (starting point shown in figures). - Change in external debt (annual, percent of GDP): -2.0; 1.6; 0.1; 0.8; -0.5; -0.2; 0.8; 0.9; 0.6; 0.8; 0.8; 0.8 (series shown for 2005/06–2016/17). - Identified external debt-creating flows (4+8+9, percent of GDP): -3.2; -2.5; -6.1; 0.9; -2.4; -1.8; -0.1; -0.2; -2.0; -2.3; -2.7; -3.0. - Residual, including change in gross foreign assets (2-3, percent of GDP): 1.2; 4.1; 6.2; -0.1; 2.0; 1.7; 0.9; 1.2; 2.6; 3.2; 3.5; 3.8. - External debt-to-exports ratio (in percent): 85.4; 85.0; 87.5; 78.2; 92.1; 85.6; 85.7; 85.0; 85.5; 86.5; 87.3; 88.0. ### Identified debt-creating flows and automatic dynamics - Current account deficit, excluding interest payments (percent of GDP): 0.6; 0.4; 0.6; 1.6; 2.3; 2.9; 3.3; 3.2; 1.7; 1.2; 0.7; 0.6. - Deficit in balance of goods and services (percent of GDP): 3.4; 3.4; 4.3; 5.4; 6.0; 6.8; 7.0; 6.7; 5.0; 4.5; 4.1; 3.7. - Exports (percent of GDP): 19.4; 21.4; 20.9; 24.3; 20.1; 21.5; 22.4; 23.7; 24.3; 25.0; 25.7; 26.4. - Imports (percent of GDP): 22.9; 24.8; 25.2; 29.7; 26.1; 28.2; 29.4; 30.4; 29.3; 29.5; 29.8; 30.1. - Net nondebt creating capital inflows (negative, percent of GDP): -1.9; -1.6; -3.5; -0.5; -3.7; -3.7; -2.5; -2.6; -2.9; -2.9; -2.9; -2.9. - Net foreign direct investment, equity (percent of GDP): 0.4; 0.8; 1.3; 1.6; 1.4; 1.6; 1.3; 1.3; 1.5; 1.5; 1.5; 1.5. - Net portfolio investment, equity (percent of GDP): 1.5; 0.7; 2.2; -1.2; 2.3; 2.1; 1.2; 1.3; 1.4; 1.4; 1.4; 1.4. - Automatic debt dynamics (percent of GDP): -1.9; -1.4; -3.2; -0.2; -1.1; -1.1; -0.9; -0.8; -0.7; -0.6; -0.5; -0.7. - Denominator 1+g+r+gr: 1.2; 1.1; 1.3; 1.0; 1.1; 1.2; 1.1; 1.1; 1.1; 1.1; 1.1; 1.1. - Contribution from nominal interest rate (percent of GDP): 0.6; 0.6; 0.7; 0.7; 0.4; 0.4; 0.4; 0.6; 0.7; 0.9; 1.1; 1.0. - Contribution from real GDP growth (percent of GDP): -1.5; -1.4; -1.4; -0.9; -1.5; -1.5; -1.3; -1.4; -1.5; -1.5; -1.6; -1.6. - Contribution from price and exchange rate changes: -1.0; -0.6; -2.5; ... (table continues in source). ### Gross external financing need - Gross external financing need (in billions of U.S. dollars): 65.9; 62.6; 81.0; 114.9; 129.7; 160.6; 194.5; 224.5; 229.0; 253.0; 281.4; 311.1. - Gross external financing need (in percent of GDP): 7.9; 6.6; 6.6; 9.5; 9.4; 10.1; 11.2; 11.8; 10.8; 10.8; 10.9; 10.9. ### Bound tests and shock scenarios - Baseline external debt referenced: 16.6 (table heading indicates baseline external debt series starting value). - Interest rate shock (permanent 1/4 standard deviation to nominal interest rate): Baseline: 5.0; Scenario: 5.2; Historical: 4.3 (interest rate levels shown in figure box). - Growth shock (permanent 1/4 standard deviation to real GDP growth): Baseline: 7.4; Scenario: 6.3; Historical: 7.1 (growth rates in figure box). - Non-interest current account shock (permanent 1/4 standard deviation): Baseline: -1.1; Scenario: -1.7; Historical: 0.6 (percent of GDP in figure box). - Combined shock (combination of B1–B3 using 1/2 standard deviation shocks) produces higher external debt trajectories (figure: Combined shock 23.6 versus Baseline 21.6). - One-time 30 percent real depreciation shock in 2010/11: noted as Real Depreciation Shock 30% with figure showing pronounced increase in external debt (figure: Combined shock with 30% depreciation reaches higher levels). - Bound test outcomes (external debt in percent of GDP under shocks B1–B5, with starting reference 18.4): - B1. Nominal interest rate at historical average plus one standard deviation: series shows rising debt to 23.5. - B2. Real GDP growth at historical average minus one standard deviation: series shows rising debt to 24.5. - B3. Non-interest current account at historical average minus one standard deviation: series shows rising debt to 27.5. - B4. Combination of B1–B3 using 1/2 standard deviation shocks: series shows rising debt to 26.2. - B5. One-time 30 percent real depreciation in 2010: series shows rising debt to 26.6. ### Scenario with key variables at historical averages - Scenario external debt (in percent of GDP) with key variables at historical averages: 19.0; 18.5; 18.4; 16.7; 15.3; 15.5; 16.0; 16.6; 17.2. - Debt-stabilizing non-interest current account (long-run constant balance that stabilizes the debt ratio): -4.2 (table indicates this as the debt-stabilizing non-interest current account value). ### Key macroeconomic assumptions underlying baseline projections - Real GDP growth at market prices (in percent): 9.3; 9.4; 9.6; 5.1; 9.1; 9.2; 8.0; 7.9; 8.1; 8.1; 8.1; 8.1. - GDP deflator in U.S. dollars (change in percent): 6.2; 3.3; 18.3; -6.0; 4.3; 5.7; 1.4; 1.1; 3.0; 2.1; 2.1; 2.1. - Nominal external interest rate (in percent): 3.9; 4.0; 4.7; 3.8; 2.7; 2.2; 2.6; 3.2; 4.1; 4.8; 5.6; 4.7. - Growth of exports of goods and services (U.S. dollar terms, in percent): 26.7; 24.5; 26.6; 15.0; -5.8; 23.0; 14.4; 15.4; 14.1; 13.5; 13.4; 13.4. - Growth of imports of goods and services (U.S. dollar terms, in percent): 30.5; 22.7; 31.6; 16.6; 0.0; 24.7; 14.0; 12.8; 7.5; 11.1; 11.4; 11.5. - Current account balance, excluding interest payments (percent of GDP): -0.6; -0.4; -0.6; -1.6; -2.3; -2.9; -3.3; -3.2; -1.7; -1.2; -0.7; -0.6. - Net non-debt creating capital inflows (percent of GDP): 1.9; 1.6; 3.5; 0.5; 3.7; 3.7; 2.5; 2.6; 2.9; 2.9; 2.9; 2.9. ### Economic and financial developments (IMF staff representative statement, March 9, 2012) - 1. GDP growth dropped to 6.1 percent y/y in 2011Q4 (6.8 percent in 2011 Q3), in line with staff projections. Investment remains sluggish with a third consecutive decline in y/y terms. Private consumption was robust at 6.4 percent y/y. Manufacturing grew by 0.8 percent y/y (versus 2.7 percent in the previous quarter), while services continued to advance at a robust pace. Manufacturing and services PMIs stabilized in February and remained well above the expansionary threshold. - 2. The trade deficit rose to $14.8 billion in January (compared with $10.3 billion in the previous year), owing to the jump in imports. Import growth reached 20.3 percent y/y, while non-oil imports growth moderated to 17.6 percent. Exports advanced by 10.1 percent y/y. - 3. Inflation pressures have continued to abate on base effects. The new national CPI recorded an inflation rate of 7.7 percent y/y, while consumer price inflation for industrial workers fell to 5.3 percent y/y due to the retrenchment in food prices. CPI-IW inflation momentum moderated in sequential terms. *Source: Fund staff estimates and IMF Staff Representative statement (March 9, 2012).* ### 4. The rupee has appreciated and capital inflows have returned in recent weeks. ### 4. The rupee has appreciated and capital inflows have returned in recent weeks. ### Exchange rate and capital flows - The rupee has appreciated by 8 percent against the U.S. dollar so far this year. - The NEER has appreciated by about 5 percent. - Portfolio equity inflows (mutual funds and ETFs) have rebounded significantly since late January. ### Recent macroeconomic assessment and outlook - Growth is projected at about 7 percent for 2011/12 and 2012/13. - Inflation is elevated; recent moderation is primarily due to base effects. - Inflation is projected to fall in the near term, but to stay above the Reserve Bank of India’s objective. - The current account is projected at 2.8 percent of GDP. - Growth risks are to the downside, including: - Further weakening of private investment if government approvals do not accelerate. - If reform efforts are not reinvigorated. - If inflation remains high and volatile. - External risks: Euro area growth could underperform and bank deleveraging could intensify. ### Executive Board views and policy guidance - Sound macroeconomic policies and fundamentals enabled India to weather well the global economic crisis, but growth slowed below trend in the last year. - Priority policy aims: bring growth back to potential, ensure inclusiveness, and further lower inflation. - Monetary policy: - Directors encouraged continued vigilance against inflation. - Agreed that policy rates should be kept unchanged until inflation is clearly on a downward trend. - Encouraged the Reserve Bank of India to stand ready to raise policy rates if inflation starts to rise again, and to consider cutting rates if inflation momentum clearly eases. - Fiscal policy: - Directors stressed that fiscal consolidation is crucial to crowd in private investment and lower inflationary expectations. - Supported planned reorientation of expenditure toward infrastructure and the social sectors. - Highlighted need to rationalize fuel and fertilizer subsidies and improve public expenditure management. - Encouraged tax reform, especially introduction of the goods and services tax. - Exchange rate and capital account policy: - Directors considered the flexible exchange rate regime an important buffer against external shocks. - Supported intervening in the foreign exchange market only to contain volatility and prevent disruptive movements. - Welcomed moves toward further trade and gradual capital account liberalization. - Structural reforms: - Directors underscored importance of reforms to raise public and private investment and boost inclusive growth. - Areas identified: facilitate land acquisition and mining, financial sector development and reform, address skill mismatches, increase labor market flexibility, improve agricultural productivity. - Encouraged development of a prioritized action plan to implement FSSA recommendations. ### Authorities’ statement and perspective - The slowdown has cyclical and global components; attributing it to governance scandals and civil activism is speculative. - Two accentuating factors identified: - Worsening external environment; a one percentage point decline in global growth could result in a 0.3 percentage points decline in growth of non-agricultural domestic demand. - Anti-inflationary monetary policy stance has dampened investment and interest-sensitive consumption. - The Reserve Bank of India raised policy rates on 13 occasions since March 2010 amounting to an increase of 350 basis points. - Inflation has moderated significantly since January 2012. ### Key statistics and projections (as presented) - Real GDP growth (y/y percent change): 2007/08: 9.3; 2008/09: 6.7; 2009/10: 8.4; 2010/11: 8.4; 2011/12 (Prel.): 6.8; 2012/13 (Est./Proj.): 7.0 - Real GDP (calendar year basis): 9.4; 7.3; 8.0; 8.4; 6.8; 7.1 - Wholesale prices (y/y percent change, average): 4.7; 8.1; 3.8; 9.6; 8.7; 7.2 - Consumer prices - industrial workers (2001 weights): 6.2; 9.1; 12.4; 10.4; 8.1; 8.5 - Gross saving (percent of GDP): 36.4; 31.7; 33.5; 31.3; 31.3; 30.4 - Gross investment (percent of GDP): 37.7; 34.0; 36.3; 34.0; 34.0; 33.4 - Central government deficit (percent of GDP): -3.1; -6.8; -6.5; -6.1; -5.9; -5.8 - General government deficit (percent of GDP): -4.4; -9.0; -9.9; -8.8; -8.1; -7.7 - General government debt (percent of GDP): 74.6; 75.4; 71.3; 66.7; 66.2; 65.7 - Broad money (y/y percent change, end-period): 21.4; 19.3; 16.8; 16.0; 16.0; 18.2 - Credit to commercial sector (y/y percent change, end-period): 21.1; 16.9; 15.8; 21.3; 18.8; ... - 91-day treasury bill yield (percent, end-period): 7.2; 5.0; 4.4; 7.3; 8.6; ... - 10-year government bond yield (percent, end-period): 7.6; 7.0; 7.8; 8.0; 8.4; ... - Merchandise exports (US$ billions): 166.2; 189.0; 182.4; 250.5; 274.2; 307.4 - Merchandise imports (US$ billions): 257.6; 308.5; 300.6; 381.1; 428.2; 489.1 - Current account balance (US$ billions): -15.7; -27.9; -38.2; -45.9; -47.6; -56.3 - Current account (percent of GDP): -1.3; -2.3; -2.8; -2.7; -2.8; -3.0 - Foreign direct investment, net (US$ billions): 15.9; 22.4; 18.0; 9.4; 18.8; 22.3 - Portfolio investment, net (equity and debt, US$ billions): 27.4; -14.0; 32.4; 30.3; 11.1; 24.1 - Overall balance (US$ billions): 92.1; -20.1; 13.4; 13.1; 5.5; 17.1 - Gross reserves (US$ billions, end-period): 309.7; 252.0; 279.1; 304.8; 298.6; 315.7 - Gross reserves (in months of imports): 10.3; 8.4; 7.2; 6.8; 5.7; 5.5 - External debt (US$ billions, end-period): 224.4; 224.5; 261.0; 298.4; 337.4; 384.7 - External debt (percent of GDP, end-period): 18.1; 18.4; 19.2; 17.7; 19.7; 20.7 - Short-term debt (percent of external debt): 6.8; 6.7; 6.7; 6.9; 8.0; 8.7 - Ratio of gross reserves to short-term debt (end-period): 3.7; 3.1; 3.1; 2.5; 2.2; 2.0 - Debt service ratio (percent): 5.3; 5.1; 4.9; 4.7; 5.6; 5.8 - Real effective exchange rate (y/y percent change, period average): 8.7; -6.8; 8.0; 11.6; ...; ... - Exchange rate (rupee/US$, end-period): 40.3; 51.2; 45.5; 45.0; ...; ... *IMF Public Information Notice (PIN) No. 12/36 — April 17, 2012; Executive Board Concluding Statement on the 2012 Article IV Consultation with India* ### 5. Lead indicators are now suggesting that the economy is reaching the bottom of the ### _cr1296 - 5. Lead indicators are now suggesting that the economy is reaching the bottom of the cycle. ### Lead indicators and recent momentum - Purchasing managers indices for India in January 2012 reached their highest level since April 2011, led by forward-looking indicators of output and new orders. - PMIs remained in expansionary mode in February 2012, with a slight moderation in output growth. - The February 2012 OECD composite leading indicator for India points to an upward positive change in momentum. - Private consumption has been resilient; a durable easing trend in core inflation is expected to boost consumer confidence significantly. - Exports expanded by 26 percent in the financial year up to December 2011, outpaced by import growth. - As capital flows turned volatile, there was a drawdown of reserves to finance the rising current account deficit. - Authorities note that policy instruments and a measured approach to capital account management restored stability and enabled a modest real appreciation in early 2012, but warn that a large and/or prolonged external shock could overwhelm these efforts. ### The quality of growth - Over 2007-12 (April-March), average GDP growth of around 8.2 per cent was achieved, compared with 7.8 percent in the preceding five-year period. - This implies a 35 per cent increase in per capita GDP during 2007-12. - Preliminary estimates suggest poverty declined by approximately one percentage point per annum during 2004-05 to 2009-10. - India is described as well poised to meet the Millennium Development Goal target of 50 per cent reduction of poverty between 1990 and 2015. - National Rural Employment Guarantee Act (MGNREGA) impacts: - 9.9 billion person-days of work created since inception in 2006-07. - 2.53 billion person-days generated in 2010-11 alone. - MGNREGA effects documented: higher agricultural wages, reduction in distress migration, increased bargaining power of agricultural labour, and secured some inclusivity in the growth process. - Increased focus on inclusion has led to heightened awareness, empowerment, demand for information about rights and entitlements, and eagerness to demand accountability from public delivery systems. ### Outlook (2012-17 growth strategy) - Authorities envisage a return to potential output growth of 8.5 to 9 percent over 2012-17. - Authorities differ from staff estimates of potential growth, viewing potential growth as a medium- to longer-term concept reflecting structural trends. - Drivers of the return to trajectory: - High rates of investment and private sector savings seen as strong macroeconomic fundamentals. - Labour force expected to increase by 32 per cent over the next 20 years, adding to growth potential. - Continued thrust on accelerating investment in physical infrastructure. - More than two-thirds of investment is by the private sector. - PPP-based efforts expected to constitute 50 per cent of estimated infrastructure investment of about 10.0 per cent of GDP by 2016-17, up from 30.0 per cent currently. - Measures to enhance private sector funding of infrastructure include establishment of infrastructure debt funds and creating a vibrant and liquid corporate bond market. - Expanded programme of Research & Development (R&D) to nurture innovation capacity of Indian companies. - Focus on alleviating supply-side constraints (water, power, land-based resources) as part of the medium-term growth strategy. ### Monetary policy issues - Authorities object to staff statements that “the RBI could give more weight to the CPI in policy formulation over WPI” given that a comprehensive CPI did not exist till January 2011. - CPIs continue to be dominated by food items; efficacy of monetary policy to deal with food inflation is limited. - RBI follows a multiple indicator approach, closely monitoring three sectional CPIs (CPI for industrial workers; CPI for agricultural labourers; CPI for rural labourers). - RBI communicates forecasts in terms of the WPI because CPIs relate to specific sections of the population, whereas the WPI is described as a national-level index. - Example cited: in the USA the Fed measures inflation by CPI but prefers to communicate in terms of the personal consumption expenditure deflator. - A new comprehensive CPI has been developed; authorities will give it a greater role once it has an established track record. - National-level CPIs have been compiled since January 2011 and so far only twelve observations are available; authorities will wait for enough observations to ensure the new CPIs have stabilized and are well understood. ### Fiscal policy - Tax revenues were affected by the cyclical downturn in growth; expenditures overshot mainly due to significantly higher than budgeted global prices of crude and fertilizer. - Restraining the fiscal deficit in 2011-12 to the targeted path of consolidation is described as a major challenge. - Final outcome for 2011-12 was to be known on March 16, 2012 when the Union Budget for 2012-13 would be presented to Parliament; authorities consider it premature to speculate on the actual outcome. - Fiscal consolidation described as continuing on a downward trajectory in terms of averages for 2010-11 and 2011-12 rather than year-by-year. - Public debt/GDP ratio reported at 67 percent at the end of 2010-11 (according to the September 2011 WEO), already very close to the target of 68 percent set for 2014-15. ### Financial sector issues and regulatory stance - Authorities welcome the FSAP review and regard engagement as extensive and productive; committed to phased adoption of international standards calibrated to local conditions. - Key responses to FSSA findings/recommendations: - Non-performing assets (NPA) level at 2.8 percent of total assets in the banking system had shown a modest increase in 2011 but compares favourably with major advanced and peer economies. - Large exposure limits are driven by development needs, especially to finance infrastructure; tightening concentration limits could severely constrain bank finance availability. - CRR/SLR benefit: provide liquidity in crisis and enhance financial stability by creating a pool of highest quality collateral; helped Indian banks during the 2008-09 global financial crisis and aids compliance with Basel III norms. - Authorities challenge staff argument that mandatory holdings weaken monetary transmission, noting government market borrowings are at market-determined interest rates and monetary policy actions impact yields; banks often hold higher than mandated levels voluntarily. - Steps taken to improve oversight over interconnectedness and financial conglomerates include: - Prudential limits on aggregate interbank liabilities. - Restricting uncollateralised funding to banks and primary dealers with caps on lending and borrowing. - Restrictions on capital instruments of banks. - Restrictions on banks’ exposure to non-bank financial companies (NBFCs), and tighter regulation of NBFCs. - Intensive monitoring of financial conglomerates and common exposures in sensitive sectors. - Authorities recognize importance of establishing information sharing arrangements with other jurisdictions and are expanding appropriate information sharing networks on a priority basis. - Ongoing developments in home-host relationships and engagement with supervisors in other jurisdictions. ### Conclusion and policy priorities - Macroeconomic fundamentals are described as strong and resilient. - Past two years’ challenges (inflation and fiscal consolidation) necessitated focus on demand management; now time to address supply-side issues. - Policy instruments highlighted to release supply constraints and support faster, sustainable, and more inclusive growth over the Twelfth Five Year Plan (2012-17): - New Manufacturing Policy (productivity and innovation enhancing elements). - National Skill Development Mission. - Intensified efforts to bridge gaps in physical and social infrastructure. *Source: _cr1296 - 5. Lead indicators are now suggesting that the economy is reaching the bottom of the cycle.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1296.pdf_