## 1. Potential Growth in India

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### Context and recent macroeconomic developments
- External vulnerabilities moderated since September 2013 due to policy actions and strengthened external buffers; risks remain, including weak corporate positions and bank asset quality.
- Political change: Bharatiya Janata Party landslide victory in May 2014 boosted reform expectations (diesel price deregulation, higher natural gas prices, steps toward more flexible labor markets, coal sector reforms, enhanced financial inclusion).
- Growth trajectory and recent performance:
  - Real GDP growth slowed to around 4½ percent in 2012/13 and 2013/14.
  - Growth rebounded to 5½ percent in H1 2014/15.
  - Real GDP growth (at factor cost) forecast: 5½ percent in 2014/15 and 6¼ percent in 2015/16.
  - Medium-term growth projected to remain at around 6¾ percent (assuming no substantial legislative changes), below the 8 percent average during 2002–07.
- Inflation dynamics:
  - CPI inflation fell from 11.2 percent in November 2013 to 5 percent in December 2014.
  - Staff projects CPI inflation to move up to about 6¼ percent by end-2014/15 and hover slightly above 6 percent over the course of 2015/16 (close to the RBI’s inflation objective of 6 percent by January 2016).
- Current account and terms-of-trade:
  - CAD narrowed by about 3 percentage points of GDP in 2013/14, about half attributable to the fall in gold imports.
  - CAD expected at around 1¾ percent of GDP in 2014/15, widening to about 2½ percent of GDP over the medium term.
  - Sustained lower global oil prices provide a large positive shock to terms of trade, helping contain the CAD.

### Financial sector and credit conditions
- Credit growth is anemic, reflecting weakened public sector bank (PSB) balance sheets and lower corporate demand for bank credit.
- Banking sector segmentation:
  - Private banks: hold about one-quarter of banking system assets; well-capitalized, profitable, low NPLs, limited exposure to troubled sectors.
  - Public sector banks: weaker asset quality and capital adequacy; diminished profitability.
- Capital needs and market financing:
  - To finance credit growth in the range of 15–20 percent and maintain CAR at about 11 percent at public sector banks, staff indicates capital injection of 0.1–0.2 percent of GDP will be required in the near term, in addition to the amount allocated in the 2014/15 Union Budget.
  - Capital markets (corporate bonds and equities) expected to help finance growth amid buoyant investor sentiment.

### Outlook and risks
- Upside drivers:
  - Expedited structural reforms, faster implementation of cleared investment projects, sustained low global energy prices.
- Downside risks:
  - External: global financial market volatility, U.S. monetary policy normalization spillovers, prolonged weak global growth.
  - Domestic: supply-driven spikes in inflation (and higher gold imports), further deterioration in corporate financial positions (including unhedged foreign exchange exposures), further bank asset quality deterioration, slower progress on supply-side bottlenecks.
- Authorities’ view:
  - Authorities project growth at about 5½ percent in the current fiscal year and slightly over 6 percent in 2015/16.
  - Authorities consider CAD to remain in the neighborhood of 2 percent of GDP.
  - Authorities view themselves as better prepared for global volatility given stronger fundamentals and higher reserves; they emphasize rupee exchange rate flexibility and increased reserves.

### Monetary policy framework and stance
- RBI actions and communication:
  - Since September 2013 the RBI raised the policy repo rate and tightened liquidity; repo rate was held at 8 percent between January 2014 and January 2015, supported by sterilizing open market operations.
  - The RBI reduced the policy repo rate by 25 basis points in January 2015.
  - RBI shifted policy formulation to focus on containing inflation, using headline CPI inflation as a de-facto nominal anchor; published two-year-ahead inflation forecasts and associated confidence bands.
  - RBI indicated a CPI inflation “glide path” to achieve a medium-term target for CPI inflation of 4 percent (+/- 2 percentage points).
- Staff view and recommendations:
  - Staff views the medium-term 4 percent inflation target set out by the Patel Committee report as broadly appropriate.
  - Staff recommends monetary policy remain tight to reduce inflation and inflation expectations on a durable basis; the stance should be data dependent and authorities should be ready to tighten further if inflationary pressures gather pace.
  - To lower CPI inflation over the medium term to 4 percent (if adopted as an objective), tight monetary policy needs to be accompanied by structural reforms to boost potential output and increase food production.
- Recent RBI operating moves (select statements/dates preserved):
  - Policy repo rate: held at 8 percent between January 2014 and January 2015; reduced by 25 basis points in January 2015.
  - On February 3 (statement): no change at 7.75 percent; SLR reduced by 50 basis points from 22 percent to 21.5 percent of net deposit liabilities; minimum residual maturity of foreign portfolio investment in India increased to three years.

### Fiscal consolidation, public debt outlook, and policy
- Recent performance and outlook:
  - Fiscal consolidation continued along government’s deficit reduction path despite a negative output gap.
  - 2013/14 fiscal deficit: 4.5 percent of GDP (authorities’ definition), outperforming the government’s target of 4.7 percent of GDP.
  - 2014/15 Budget target: central government deficit of 4.1 percent of GDP (authorities’ definition, equivalent to about 4½ percent of GDP in IMF terms).
  - Medium-term target: central government deficit to narrow to 3 percent of GDP by 2016/17, but detailed measures underpinning this path have not been articulated.
- Quality and measures for consolidation:
  - Overhauling the subsidy regime and reducing petroleum and fertilizer subsidies is estimated to yield around ½ of one percent of GDP in fiscal savings.
  - Further revenue gains via tax administration reforms and implementation of a well-designed GST with minimal exemptions and a moderate single rate.
  - Staff recommends moving to direct cash transfers using Aadhaar, and strengthening the Fiscal Responsibility and Budget Management Act with rules that provide room for countercyclical fiscal policy.
- Public debt projections:
  - Under the baseline, public debt-to-GDP ratio is forecast to decline gradually to about 58½ percent over the medium term from its current level of 65½ percent.
  - Baseline uses conservative growth assumptions; large negative growth shocks are a major risk to the declining debt trajectory.

### External sector, reserves, and exchange rate guidance
- Reserves and inflows:
  - International reserves increased by about US$30 billion over the last year to reach US$320 billion as at end-December 2014 (standing at 148 percent of the Fund’s reserve adequacy metric).
  - Net long forward position of US$13.2 billion as of end-November 2014 due to forward market intervention.
  - Drivers: robust FII flows, sharp CAD correction (largely due to contraction in gold imports), inflows of about US$34 billion of NRI deposits, and overseas bank borrowings facilitated by a concessional FX swap facility offered by the RBI.
- Staff assessment and guidance:
  - Staff assesses India’s external position to be broadly in line with fundamentals.
  - Recommendation: greater exchange rate flexibility to discourage excessive private-sector risk taking; FX intervention should be limited to preventing disruptive movements and checking self-fulfilling momentum divorced from fundamentals.
  - If global financial market volatility resurfaces: allow orderly depreciation via exchange rate flexibility, judicious FX intervention in spot and forward markets, consider temporary monetary tightening, liberalize non-debt creating capital inflows further, and reuse tools employed in the post-May 2013 period (e.g., FX swaps to attract NRI deposits).

### Financial sector stability: asset quality, PSBs, and reforms
- Asset quality and corporate vulnerabilities:
  - System-wide gross NPAs increased to 4.1 percent of total advances at end-fiscal year 2013/14.
  - PSBs’ NPAs: 4.7 percent of total advances (end-fiscal year 2013/14).
  - Restructured loans increased from 5.8 to 5.9 percent of total advances over the last fiscal year.
  - Hedge ratio for ECBs and FCCBs declined from about 34 percent of borrowings in 2013/14 to about 15 percent in July–August 2014.
  - Sectors with greater stress (infrastructure, textiles, engineering, metals and products, chemicals, and mining) make up 36 percent of NPAs as of March 2014.
- Public sector banks (PSBs):
  - PSBs represent three-quarters of banking system assets.
  - PSBs face larger capital needs, weaker asset quality, and lower operating efficiency.
  - Government intends to reduce its shareholdings in PSBs down to 52 percent to allow public banks to strengthen their equity capital base.
- RBI regulatory progress and recommended actions:
  - Implementing Basel III; identifying Domestic Systemically Important Banks and imposing capital surcharges; improving resolution of impaired assets; expanding access to finance.
  - Prudential changes: ARCs required to provide at least 15 percent equity toward purchases of NPAs; phasing out (by April 1, 2015) the ability for many loans to be categorized as rescheduled.
  - Recommendation to end forbearance provided by current restructuring mechanism for all types of loans.
  - Strengthen regulation for banks’ credit quality classification and require increased provisioning; bolster capital buffers in PSBs; strengthen insolvency legal and institutional framework and implement Companies Act 2013 provisions.
- Potential capital needs:
  - Staff indicates capital injection of 0.1–0.2 percent of GDP near term for PSBs (to finance 15–20 percent credit growth and maintain CAR at about 11 percent).
  - Box 8 scenarios: AT1 requirements for PSBs in likely scenarios will amount to less than ½ of one percent of GDP.

### Structural policies to boost growth and employment
- Priorities:
  - Address long-standing supply bottlenecks (energy, mining, power); implement labor and product market reforms; ease land acquisition constraints.
  - Strengthen business climate: streamline land and environmental clearances; simplify procedures to improve Doing Business indicators—particularly resolving insolvency, enforcing contracts, and trade across borders.
  - Agricultural reforms: reduce inefficiencies in public food procurement, distribution and storage; lessen impediments to inter-state movement of agricultural produce; address inadequate irrigation infrastructure.
  - Reorient expenditure toward growth-enhancing and social spending through tax and subsidy reforms to create fiscal space for health, education, and public infrastructure.
- Authorities’ initiatives:
  - Liberalized FDI in several sectors (railway infrastructure, construction, defense, insurance) and introduced ordinances to ease re-auction of cancelled coal blocks.
  - Launched “Make in India,” replaced Planning Commission with NITI Aayog, and announced infrastructure initiatives (industrial corridors, 100 smart cities, Sagarmala project, digital India).
  - State-level labor law reforms (example: Rajasthan) and other states considering similar measures.

### Risk Assessment Matrix — key risks and policy responses
- Domestic risks (examples and staff policy recommendations):
  - Slower-than-expected progress in addressing supply side bottlenecks — Policies: continue to address bottlenecks, strengthen business climate, address agricultural productivity.
  - Strong pick-up in inflation — Policies: raise interest rates until inflation is clearly on a downward trend; improve agricultural productivity and invest in infrastructure.
  - Balance sheet risks — Policies: strengthened oversight, raising provisioning requirements, incentivize corporate restructuring, improve insolvency framework.
- External risks (examples and responses):
  - Surge in financial market volatility (Likelihood: H; Impact: M) — Policies: attract stable non-debt creating capital flows, rupee flexibility, monetary tightening, FX swaps to attract NRI deposits, dollar liquidity to OMCs.
  - Protracted slower growth in advanced economies (Likelihood: H; Impact: M) — Policies: structural reform to raise returns to investment.
  - Financial imbalances from protracted low interest rates (Likelihood: M; Impact: M) — Policies: improve CAD financing mix, monitor unhedged FX positions, build external buffers.

### Debt sustainability, stress tests, and external-sector assessment (select figures)
- Public debt:
  - Current public debt level cited as 65½ percent (context: projected to decline to about 58½ percent over the medium term under baseline).
- Annex II underlying baseline assumptions (selected series, percent):
  - Baseline real GDP growth (2014–2019): 5.8, 6.3, 6.5, 6.6, 6.7, 6.7.
  - Baseline inflation (2014–2019): 6.9, 7.0, 6.1, 5.4, 5.5, 5.6.
  - Baseline primary balance (2014–2019): -2.2, -2.0, -1.9, -1.9, -1.9, -1.8.
  - Baseline effective interest rate (2014–2019): 8.3, 8.5, 8.4, 8.3, 8.3, 8.2.
- External-sector assessment (Box 6) key points:
  - Staff assesses a CA norm of about 2½ percent of GDP as appropriate; projected CAD about 2 percent of GDP in FY2014/15; CA gap estimated in range -1 to +1 percent of GDP.
  - India’s NIIP: -17 percent of GDP in FY2013/14, down from -12 percent in FY2010/11.
  - External debt at 23 percent of GDP as at end-September 2014.
  - With CA deficits of about 2½ percent of GDP projected for the medium term, NIIP-to-GDP ratio will remain broadly stable.

### Selected recent policy actions (2014/15) — highlights
- Food inflation measures: smaller MSP increases for paddy (3.8 percent) and wheat (3.6 percent) for 2014/15; approved sale of 10 million tons of wheat in open market; revised buffer stock norms; brought onion and potato under stockholding limits; proposed Rs. 5 billion price stabilization fund.
- Fiscal measures: raised rail passenger fares by 14.2 percent and freight rates by 6.5 percent; deregulated diesel (October 2014); raised gas price to $5.61/mmbtu from $4.20/mmbtu; fixed LPG subsidy per cylinder and re-launched DBT pilot.
- Ease of Doing Business: amendments to Apprentices Act, online Labour Identification Number portal, state labor law reforms (examples: Rajasthan).
- Structural and infrastructure: allowed 100 percent FDI in railway infrastructure; raised FDI in defense to 49 percent; ordinance to raise FDI in insurance to 49 percent; SEBI regulations for REITs/InvITs; RBI allowed banks to raise long-term bonds to finance infrastructure.
- Financial sector: two new bank licenses granted (April 2014); extended Basel III transitional period to March 31, 2019; final guidelines on Liquidity Coverage Ratio phased in from January 1, 2015; RBI framework for revitalizing distressed assets; guidelines on non-cooperative borrowers (Rs 50 million and above).
- Monetary policy: RBI accepted Patel Committee recommendations; glide path to achieve 8 percent CPI by January 2015 and 6 percent by January 2016; moved to bi-monthly review and one-year-ahead inflation forecasts.
- External/BoP measures: removed QR on gold import under 80:20 scheme (November 2014); adjusted FII limits in government securities; raised individual remittance limit to $125,000 then to US$ 250,000 per person per year (recently).

### Short-term outlook and IMF Executive Board assessment (select projections/indicators)
- IMF staff projections (selected):
  - Real GDP (at factor cost): 2014/15 5.6; 2015/16 6.3.
  - Consumer prices - Combined: 2014/15 6.7; 2015/16 6.3.
  - Central government deficit (percent of GDP): 2014/15 -4.4; 2015/16 -4.1.
  - General government deficit (percent of GDP): 2014/15 -7.1; 2015/16 -6.8.
  - Gross reserves (end-period, in billions of U.S. dollars): 2014/15 340.8; 2015/16 390.9 (table projections).
  - Current account balance (in percent of GDP): 2014/15 -1.8; 2015/16 -1.7.
  - Exchange rate (rupee/U.S. dollar, end-period): 2014/15 61.8 (as of 29 January 2015).
- Executive Board assessment and recommendations:
  - Welcomed policy initiatives and reduced external vulnerabilities; noted limited room for countercyclical macro policy due to still-high fiscal deficits and upside inflation risks.
  - Recommended remaining tight monetary policy to consolidate gains and further efforts to strengthen the monetary policy framework toward flexible inflation targeting.
  - Encouraged articulating and implementing specific supporting fiscal measures to enhance quality and sustainability of consolidation, including GST and improved tax administration.
  - Recommended improving external financing mix by attracting stable, non-debt creating flows (FDI) and limiting FX intervention to prevent disruptive movements.

*International Monetary Fund staff report excerpts (content unit: _cr1561)._

### 1. Potential Growth in India ______________________________________________________________________ 29

### 1. Potential Growth in India

### Context and recent macroeconomic developments
- External vulnerabilities moderated since September 2013 due to policy actions and strengthened external buffers; risks remain, including weak corporate positions and bank asset quality.
- Political change: Bharatiya Janata Party landslide victory in May 2014 boosted reform expectations (diesel price deregulation, higher natural gas prices, steps toward more flexible labor markets, coal sector reforms, enhanced financial inclusion).
- Growth trajectory and recent performance:
  - Real GDP growth slowed to around 4½ percent in 2012/13 and 2013/14.
  - Growth rebounded to 5½ percent in H1 2014/15.
  - Real GDP growth (at factor cost) forecast: 5½ percent in 2014/15 and 6¼ percent in 2015/16.
  - Medium-term growth projected to remain at around 6¾ percent (assuming no substantial legislative changes), below the 8 percent average during 2002–07.
- Inflation dynamics:
  - CPI inflation fell from 11.2 percent in November 2013 to 5 percent in December 2014.
  - Staff projects CPI inflation to move up to about 6¼ percent by end-2014/15 and hover slightly above 6 percent over the course of 2015/16 (close to the RBI’s inflation objective of 6 percent by January 2016).
- Current account and terms-of-trade:
  - CAD narrowed by about 3 percentage points of GDP in 2013/14, about half attributable to the fall in gold imports.
  - CAD expected at around 1¾ percent of GDP in 2014/15, widening to about 2½ percent of GDP over the medium term.
  - Sustained lower global oil prices provide a large positive shock to terms of trade, helping contain the CAD.

### Financial sector and credit conditions
- Credit growth is anemic, reflecting weakened public sector bank (PSB) balance sheets and lower corporate demand for bank credit.
- Banking sector segmentation:
  - Private banks: hold about one-quarter of banking system assets; well-capitalized, profitable, low NPLs, limited exposure to troubled sectors.
  - Public sector banks: weaker asset quality and capital adequacy; diminished profitability.
- Capital needs and market financing:
  - To finance credit growth in the range of 15–20 percent and maintain CAR at about 11 percent at public sector banks, staff indicates capital injection of 0.1–0.2 percent of GDP will be required in the near term, in addition to the amount allocated in the 2014/15 Union Budget.
  - Capital markets (corporate bonds and equities) expected to help finance growth amid buoyant investor sentiment.

### Outlook and risks
- Upside drivers: expedited structural reforms, faster implementation of cleared investment projects, sustained low global energy prices.
- Downside risks:
  - External: global financial market volatility, U.S. monetary policy normalization spillovers, prolonged weak global growth.
  - Domestic: supply-driven spikes in inflation (and higher gold imports), further deterioration in corporate financial positions (including unhedged foreign exchange exposures), further bank asset quality deterioration, slower progress on supply-side bottlenecks.
- Authorities’ view:
  - Authorities project growth at about 5½ percent in the current fiscal year and slightly over 6 percent in 2015/16.
  - Authorities consider CAD to remain in the neighborhood of 2 percent of GDP.
  - Authorities view themselves as better prepared for global volatility given stronger fundamentals and higher reserves; they emphasize rupee exchange rate flexibility and increased reserves.

### Policy recommendations and framework
- Overall recommendation: adopt a comprehensive medium-term policy framework (monetary, fiscal, financial, structural) to raise actual and potential growth, increase policy space, and limit vulnerabilities.
- Monetary policy:
  - Since September 2013 the RBI raised the policy repo rate and tightened liquidity; repo rate was held at 8 percent between January 2014 and January 2015, supported by sterilizing open market operations.
  - The RBI reduced the policy repo rate by 25 basis points in January 2015.
  - Staff recommends monetary policy remain tight to reduce inflation and inflation expectations on a durable basis; the stance should be data dependent and the authorities should be ready to tighten further if inflationary pressures gather pace.
  - To lower CPI inflation over the medium term to 4 percent (if adopted as an objective), tight monetary policy needs to be accompanied by structural reforms to boost potential output and increase food production.
- Fiscal and structural policy:
  - Staff supports authorities’ medium-term consolidation intentions; fiscal balance met in 2013/14.
  - Continued reforms needed in factor and product markets (many on the concurrent list requiring center–state consensus); some states have initiated labor market reforms requesting presidential assent as a faster modality.
- Financial sector policy:
  - Address PSB capital shortfalls to enable credit supply expansion.
  - Implement FSAP recommendations (noted that almost all key recommendations of the 2012 FSAP Update have been implemented).

### Key numeric indicators and projections (as stated)
- Real GDP growth:
  - ~4½ percent in 2012/13 and 2013/14.
  - 5½ percent in H1 2014/15.
  - Forecast: 5½ percent in 2014/15; 6¼ percent in 2015/16.
  - Medium-term projection: around 6¾ percent.
  - 8 percent average during 2002–07.
- Inflation:
  - 11.2 percent in November 2013; 5 percent in December 2014.
  - Projected about 6¼ percent by end-2014/15; slightly above 6 percent over 2015/16.
  - RBI inflation objective: 6 percent by January 2016.
  - Hypothetical medium-term objective mentioned: 4 percent CPI inflation.
- Policy rates and central bank actions:
  - Repo rate held at 8 percent between January 2014 and January 2015.
  - Policy repo rate reduced by 25 basis points in January 2015.
- Current account:
  - CAD declined by 3 percentage points of GDP in 2013/14.
  - CAD expected: around 1¾ percent of GDP in 2014/15; about 2½ percent of GDP over the medium term.
- Banking sector capital needs:
  - Capital injection estimated at 0.1–0.2 percent of GDP near term to finance 15–20 percent credit growth and maintain CAR at about 11 percent in public sector banks.

*Source: IMF staff report excerpt titled "1. Potential Growth in India" (chapter content provided).*

### 14. Continued progress is needed to further strengthen the monetary policy framework

### 14. Continued progress is needed to further strengthen the monetary policy framework

### Monetary policy framework: progress and assessment
- RBI has shifted policy formulation to focus on containing inflation, using headline CPI inflation as a de-facto nominal anchor.
- Policy communication has been strengthened, including publication of two-year-ahead inflation forecasts and associated confidence bands.
- Staff views the medium-term 4 percent inflation target set out by the Patel Committee report as broadly appropriate.
- Given India’s large weight on food in its CPI basket and structurally-high food inflation, achieving the 4 percent target will require ramping up food supply commensurate with strong consumption demand.
- The associated band (+/- 2 percent) is appropriate given India’s susceptibility to food supply and external shocks.
- Staff supports further enhancements along the Patel Committee Report lines, including:
  - increasing the operational autonomy of the RBI;
  - institutionalization and setting the target zone for headline CPI inflation;
  - establishment of a Monetary Policy Committee and accountability framework.

### Authorities’ views on monetary policy
- Monetary policy must balance reducing inflation and limiting adverse impact on growth while preserving financial stability.
- RBI recognizes the effectiveness of supply-side measures to help contain inflation.
- Implementation of growth-friendly fiscal consolidation and additional supply-side measures are viewed as pre-conditions for monetary easing.
- Upside risks to inflation cited: spikes in oil prices, input-cost price pressures, deficient rainfall, and excess demand for protein-rich food items.
- Authorities state India has not yet adopted a flexible inflation targeting regime; current regime is transitional.
- Discussions are ongoing between RBI and the government on the final contours of the new monetary policy framework.
- RBI has indicated a CPI inflation “glide path” to achieve a medium-term target for CPI inflation of 4 percent (+/- 2 percentage points).

### Fiscal consolidation: recent performance and outlook
- Fiscal consolidation has continued in line with the government’s deficit reduction path despite a negative output gap and resulting pro-cyclical fiscal tightening.
- 2013/14 fiscal deficit: 4.5 percent of GDP (authorities’ definition), outperforming the government’s target of 4.7 percent of GDP.
- Primary deficit has narrowed by 2 percentage points of GDP since 2010/11.
- Consolidation to date was achieved largely through cuts in capital spending.
- 2014/15 Budget target: central government deficit of 4.1 percent of GDP (authorities’ definition, equivalent to about 4½ percent of GDP in IMF terms).
- Declining global oil prices, diesel-price deregulation, and capping of LPG subsidies expected to help lower the fuel subsidy bill.
- To help meet the 2014/15 deficit target, energy excise duties were increased and non-plan expenditure was restrained.
- Medium-term target: central government deficit to narrow to 3 percent of GDP by 2016/17, but detailed measures underpinning this path have not been articulated.

### Fiscal risks, required measures, and quality of consolidation
- Overhauling the subsidy regime and reducing petroleum and fertilizer subsidies is estimated to yield around ½ of one percent of GDP in fiscal savings.
- Given narrow tax bases, further revenue gains can be achieved through tax administration reforms, including reorganizing tax administration along functional lines and merging indirect and direct tax boards.
- Without comprehensive fiscal measures, adjustment will likely occur via expenditure compression (including lower capital spending) or underfunding of social programs, undermining growth and inclusiveness.
- Staff recommends improving the quality of consolidation to be more growth enhancing by:
  - Tax reform:
    - Implement a well-designed goods and service tax (GST) with minimal exemptions and a moderate single rate.
    - Progress toward a revised direct tax code with smaller and streamlined deductions.
    - Continue tax administration improvements along lines in the Tax Administration Reform Commission (TARC) reports.
  - Subsidy reform:
    - Further reduce fuel (LPG and kerosene) subsidies and tackle fertilizer subsidies.
    - Pare back untargeted food subsidies by rationalizing eligible beneficiaries and reforming the Food Corporation of India.
    - Move to direct cash transfers using Aadhaar to reduce leakages and improve governance.
    - Pursue an approach based on three pillars: direct benefit transfers, increased financial inclusion, and use of Aadhaar for better targeting.
  - Fiscal responsibility legislation:
    - Strengthen the Fiscal Responsibility and Budget Management Act.
    - Consider rules that provide room for countercyclical fiscal policy, such as capping nominal expenditure growth in addition to a deficit rule with built-in flexibility.

### Public debt outlook
- India’s public debt is projected to decline over the medium term and remains on a sustainable path.
- Under the baseline, the public debt-to-GDP ratio is forecast to decline gradually to about 58½ percent over the medium term from its current level of 65½ percent.
- Baseline uses conservative growth assumptions; large negative growth shocks are a major risk to the declining debt trajectory.

### Authorities’ views on fiscal consolidation and revenue mobilization
- Authorities are committed to fiscal adjustment during the slowdown.
- 2014/15 adjustment is likely via expenditure compression, but authorities aim to protect investment budgets and avoid sharp reductions in capital spending.
- August 2014 reforms: liberalized project appraisal and approval processes in line Ministries; introduced zero-based budgetary principles.
- Expenditure Management Commission expected to propose recurrent spending rationalization, including direct benefit transfers linked to Aadhaar.
- Authorities expect GST to gradually boost revenue by promoting growth and moving activity into the formal sector.
- Authorities consider some flexibility could be introduced around the fiscal deficit target in discussions of a renewed fiscal rule.
- Authorities disagreed with staff on merging direct and indirect tax boards, favoring continued functional specialization.

### External stability: reserves, interventions, and policy guidance
- International reserves increased by about US$30 billion over the last year to reach US$320 billion as at end-December 2014 (standing at 148 percent of the Fund’s reserve adequacy metric).
- RBI has a net long forward position of US$13.2 billion as of end-November 2014 due to forward market intervention.
- Reserve build-up drivers: robust FII flows, sharp CAD correction (largely due to contraction in gold imports), inflows of about US$34 billion of non-resident Indian (NRI) deposits, and overseas bank borrowings facilitated by a concessional FX swap facility offered by the RBI.
- Based on a range of methodologies, staff assesses India’s external position to be broadly in line with fundamentals.
- Foreign exchange intervention strategy aims to enhance growth, reduce inflation, limit volatility, and build precautionary buffers.
- Forward FX purchases have helped cover forward FX liabilities and maintain tight monetary conditions to contain inflation.
- Forward intervention and interest rate differentials increased forward premia, creating arbitrage opportunities and financial market distortions.
- Given adequate reserve buffers, greater exchange rate flexibility is recommended to discourage excessive private-sector risk taking.
- FX intervention should be limited to preventing disruptive movements and checking self-fulfilling momentum divorced from fundamentals.

### Policy recommendations for external shocks and CAD financing
- If global financial market volatility resurfaces, recommended measures include:
  - Exchange rate flexibility to allow orderly depreciation of the rupee, with judicious FX intervention in spot and forward markets and liquidity provision through swaps to minimize disruptions.
  - Consider temporary monetary tightening to make shorting the rupee more costly, bolster the capital account position, and contain inflationary impact of depreciation.
  - Liberalize non-debt creating capital inflows further; avoid measures that limit capital outflows.
  - Reuse tools employed during the post-May 2013 period if needed (FX swaps to attract NRI deposits, dollar liquidity to oil-marketing companies).
  - RBI should further explore options to increase availability of bilateral and multilateral swap lines.
- CAD financing mix could be improved by attracting more stable, non-debt creating capital flows, particularly FDI.
  - Business environment improvements, further liberalization of FDI in specific sectors, and simplification of procedures would help attract FDI.
  - Higher FDI limits in sectors such as construction and insurance could increase FDI flows.
  - Further liberalization of external commercial borrowing should proceed cautiously and be carefully monitored by the RBI because of potential corporate balance sheet risks.

### External-sector facts and facilities
- The RBI introduced two foreign exchange swap schemes in September 2013 to encourage long-term foreign exchange deposits by NRIs and long-term overseas foreign exchange borrowing by banks (details noted in the text).
- India has a swap line with the Bank of Japan of US$50 billion.
- The BRICS’ Contingency Reserve Arrangement will enable India to draw US$6 billion (and another US$12 billion with a Fund program).

*International Monetary Fund staff summary of section 14 from the source document.*

### 27. The authorities noted that while India’s external vulnerabilities are reduced, they

### 27. The authorities noted that while India’s external vulnerabilities are reduced, they

### External buffers and exchange rate policy
- Authorities intend to further rebuild their external buffers.
- Authorities are concerned about:
  - Risks of disorderly monetary policy normalization in advanced countries.
  - Loss of export competitiveness due to prolonged use of unconventional monetary policies by advanced countries.
- Authorities welcomed IMF staff analysis showing India and other EMs have been affected by unconventional monetary policies of advanced economies.
- Despite greater resilience to external shocks, India would likely be adversely affected by a disorderly reversal of such policies in the future.
- Authorities reiterated they are not targeting any specific level of the rupee exchange rate.
- Foreign exchange purchases over the past year were attributed to a desire to rebuild external buffers.
- Authorities acknowledge tension between foreign exchange intervention and the focus on reducing inflation, and consider financial market distortions from intervention policy as minimal.
- Significant progress has been made in creating a conducive business environment to attract foreign direct investment flows.

### D. Preserving Financial Sector Stability — overview
- Past weak growth and delayed infrastructure investment projects have placed pressure on bank asset quality.
- The banking sector is generally sound, but weak growth and supply-side bottlenecks have led to deterioration in asset quality, particularly at public sector banks (PSBs).

### Banking asset quality and corporate vulnerabilities
- System-wide, gross non-performing assets (NPAs) increased to 4.1 percent of total advances at end-fiscal year 2013/14.
- PSBs’ NPAs reached 4.7 percent of total advances (end-fiscal year 2013/14), notwithstanding sales of NPAs to asset restructuring companies (ARCs).
- Restructured loans (as a share of total advances) increased slightly from 5.8 to 5.9 percent of total advances over the last fiscal year.
- Concerns over evergreening remain: more than 90 percent of those sales of NPAs to ARCs were financed by banks via issuance of security receipts.
- Corporate indicators:
  - Share of debt held by firms with an interest coverage ratio below one fell by 2.5 percent to 13.8 percent during 2013/14.
  - Shares of loss-making companies and those with a leverage ratio above two increased slightly to 22.9 and 31.4 percent, respectively.
- Sectors with greater stress (infrastructure, textiles, engineering, metals and products, chemicals, and mining) make up 36 percent of NPAs as of March 2014.
- Hedge ratio for external commercial borrowings and foreign currency convertible bonds (excluding natural hedges) declined sharply from about 34 percent of borrowings in 2013/14 to about 15 percent in July–August 2014.

### Public sector banks (PSBs) — challenges and reform needs
- PSBs represent three-quarters of banking system assets.
- Weaknesses more pronounced in PSBs include larger capital needs, weaker asset quality, and lower operating efficiency.
- New capital injections for banks (to meet Basel III requirements and additional capital requirements due to reclassified restructured loans) are likely to be moderate.
- A multi-pronged approach recommended to remedy structural issues in PSBs, including weak corporate governance. Measures should entail:
  - Further disinvestment by the government.
  - Improving corporate governance and human resource policies.
  - Implementation consistent with key recommendations of the Nayak Committee report.
- Staff welcomes the government’s intention to reduce its shareholdings in PSBs down to 52 percent to allow public banks to strengthen their equity capital base.

### RBI progress on financial sector reforms
- RBI efforts focused on strengthening regulation, including:
  - Implementing Basel III.
  - Identifying Domestic Systemically Important Banks and imposing capital surcharges.
  - Improving resolution of impaired assets.
  - Expanding access to finance.
- Prudential regulatory changes:
  - ARCs required to provide at least 15 percent equity towards purchases of NPAs.
  - Phasing out (by April 1, 2015) the ability for many types of loans to be categorized as rescheduled (and thereby face lower provisioning requirements).
- From July 2014, RBI allowed move of infrastructure and coal sector loans into five-year term loans with the ability of rollover to improve asset-liability structure.
- Recommendation: end forbearance provided by current restructuring mechanism for all types of loans.
- RBI established a large borrower database (beginning May 2014) to remove information asymmetries and improve credit risk management.
- RBI intends to subject RBI-regulated non-bank financial corporations (NBFCs) to more stringent regulatory norms (in line with those for banks).
  - NBFC assets correspond to about 13 percent of bank assets.
  - Largest 480 NBFCs (representing around 90 percent of total NBFC assets) are subject to RBI regulation and supervision.
  - Government-owned NBFCs are not subject to full RBI supervision.

### Corporate governance, securities market, and market infrastructure
- Measures enacted to improve corporate governance, SEBI enforcement powers, and transparency of participatory notes (P-Notes).
- Improvements led to India’s “Protecting Minority Investors rank” moving from about 30th in 2013 to 7th as at June 2014.
- SEBI Act amendment provided regulator with powers of search and seizure; for cases crossing state lines, recourse now available to a single court in Mumbai.
- Foreign investors’ ownership of P-Notes restricted by investor type; brokers selling P-Notes must provide SEBI with names of beneficiaries.
- India is re-negotiating double-taxation treaties to rationalize such investments and follow up on measures to ease registration burden for foreign institutional investors (FIIs).
- Interagency discussions continue on expanding and improving liquidity of the corporate bond market; SEBI considering steps to encourage more debt-for-equity swaps.

### Financial inclusion
- Enhancing financial inclusion is a key government priority.
- RBI guidelines to set up differentiated banks (such as payments banks) focusing on basic financial services using new technologies, investing only in relatively safe assets such as government securities.
- Two new banking licenses allocated in April 2014, with at least 25 percent of new branches required to be in rural areas.
- Government launched Jan Dhan Yojana scheme to provide bank accounts for each poor Indian family; each account to include a debit card, accident and life insurance coverage, and an overdraft facility.

### Key statistics and data references
- Gross NPAs: 4.1 percent of total advances at end-fiscal year 2013/14 (system-wide).
- PSBs’ NPAs: 4.7 percent of total advances (end-fiscal year 2013/14).
- Restructured loans: increased from 5.8 to 5.9 percent of total advances over the last fiscal year.
- Restructured loans reclassification and provisioning changes effective by April 1, 2015.
- Hedge ratio for ECBs and FCCBs: about 34 percent in 2013/14; about 15 percent in July–August 2014.
- NBFC assets: about 13 percent of bank assets.
- Largest 480 NBFCs represent around 90 percent of total NBFC assets.
- India’s “Protecting Minority Investors rank”: about 30th in 2013; 7th as at June 2014.

### Staff recommendations to maintain financial stability
- Strengthen regulation for banks’ credit quality classification and require increased provisioning (particularly for all types of restructured assets under the Corporate Debt Restructuring framework).
- Bolster capital buffers in public sector banks to ensure ability to support recovery and meet Basel III obligations.
- Strengthen monitoring of corporate vulnerabilities given increased unhedged FX exposures of large corporates.
- Endorse the 2012 FSAP recommendation to reduce group exposure limits in line with international norms.
- Improve debt recovery by banks, including incentives to swiftly deal with delinquent borrowers and promoters, and enhancing supervision.
- Improve insolvency legal and institutional framework, particularly implementation of the Companies Act 2013:
  - Build a larger corps of specialized judges and a cadre of insolvency and workout experts in the private sector to facilitate faster insolvency resolution.
- Continue steps to update India’s regulatory architecture drawing upon recommendations by the Financial Sector Legislative Reform Commission (FSLRC) and global regulatory reform.
- Continue reducing the Statutory Liquidity Requirement as the fiscal deficit declines to free up resources for private sector lending.
- Enhance corporate bond market liquidity and develop a robust bond holder protection mechanism.
- Facilitate financial inclusion through new technologies (for example, Aadhaar-based KYC compliance and Aadhaar-supported direct benefit transfers), including mobile phone payments technology.

### Authorities’ views on financial sector issues
- Authorities emphasized strong actions taken to strengthen regime for tackling stressed assets.
- They are balancing need to instill greater payment discipline in borrowers against challenges faced by over-leveraged banks and infrastructure firms, sometimes due to lack of government action to clear projects timely.
- Authorities created a database of large borrowers and placed pressure on “willful defaulters.”
- Recognize challenges inherent in ARC mechanism and are undertaking reforms of the bankruptcy and insolvency framework.
- Authorities view slowdown in private sector credit growth primarily due to weak demand for bank loans rather than impaired bank balance sheets:
  - Build-up of excess capacity in some sectors means recovery could continue with sluggish credit growth.
  - Oil marketing companies’ demand for bank credit has fallen due to much-reduced oil prices.
  - Some corporates are shifting to non-bank financing sources reflecting lower funding costs.
  - Lenders are more cautious due to RBI efforts to rein in bad lending practices, but banks—including PSBs—remain well capitalized and liquid.

### E. Structural policies to boost growth and employment
- Address long-standing supply bottlenecks (energy, mining, power), and implement labor and product market reforms to boost growth and job creation.
- Key reform areas:
  - Reforms to the power sector and rationalizing natural resource allocation, including allowing further private sector participation in coal mining and pricing reforms.
  - Easing land acquisition: government approved an ordinance in December 2014 to simplify and clarify acquisition under the Land Acquisition, Rehabilitation and Resettlement Act 2013.
  - Strengthening the business climate: streamline and expedite land and environmental clearances; simplify procedures to improve Doing Business indicators—particularly resolving insolvency, enforcing contracts, and trade across borders; adopt Tax Administration Reform Commission recommendations.
  - Improving labor market flexibility: state-level steps (for example, Rajasthan) welcome and should be complemented by national reforms to increase formal employment and female labor force participation.
  - Reorienting expenditure towards growth-enhancing and social spending through structural fiscal reforms (including tax and subsidy reforms) to create fiscal space for health, education, and public infrastructure.
  - Agricultural reforms: reduce inefficiencies in public food procurement, distribution and storage; lessen impediments to inter-state movement of agricultural produce; address inadequate irrigation infrastructure.

### Authorities’ views on structural reforms
- Broad agreement that structural reforms are needed for higher potential growth.
- Authorities noted momentum under current government to improve business climate.
- Prime Minister set target of dramatically improving India’s ranking in the World Bank’s Doing Business survey and launched “Make in India” campaign to attract investment.
- Steps being taken at center and states to ease labor market restrictions and plans to simplify the Land Acquisition, Rehabilitation and Resettlement Act.

*Excerpt from IMF staff report (_cr1561_), paragraphs 27–38.*

### 39.  Policy actions have reduced external vulnerabilities, though risks remain. India was hit hard

### _cr1561 - 39.  Policy actions have reduced external vulnerabilities, though risks remain. India was hit hard

### Summary of recent policy actions and effects
- Global liquidity tightening during the post-May 22, 2013 taper tantrum period hit India hard.
- Authorities implemented wide-ranging policies to:
  - contain market volatility,
  - accelerate project approvals,
  - correct imbalances, and
  - build buffers against external shocks.
- Result: underlying vulnerabilities have receded, but there is little room for countercyclical macroeconomic policies to respond to domestic and external shocks.

### Economic outlook and inflation
- Near-term growth outlook: improved, helped by greater political certainty, several policy actions, improved business confidence, and reduced external vulnerabilities.
- Growth: appears to have bottomed out and is expected to strengthen gradually due to revival in industrial and investment activity and steps to alleviate supply-side bottlenecks.
- Inflation: persistently high but has moderated recently due to favorable base effects, a tight monetary stance, lower global commodity prices, and government efforts to contain food inflation.
- Concern: inflation remains ingrained with elevated inflation expectations.
- Policy implication: tight fiscal and monetary policies are needed to continue narrowing macroeconomic imbalances.

### Risks and scenarios
- Downside external risks:
  - Spillovers from weak global growth and global financial market volatility could be very disruptive.
  - Unexpected developments in the course of U.S. monetary policy normalization pose risks.
- Domestic downside risks:
  - Heightened weaknesses in corporate balance sheets.
  - Worsening bank asset quality.
  - Slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth.
- Upside scenarios:
  - Expedited structural reforms and faster implementation of cleared investment projects could lead to stronger growth.
  - A further decline in global energy prices could support growth.

### Monetary policy guidance
- Recommendation: monetary policy needs to remain tight to consolidate recent gains in reducing inflation.
- Rationale:
  - In the absence of supply-side measures to raise potential output and constrain food price inflation, a tight monetary stance is needed to durably bring down inflation and achieve the RBI’s 6 percent CPI inflation objective by 2016.
  - To lower inflation durably over the medium term, tight monetary policy must be accompanied by further structural reforms.
  - Continued progress is needed to strengthen the monetary policy framework and move towards flexible inflation targeting.

### Fiscal policy guidance
- Observation: recent fiscal consolidation has been achieved largely through cuts in capital spending, while tax revenues have stagnated.
- Positive measures noted: October 2014 diesel-price deregulation and capping of LPG subsidies are expected to help lower the fuel subsidy bill.
- Assessment: medium-term fiscal targets are broadly appropriate but appear challenging without clearly articulated supporting measures.
- Required actions to create fiscal space for growth-enhancing spending:
  - Significant tax reforms, including introduction of the GST and better tax administration.
  - Rationalizing subsidies, including further reductions in fuel and fertilizer subsidies and untargeted food subsidies.

### External sector and reserves
- Assessment: external position broadly consistent with medium-term fundamentals; reserves are assessed to be adequate.
- Policy guidance:
  - Greater exchange rate flexibility would be welcome to encourage private sector entities to limit excessive risk taking.
  - Foreign exchange intervention should be limited to preventing disruptive exchange rate movements.
  - If global financial market volatility resurfaces, exchange rate flexibility should serve as an important shock absorber.
  - Improve current account deficit financing mix by enhancing the environment for attracting stable, non-debt creating capital flows, particularly FDI.
  - Further liberalization of external commercial borrowing should proceed cautiously given potential vulnerabilities of corporate balance sheets.

### Financial sector recommendations
- Condition: Indian banking system is well capitalized but facing slow growth and heightened corporate vulnerabilities leading to deterioration in bank asset quality.
- Recommended RBI actions:
  - Further strengthen regulation for banks’ credit quality classification.
  - Require increased provisioning.
  - Continue to monitor corporates’ FX unhedged exposures.
  - Reduce group exposure limits in line with international norms.
- Public sector banks:
  - Augmenting capital buffers in public sector banks is essential to ensure adequate credit provision and to meet Basel III capital requirements.
  - Over the medium term, implement the authorities’ plan to reduce the public shareholding in public sector banks to 52 percent.
  - Improve corporate governance at public banks.

### Structural reforms and supply-side measures
- Priority reforms to achieve faster, more inclusive growth:
  - Reforms to labor and product markets to increase labor market flexibility and formal-sector employment.
  - Alleviate long-standing supply bottlenecks, especially in the power sector and natural resource allocation and pricing, to boost investment and potential growth.
  - Continue efforts to streamline and expedite land and environmental clearances.
  - Simplify procedures to improve India’s business climate and broaden the manufacturing base.

*Source: _cr1561 - 39.  Policy actions have reduced external vulnerabilities, though risks remain. India was hit hard*

### 47. It is recommended that the next Article IV consultation take place on the standard 12-month

### _cr1561 - 47. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Key Policy Actions 2014/15 — Food Inflation
- Smaller minimum support price (MSP) increases for cereal crops for 2014/15: paddy by 3.8% and wheat by 3.6%; imposed restrictions on state governments that offer additional bonuses over MSP to remove cascading.
- Approved sale of 10 million tons of wheat in the domestic open market.
- In January 2015, the government revised food grain buffer stock norms and mandated sale of excess stocks.
- Brought onion and potato within the purview of stockholding limits under the Essential Commodities Act, 1955 to empower states to undertake de-hoarding operations to control prices.
- Authorized National Agricultural Cooperative Marketing Federation to import onion to augment domestic supply.
- Advised state governments to delist fruits and vegetables from the Agriculture Produce Marketing Committee (APMC) Act, 1998 to allow farmers the freedom to sell their produce in alternative markets.
- Proposed Rs. 5 billion price stabilization fund and creation of a National Common Market for agricultural commodities; set up a committee to consider restructuring of Food Corporation of India to improve its operational efficiency.

### Key Policy Actions 2014/15 — Fiscal Policy
- Raised rail passenger fares by 14.2 percent and freight rates by 6.5 percent; deregulated diesel price (October 2014) and raised excise duty on petrol and diesel on four occasions (most recently in January 2015).
- Announced revised formula for natural gas price fixation; raised gas prices to $5.61/mmbtu from $4.20/mmbtu, with a provision to revise prices every six months.
- Fixed LPG subsidy on a per cylinder basis; re-launched modified Direct Benefit Transfer (DBT) Scheme in LPG in 54 districts in November 2014, to cover whole country (676 districts) beginning 1st January, 2015.
- Announced a 10 percent cut in non-plan expenditure; set up an Expenditure Management Commission to streamline government spending.

### Key Policy Actions 2014/15 — Ease of Doing Business
- Amended Apprentices Act to redefine small factories (up to 40 workers) and freed those from furnishing separate labor returns; introduced electronic portal to allot Labour Identification Number (LIN) to facilitate online compliance on labor laws; activated random inspection scheme; allowed women to work on night shifts; raise overtime hours limit; advised states to allow self inspection of boilers; and introduced online system for environment and forest approval.
- Rajasthan state government amended its state labor laws: (i) Industrial Disputes Act to allow companies employing less than 300 people (previously 100) to undertake retrenchments without permission; (ii) Contract Labor Act to free up companies employing 50 or less from (previously, 20); (iii) Factories Act to raise the bar to 20 workers (previously, 10) to be categorized as manufacturing; and (iv) Apprentices Act to allow third party training of apprentices.
- Madhya Pradesh, Haryana and Maharashtra states have evinced interest in carrying out similar changes.

### Key Policy Actions 2014/15 — Structural Policy
- Allowed 100 percent FDI in railway infrastructure and construction development sector; raised FDI in defense to 49 percent from 26 percent, with provision to approve FDI above 49 percent on a case-by-case basis.
- Introduced ordinance to raise FDI in insurance sector to 49 percent from 26 percent (December 2014).
- Issued an ordinance to facilitate re-auction of cancelled coal blocks for captive use; undertakes to open up the sector to commercial allocation at a later date.
- In January 2015 the now-dismantled Planning Commission was replaced with the NITI (National Institution for Transforming India) Aayog, with objectives to evolve national development priorities; foster cooperative federalism; develop mechanisms to formulate plans at village level; and focus on technology upgrades.
- Announced national strategy for “Make-in-India” to boost manufacturing (October 2014).

### Key Policy Actions 2014/15 — Infrastructure Initiatives
- Plan to complete work on industrial corridors; build 100 smart cities, link key cities with bullet trains; initiate “Sagarmala project” to set up 10 coastal economic regions (CERs) and implement “digital India Project”.
- SEBI notified regulations for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs); RBI allowed banks to raise long-term bonds with a minimum maturity of 5 years to finance infrastructure sector.
- Road Ministry empowered to amend “Model Concession Agreement” to expedite road projects.

### Key Policy Actions 2014/15 — Financial Sector
- RBI grants “in-principle” approval to two new banks and will consider giving licenses “on tap” in future (April 2014); issued guidelines on differentiated bank licenses for payment banks and small banks.
- Launched Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme to open 100 million bank accounts for poor families; account holder to benefit from a debit card, accident and life insurance cover and an overdraft facility; accounts to be linked to Aadhaar numbers.
- RBI extended the transitional period for full implementation of Basel III Capital Regulations to March 31, 2019, instead of March 31, 2018; issued final guidelines on the Liquidity Coverage Ratio, to be introduced in a 5-year phased manner starting with a minimum requirement of 60 percent from January 1, 2015.
- RBI introduced a framework for revitalizing distressed assets with guidelines for refinancing of project loans, sale of NPAs and other measures; issued guidelines for flexible restructuring/refinancing long-term project loans and take-out financing under 5/25 rule.
- RBI issued new guidelines against “non-cooperative borrowers”, defined as willful defaulters with loan amounts of Rs 50 million or more.
- Set up four Task Forces to assist government in preparing roadmap for establishment of new agencies as per FSLRC recommendations.
- Government allowed Public Sector Banks (PSBs) to raise capital to meet Basel III additional requirements by diluting government shareholding in PSBs to 52 percent in a phased manner (issued December 2014).

### Key Policy Actions 2014/15 — Monetary Policy
- RBI accepted Patel Committee recommendations to anchor CPI headline inflation with a "glide path" for achieving 8 percent CPI headline inflation by January 2015 and 6 percent by January 2016.
- RBI shifted to a bi-monthly cycle of monetary policy review and provided one-year-ahead inflation forecasts. Government supportive of formal adoption of a new monetary policy framework for flexible inflation targeting.
- RBI raised repo rate by 25 bps to 8 percent in January 2014, and then reduced the rate by 25 bps in January 2015.
- Reduced SLR by 100 bps to 22 percent of NDTL; raised limit for liquidity under 7-day and 14-day term repos to 0.75 percent of NDTL and reduced liquidity under overnight repos (LAF) to 0.25 percent of NDTL.
- Reduced HTM ceiling to 24 percent of NDTL; reduced liquidity under export credit refinance (ECR) to 15 percent of eligible export credit outstanding.

### Key Policy Actions 2014/15 — Balance of Payments Measures
- Removed quantitative restrictions on import of gold under 80:20 scheme (November 2014).
- Share of long-term investors in government dated securities, within the overall limit of US$ 30 billion for FII investment, was reduced by US$ 5 billion.
- Restricted FII investment in T-bills and Government-dated securities to those with a residual maturity of more than three years.
- Raised the limit for individual remittances to $125,000 from $75,000; restored the limit of Overseas Direct Investments by corporates to 400 percent of net worth.

### Key Policy Actions 2014/15 — Risk Management
- RBI allowed free canceling and rebooking of forward contracts for all current and capital account transactions with a residual maturity of one year or less; relaxed hedging of currency risk by exporters and importers under the past performance route.
- Allowed FIIs to hedge the coupon receipts falling due during the next 12 months and rebooking of cancelled contracts in case of contracted exposures.
- Allowed all resident individuals, firms and companies to book foreign exchange derivative contracts up to US$ 250,000.

### India FSAP Main Recommendations and Risks: December 2014 Update — System-wide and Financial Sector Oversight (selected findings and actions)
- Enhance RBI monitoring of corporate indebtedness, refinancing risk, and foreign exchange exposures (¶13 - FSSA).
  - Banks directed to check corporate customers’ unhedged FX-exposures and to appropriately reserve against those in line with formulas provided by RBI; non-compliance can be penalized.
  - RBI setting up the "large borrower’s database"; banks to provide information on corporates whose total exposure exceeds Rs 50 million. Database is up and running but data quality and operational issues remain.
  - Since December 2013, banks must report accounts past due between 61-90 days and set up joint lenders’ committee for exposures in excess of Rs 1 billion.
- Improve performance and financial strength of public financial institutions and subject them to full supervision and regulation (¶20).
  - A law is being drafted to remove members of boards of public banks who are related to supervisory agencies.
  - Nayak Committee report (May 2014) recommended governance changes in PSBs; government intends to reduce its shareholdings in PSBs to 52 percent to support reform.
  - RBI recommended NBFCs be made subject to RBI oversight; no change in law needed. FSLRC expected to restructure financial supervisory system.
- Strengthen oversight of banks’ overseas operations through MOUs, onsite inspections, and supervisory colleges (¶35).
  - Additional MOUs being negotiated and signed; RBI hosted supervisory colleges; overseas offices of five large Indian banks (representing 86 percent of total overseas assets) have been inspected.
- Enhance formal statutory basis for autonomy of regulators (¶35, 41, 46).
  - RBI notes it currently cannot revoke license of a PSB; requesting legislative change.
- Tighten definition of large and related party concentration and reduce exposure limits to align with international practices (¶35).
  - Authorities committed to align with 'Final Standard' for connected counterparties by January 2019 but noted higher current limits are used to facilitate financing for infrastructure.
- Enhance specialized expertise for supervision (¶37).
  - RBI working on a certification system for supervisors; using U.S. Federal Reserve approach to accreditation of bank-internal credit models; new training programs with World Bank Financial Sector Development Program.
- Strengthen coordination and information sharing among domestic supervisors (¶49, 67).
  - Financial Stability and Development Council (FSDC) set up; subcommittee headed by RBI Governor; inter-regulatory committee to help banking sector comply with Basel III set up March 2014.
  - Repository work initiated to capture all accounts of an individual or entity; MOU between RBI, SEBI, and other agencies signed.
  - Supervision of commodities exchanges shifted to Ministry of Finance from Ministry of Corporate Affairs (2013).
- Provide lead supervisor legal backing for consolidated supervision (¶49).
  - Section 29a of Banking Law amended to enable banking supervisors to inspect companies associated with any bank and allow joint inspections by RBI and other regulators.
- Expedite passage of Insurance Law (Amendment) Bill (¶43).
  - Not passed yet.
- Enact legislation formalizing the New Pension Scheme and PFRDA (¶33).
  - New Pension Law (PFRDA) was passed.
- Plan reduction in SLR and review hold-to-maturity category (¶51).
  - Authorities want to keep SLR as monetary tool. Five percentage points of SLR can be used for repo with RBI for up to 30 days; an additional two percentage points can be used to access the Marginal Standing Facility (MSF).
- Strengthen resolution tools for nonviable entities (¶53).
  - Work in planning stage; internal working group produced a plan; task force under FSLRC set up; RBI Governor prioritizing issue.
- Develop and periodically test arrangements for major financial system disruption (¶54, 66).
  - Crisis management group set up inside RBI; inter-regulatory committee of FSDC set up early warning group.
  - Core settlement guarantee fund set up at Clearing Corporation of India (CCIL); SEBI issued more granular norms for stress testing and harmonization of default waterfalls across clearing corporations.
- Ease investment directives to encourage investments in corporate and infrastructure bonds by institutional investors (¶34, 62).
  - Taxes on FX-bonded debt reduced; three types of investment limits for foreign investors consolidated into one limit of $51 billion; new infrastructure investment schemes implemented.
  - One-year lock-in period for foreigners removed; guidelines for insurers and pension funds to increase participation.
  - Bonds for infrastructure financing exempt from CRR and can be deducted from SLR requirements; pension funds can invest in corporate and infrastructure bonds with a minimum rating of AA.
- Consider further easing restrictions on bond market investments by FIIs (¶59).
  - Some progress: Limits on FII investments in GSecs and T-bills combined and increased to $30 billion.
- Financial market infrastructure — strengthen CCP liquidity risk management (¶66).
  - Credit lines of Rs 27 billion available to CCPs for settlement with RBI, and Rs 63 billion in lines at designated settlement banks. US$ 750 million in lines made available for FX clearing.
  - SEBI advised CCPs to align liquidity risk management with CPSS-IOSCO Principles; requires CCPs to test adequacy of clearing arrangements.
- Consider replacing commercial bank settlement model with central bank settlement model (¶66).
  - Some progress: committee of SEBI and RBI working on issue; working group favors current CCIL model where clearing corporations and clearing banks settle via central bank accounts.
- Enact comprehensive modern corporate insolvency law and upgrade SARFAESI Act 2002 (¶69).
  - Partial progress: New insolvency statutes passed as part of the Companies Act.
  - Government set up a committee to devise an entrepreneur-friendly bankruptcy framework.

*Prepared by the IMF staff as presented in the source document.*

### Box 1. Potential Growth in India

### Box 1. Potential Growth in India

### Estimated potential growth
- Staff estimates suggest India’s potential output growth is about 6¾ percent in the medium term.
- A range of empirical approaches indicate:
  - Trend growth peaked at about 8 percent just before the Global Financial Crisis of 2008.
  - Trend growth has declined in recent years to around 6–7 percent.
- The Reserve Bank of India has recently lowered its estimate of potential growth to about 7 percent.

### Drivers of the slowdown
- The slowdown in potential growth appears to have been driven largely by the decline in trend total factor productivity (TFP) growth.
- TFP contribution:
  - Declined from about 3 percentage points during the high-growth period of 2002–07
  - To about 2 percentage points during 2011–13.
- Sector-based analysis:
  - Slowdown was more pronounced in sectors affected by regulatory and infrastructure bottlenecks, highlighting the importance of addressing supply-side constraints.

### Policy context and macro implications
- Actual GDP growth fell below 5 percent in both 2012/13 and 2013/14, leading to the emergence of excess supply.
- Given limited policy space, tight fiscal and monetary policies were implemented to rein in persistently-high inflation and current account deficit pressures.
- Rebuilding policy space is necessary to enable credible counter-cyclical aggregate demand management going forward.

### Policy recommendations to raise potential growth
- A multi-pronged strategy is required to improve factor productivity, including through productivity-enhancing capital investment.
- Key reforms recommended:
  - Strengthen the business climate.
  - Implement factor market reforms (land, labor, natural resources) to revitalize growth and better utilize India’s large and young labor force.

*Prepared by Volodymyr Tulin.*

### Box 6. External Sector Assessment

### Box 6. External Sector Assessment

### Current Account and Exchange Rates
- After a major adjustment in fiscal year (FY) 2013/14, the current account deficit (CAD) is projected to widen slightly to about 2 percent of GDP in FY2014/15 as domestic demand strengthens.
- The EBA CA regression estimates a norm of about -4.2 percent of GDP for India in FY2014/15.
- Staff judgment: global financial markets could not be counted on to reliably finance a deficit of that size, given India’s current (albeit reduced) vulnerabilities.
- Staff assesses that a smaller CAD of about 2½ percent of GDP is a more appropriate norm, given risks associated with global financial market volatility.
- This assessed norm (about 2½ percent of GDP) is higher than the estimated underlying CAD of about 2 percent of GDP in FY2014/15.
- The CA gap is therefore estimated to be in a range of -1 to +1 percent of GDP.
- The real effective exchange rate (REER) appreciated by about 5 percent between March and October 2014, in comparison with a 7 percent depreciation during FY2013/14.
- The EBA REER regression approach estimates a slight gap of about +2 percent for the 2014 average REER.
- Staff assesses the REER gap for 2014 to be in the range of -5 to +5 percent, and notes it is in line with the CA gap assessment.
- The EBA ES (external sustainability) approach estimates a CA norm of about -1.7 percent of GDP, as the CA consistent with holding the NFA-to-GDP ratio at its current level (-25.6 percent of GDP).

### Capital Account Flows and International Investment Position
- India’s financial account has been dominated by portfolio equity and FDI flows.
- The composition of CA financing has recently shifted toward more debt flows, particularly in the form of NRI deposits and external commercial borrowings.
- Recommendation/assessment: the financing mix should be improved by enhancing the environment for attracting stable non-debt-creating capital flows.
- India’s net international investment position (NIIP) deteriorated to -17 percent of GDP in FY2013/14, from -12 percent in FY2010/11.
- Both assets and liabilities have risen steadily over the last decade; external debt has increased sharply in the last three years.
- External debt at 23 percent of GDP as at end-September 2014 remains moderate when compared to other emerging markets.
- The maturity profile of external debt is favorable: the share of long-term external debt in total debt is about 80 percent and the ratio of short-term external debt to FX reserves is low.
- With CA deficits of about 2½ percent of GDP projected for the medium term, India’s NIIP-to-GDP ratio will remain broadly stable.

*Prepared by Mehdi Raissi.*

### Box 8. Potential Capital Needs of India’s Commercial Banks (Concluded)

### Box 8. Potential Capital Needs of India’s Commercial Banks (Concluded)

### Indian Banks' Recapitalization Costs under Basel III
- Table title: Indian Banks' Recapitalization Costs under Basel III: Additional Capital Requirements as Percent of FY 2019 GDP.
- Simulation details and assumptions:
  - Simulations based on 2012 data (except ROA and ROE, where 2011 and 2012 averages are used).
  - A 15 percent transition rate from restructured loans to NPAs is assumed.
  - Numbers equal Equity Tier 1 ratio plus Capital Conversion Buffer plus additional cushion of zero, 1, or 2 percentage points.
  - Simulations use stock values at end-March 2014, and flow variables averaged across fiscal years 2012 and 2013.
  - The average provisioning ratio of private sector banks is slightly above 60 percent; this provisioning ratio was used as a minimum. If a bank’s provisioning ratio for 2012/13 exceeded 60 percent, the actual number was used.
  - Historically, about 15 percent of restructured advances have moved into NPAs, with this number moving close to 20 percent in recent months. The authorities have used a maximum 30 percent transition rate in their stress tests.

### Additional Tier 1 (AT1) Capital and Market Considerations
- AT1 capital will have to be raised beyond CET1 requirements.
- AT1 capital can be raised in the form of bonds which are either convertible into equity, or will have to take haircuts, in the event that pre-specified CET1 ratios are breached.
- In the scenarios deemed more likely, for PSBs those requirements will amount to less than ½ of one percent of GDP.
- Recommendation: supervisors should ensure that sales to non-institutional investors appropriately disclose the risks related to loss absorption inherent in those bonds.

### Fiscal and Policy Implications for Government Support
- Under scenarios which assume moderate credit growth, and a continued challenging operating environment similar to 2012/13, total required capital injections from the government are likely to be manageable.
- Under current equity market valuations, and the government's announced intention to reduce its share in all PSBs to 52 percent, lower capital injections by the government may be needed.
- Further reforms, especially to enhance the operating performance and the credit culture of the PSBs, will help reduce the capital injection needs.

*Source: RBI, Bankscope, IMF staff calculations; Box 8 text and notes.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Domestic Risks
- Slower-than-expected progress in addressing supply side bottlenecks
  - Likelihood: M
  - Impact: M: Slower-than-expected progress in addressing supply side bottlenecks could weigh on growth and stoke inflation, thereby it could undermine macroeconomic and financial stability.
  - Policies to Minimize Impact:
    - Continue to address long-standing supply bottlenecks, especially in the energy, mining and power sectors, as well as labor market reforms.
    - Strengthen business climate and address factors hampering agricultural productivity.

- Strong pick-up in inflation
  - Likelihood: M
  - Impact: M–H: A strong pick-up in inflation could discourage financial saving, erode external competitiveness and generate external imbalances. It also hurts the poor, especially in urban areas, the most. High inflation expectations could increase the economic costs of bringing inflation down in a sustainable way, further damaging growth.
  - Policies to Minimize Impact:
    - Raising interest rates until inflation is clearly on a downward trend.
    - Improved agricultural productivity and investing in infrastructure to improve the supply response can reduce food price pressures.

- Balance sheet risks
  - Likelihood: M
  - Impact: H: Continued corporate stress could add to bank NPAs, raising capital concerns and reducing lending in the medium term.
  - Policies to Minimize Impact:
    - Strengthened oversight of financial and corporate risks.
    - Raising provisioning requirements.
    - Policies to incentivize genuine corporate restructuring and improvements to insolvency framework.

### External Risks
- A surge in financial market volatility
  - Likelihood: H
  - Impact: M: While external vulnerabilities have declined considerably, the impact from a surge in global financial market volatility could be disruptive, particularly against the backdrop of large capital inflows more recently and weak corporate balance sheets.
  - Policies to Minimize Impact:
    - Enhance the environment for attracting stable non-debt creating capital flows, particularly FDI.
    - Rupee flexibility and monetary policy tightening.
    - Offer FX swaps to banks to attract NRI deposits as well as providing dollar liquidity to oil marketing companies to limit depreciation.

- Protracted period of slower growth in advanced economies
  - Likelihood: H
  - Impact: M: Deterioration in the advanced countries’ economic outlook would cloud the sustainability of the recovery in India, both for exports and investment.
  - Policies to Minimize Impact:
    - Structural reform will raise returns to investment and strengthen domestic sources of growth.

- Heightened geopolitical risks in the Middle East
  - Likelihood: M
  - Impact: M-H: Significant effects on the current account deficit, inflation and the fiscal deficit.
  - Policies to Minimize Impact:
    - Further shift toward market pricing to minimize fiscal impact and improved targeting of transfers to shelter the most vulnerable.

- Financial imbalances from protracted period of low interest rates continue to build
  - Likelihood: M
  - Impact: M: Rapid capital inflows, increased leverage by corporates especially those with unhedged FX exposures, and strong currency appreciation pressures would set the stage for disruptive movements in macroeconomic and financial variables in the event of sudden shifts in markets’ expectations.
  - Policies to Minimize Impact:
    - Further improve the current account deficit financing mix.
    - Structural reforms, close monitoring of unhedged FX positions, and building of external buffers are also key.

### Legend and Notes
- “L”=Low; “M”=Medium; “H”=High.
- This matrix shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline. The Risk Assessment Matrix reflects staff views on the source of risks and overall level of concern as of the time of discussions with authorities.

*Source: Annex I. Risk Assessment Matrix (IMF staff).*

### Annex II. Figure 4. India: Public DSA—Composition of Public Debt and Alternative Scenarios

### Annex II. Figure 4. India: Public DSA—Composition of Public Debt and Alternative Scenarios

### Underlying Assumptions (in percent)
- Baseline Scenario (2014–2019)
  - Real GDP growth: 5.8, 6.3, 6.5, 6.6, 6.7, 6.7
  - Inflation: 6.9, 7.0, 6.1, 5.4, 5.5, 5.6
  - Primary Balance: -2.2, -2.0, -1.9, -1.9, -1.9, -1.8
  - Effective interest rate: 8.3, 8.5, 8.4, 8.3, 8.3, 8.2
- Historical Scenario (2014–2019)
  - Real GDP growth: 5.8, 7.5, 7.5, 7.5, 7.5, 7.5
  - Inflation: 6.9, 7.0, 6.1, 5.4, 5.5, 5.6
  - Primary Balance: -2.2, -2.7, -2.7, -2.7, -2.7, -2.7
  - Effective interest rate: 8.3, 8.5, 8.2, 7.9, 7.7, 7.5
- Constant Primary Balance Scenario (2014–2019)
  - Real GDP growth: 5.8, 6.3, 6.5, 6.6, 6.7, 6.7
  - Inflation: 6.9, 7.0, 6.1, 5.4, 5.5, 5.6
  - Primary Balance: -2.2, -2.2, -2.2, -2.2, -2.2, -2.2
  - Effective interest rate: 8.3, 8.5, 8.4, 8.3, 8.2, 8.1

### Composition of Public Debt: Baseline and Alternative Scenarios
- Gross Nominal Public Debt (in percent of GDP), projection
  - Time series plotted from 2012 through 2019 with values represented across scenarios (visual depiction indicated; numbers in figure not enumerated in text).
- Public Gross Financing Needs (in percent of GDP), projection
  - Time series plotted from 2012 through 2019 with values shown as 10, 10, 11, 11, 12, 12, 13, 13 for the 2012–2019 sequence (as presented in figure).
- By Maturity (in percent of GDP), projection (2003–2019)
  - Medium and long-term and Short-term components plotted across 2003–2019 (visual depiction).
- By Currency (in percent of GDP), projection (2003–2019)
  - Local currency-denominated and Foreign currency-denominated components plotted across 2003–2019 (visual depiction).

### Stress Tests — Macro-Fiscal Scenarios and Assumptions
- Macro-fiscal stress test scenarios and underlying assumptions (2014–2019)
  - Primary Balance Shock
    - Real GDP growth: 5.8, 6.3, 6.5, 6.6, 6.7, 6.7
    - Inflation: 6.9, 7.0, 6.1, 5.4, 5.5, 5.6
    - Primary balance: -2.2, -2.9, -2.8, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 8.5, 8.5, 8.4, 8.3, 8.2
  - Real GDP Growth Shock
    - Real GDP growth: 5.8, 3.9, 4.2, 6.6, 6.7, 6.7
    - Inflation: 6.9, 6.4, 5.5, 5.4, 5.5, 5.6
    - Primary balance: -2.2, -2.5, -3.1, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 8.5, 8.5, 8.4, 8.3, 8.2
  - Real Interest Rate Shock
    - Real GDP growth: 5.8, 6.3, 6.5, 6.6, 6.7, 6.7
    - Inflation: 6.9, 7.0, 6.1, 5.4, 5.5, 5.6
    - Primary balance: -2.2, -2.0, -1.9, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 8.5, 8.5, 8.5, 8.5, 8.4
  - Real Exchange Rate Shock
    - Real GDP growth: 5.8, 6.3, 6.5, 6.6, 6.7, 6.7
    - Inflation: 6.9, 16.0, 6.0, 6.1, 5.4, 5.5, 5.6 (note: inflation series as presented)
    - Primary balance: -2.2, -2.0, -1.9, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 8.8, 8.6, 8.5, 8.4, 8.3
  - Combined Shock
    - Real GDP growth: 5.8, 3.9, 4.2, 6.6, 6.7, 6.7
    - Inflation: 6.9, 6.4, 5.5, 5.4, 5.5, 5.6
    - Primary balance: -2.2, -2.9, -3.1, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 8.8, 8.7, 8.7, 8.6, 8.6
  - Contingent Liability Shock
    - Real GDP growth: 5.8, 3.9, 4.2, 6.6, 6.7, 6.7
    - Inflation: 6.9, 6.4, 5.5, 5.4, 5.5, 5.6
    - Primary balance: -2.2, -7.1, -1.9, -1.9, -1.9, -1.8
    - Effective interest rate: 8.3, 9.3, 8.7, 8.5, 8.4, 8.3

### Stress Tests — Key Dynamics (visual series presented)
- Gross Nominal Public Debt (in percent of GDP): time series across 2014–2019 under Baseline, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, and Combined Macro-Fiscal Shock (visual depiction).
- Gross Nominal Public Debt (in percent of Revenue): time series across 2014–2019 under Baseline and shocks (visual depiction).
- Public Gross Financing Needs (in percent of GDP): time series across 2014–2019 under Baseline and shocks (visual depiction).
- Extended scales shown in figures include ranges up to 400 (in percent of Revenue) and up to 80 (in percent of GDP) depending on panel (visual depiction).

### External Debt Sustainability: Bound Tests (External debt in percent of GDP)
- Testing framework notes
  - Individual shocks are permanent one-half standard deviation shocks.
  - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
  - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2014/15.
- Selected labeled values from panels (as presented)
  - Baseline value shown as 24 (external debt in percent of GDP).
  - Interest rate shock panel: labelled "i-rate shock" with Baseline 24.
  - CA shock panel: labelled CA shock with Baseline 24 and scenario value 27.
  - Combined shock panels: Combined shock 26 (baseline 24) and Combined shock with 30% depreciation 36 (baseline 24).
  - Growth shock panel: labelled Growth shock with Baseline 24 and scenario value 25.
- Baseline / Scenario / Historical box averages (as presented)
  - Growth: Baseline: 4.0; Scenario: 4.5; Historical: 3.0
  - Real GDP growth: Baseline: 6.6; Scenario: 5.4; Historical: 7.5
  - Non-interest current account balance: Baseline: -1.3; Scenario: -2.0; Historical: -1.7
  - Growth shock magnitude (in percent per year) shown as a panel label (visual depiction).

*Source: IMF staff.*

### Annex II. Table 1. India: External De

### Annex II. Table 1. India: External Debt Sustainability Framework, 2009–2019

### Baseline: External debt and projections (percent of GDP unless otherwise indicated)
- External debt (baseline): 2009: 19.1; 2010: 18.6; 2011: 19.2; 2012: 22.0; 2013: 23.5; 2014: 24.2; 2015: 23.6; 2016: 23.6; 2017: 23.5; 2018: 23.6; 2019: 23.6
- Debt-stabilizing non-interest current account 6/: -3.6
- Change in external debt: 2009: 0.8; 2010: -0.5; 2011: 0.6; 2012: 2.8; 2013: 1.5; 2014: 0.7; 2015: -0.6; 2016: 0.0; 2017: 0.0; 2018: 0.1; 2019: 0.0

### Identified external debt-creating flows (lines 4+8+9)
- Identified external debt-creating flows: 2009: -2.9; 2010: -3.5; 2011: 0.3; 2012: 2.2; 2013: -0.1; 2014: -2.0; 2015: -2.2; 2016: -1.9; 2017: -1.8; 2018: -1.7; 2019: -1.5

- Current account deficit, excluding interest payments: 2009: 2.4; 2010: 2.4; 2011: 3.8; 2012: 4.3; 2013: 1.3; 2014: 1.4; 2015: 1.2; 2016: 1.2; 2017: 1.3; 2018: 1.3; 2019: 1.5

- Deficit in balance of goods and services (in percent of GDP): 2009: -46.8; 2010: -49.7; 2011: -54.8; 2012: -55.7; 2013: -54.1; 2014: -52.5; 2015: -49.9; 2016: -49.3; 2017: -48.6; 2018: -48.0; 2019: -47.2

- Exports (presentation in source is concatenated): 2009–2019 line as printed: 20.422.424.024.325.0 24.323.122.822.422.121.6

- Imports (presentation in source is split across lines, with leading negative sign): 2009: -26.4; 2010: -27.2; 2011: -30.7; 2012: -31.4; 2013: -29.0; 2014: -28.3; 2015: -26.8; 2016: -26.5; 2017: -26.2; 2018: -25.9; 2019: -25.5

- Net non-debt creating capital inflows (negative): 2009: -3.7; 2010: -2.4; 2011: -2.1; 2012: -2.6; 2013: -1.4; 2014: -2.6; 2015: -2.6; 2016: -2.6; 2017: -2.6; 2018: -2.6; 2019: -2.6

### Automatic debt dynamics and contributions (percent of GDP)
- Automatic debt dynamics 1/: 2009: -1.5; 2010: -3.4; 2011: -1.5; 2012: 0.4; 2013: 0.1; 2014: -0.8; 2015: -0.8; 2016: -0.6; 2017: -0.5; 2018: -0.4; 2019: -0.4

- Contribution from nominal interest rate: 2009: 0.4; 2010: 0.3; 2011: 0.3; 2012: 0.4; 2013: 0.4; 2014: 0.4; 2015: 0.5; 2016: 0.8; 2017: 0.9; 2018: 1.0; 2019: 1.0

- Contribution from real GDP growth: 2009: -1.4; 2010: -1.6; 2011: -1.1; 2012: -0.9; 2013: -1.1; 2014: -1.2; 2015: -1.3; 2016: -1.4; 2017: -1.4; 2018: -1.5; 2019: -1.5

- Contribution from price and exchange rate changes 2/: 2009: -0.6; 2010: -2.2; 2011: -0.7; 2012: 0.9; 2013: 0.7; 2014: ... (ellipsis in source indicates continuation not provided)

### Residuals and other flows
- Residual, incl. change in gross foreign assets (2-3) 3/: 2009: 3.6; 2010: 3.0; 2011: 0.3; 2012: 0.6; 2013: 1.5; 2014: 2.7; 2015: 1.6; 2016: 1.9; 2017: 1.8; 2018: 1.7; 2019: 1.5

### External debt metrics and financing needs
- External debt-to-exports ratio (in percent): 2009: 93.7; 2010: 82.9; 2011: 79.8; 2012: 90.5; 2013: 93.7; 2014: 99.5; 2015: 101.9; 2016: 103.4; 2017: 105.1; 2018: 107.0; 2019: 109.0

- Gross external financing need (in billions of US dollars) 4/: 2009: 123.8; 2010: 147.8; 2011: 202.1; 2012: 233.0; 2013: 222.6; 2014: 223.1; 2015: 253.7; 2016: 287.0; 2017: 318.9; 2018: 358.2; 2019: 401.3

- Gross external financing need (in percent of GDP): source shows fragmentary values and labels: 9.1  8.610.712.511.910-Year10-Year 10.911.011.511.712.012.3 (presentation in source is concatenated and not separable)

### Scenario with key variables at their historical averages 5/
- Scenario external debt (percent of GDP): 24.2; 24.7; 24.7; 24.4; 24.1; 23.6; -4.1 (note: source presents these figures with limited context and a trailing -4.1)

### Key macroeconomic assumptions underlying baseline (selected series)
- Historical Standard Deviation (as labeled in source) — selected items:
  - Real GDP growth (in percent): historical: 8.5; standard deviation: 10.3; baseline path (2009–2019 entries in table): 6.6; 4.7; 5.0; 7.5; 2.3; 5.8; 6.3; 6.5; 6.6; 6.7; 6.7
  - GDP deflator in US dollars (change in percent): historical: 2.8; standard deviation: 13.5; projection entries: 3.2; -5.6; -3.9; 4.2; 7.9; 3.3; 5.7; 2.2; 2.4; 2.0; 2.5
  - Nominal external interest rate (in percent): historical: 2.7; standard deviation: 2.0; projection entries: 2.0; 2.1; 1.9; 3.0; 1.0; 2.0; 2.5; 3.7; 4.2; 4.8; 4.8
  - Growth of exports (US dollar terms, in percent): historical: -5.6; standard deviation: 37.7; projection entries: 17.9; 0.0; 3.9; 18.5; 15.1; 5.8; 7.1; 7.2; 7.2; 7.3; 7.3
  - Growth of imports (US dollar terms, in percent): historical: 0.0; standard deviation: 29.0; projection entries: 24.2; 0.9; -6.6; 20.1; 17.7; 6.5; 6.3; 7.8; 7.9; 7.7; 7.7
  - Current account balance, excluding interest payments (percent of GDP): historical: -2.4; standard deviation: -2.4; projection entries: -3.8; -4.3; -1.3; -1.7; 1.5; -1.4; -1.2; -1.2; -1.3; -1.3; -1.5
  - Net non-debt creating capital inflows: historical: 3.7; standard deviation: 2.4; projection entries: 2.1; 2.6; 1.4; 2.2; 0.9; 2.6; 2.6; 2.6; 2.6; 2.6; 2.6

### Formulae and definitions (from source footnotes)
- 1/ Automatic debt dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
- 2/ Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- 3/ For projection, line includes the impact of price and exchange rate changes.
- 4/ Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- 5/ Key variables included in scenario: real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- 6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

*Source: Annex II. Table 1. India: External Debt Sustainability Framework, 2009–2019 (from the provided IMF content).*

### 7.75 percent on February 3, in line with market expectations. The RBI stated in its latest

### _cr1561 - 7.75 percent on February 3, in line with market expectations. The RBI stated in its latest

### Monetary policy and RBI regulatory measures
- Policy repo rate: no change at 7.75 percent on February 3; rationale: "absence of substantial new developments on the disinflationary process or on the fiscal outlook, since the 25 basis points cut in the policy repo rate of January 15."
- RBI reductions and regulatory adjustments (February 3, 2015 statement):
  - Statutory liquidity ratio (SLR) reduced by 50 basis points from 22 percent to 21.5 percent of net deposit liabilities.
  - Limits for foreign exchange remittances increased.
  - Minimum residual maturity of foreign portfolio investment in India increased to three years.
- Policy intent: SLR reduction "to provide room to banks to increase their lending to productive sectors on competitive terms to support investment and growth."
- Inflation guidance: RBI indicated inflation is likely to be around 6 percent by January 2016.

### International reserves, capital flows, and external sector
- Net portfolio investment inflows (equity and debt) in 2015: about US$ 7 billion, of which about US$ 2 billion occurred thus far in February 2015.
- International reserves:
  - Increased by about US$ 8 billion during 2015 (to date), after increasing by US$ 27 billion in 2014.
  - "Currently stand at about US$ 328 billion (an all-time high) representing about 6½ months of next year’s imports of goods and services."
- IMF staff note (end-December 2014): international reserves reached US$320 billion (representing about 6½ months of import coverage) at end-December 2014.
- Current account and external outlook:
  - Current account deficit projected around 1¾ percent of GDP in FY 2015/16.
  - External risks include potential disruptive spillovers from global financial market volatility and U.S. monetary policy normalization.

### Fiscal developments and privatization
- Government divestment:
  - Sold 10 percent of stake in Coal India Limited during week ending January 30, 2015, raising around US$ 3.6 billion.
  - Proceeds intended to help meet 2014/15 fiscal deficit target of 4.1 percent of GDP.
- Fiscal consolidation path:
  - Central Government gross fiscal deficit (GFD) history and targets:
    - 2011-12: 5.7 percent of GDP.
    - 2013-14: 4.6 percent of GDP.
    - Budgeted 2014-15: 4.1 percent of GDP.
  - Measures supporting consolidation:
    - Deregulation of diesel prices (October 2014).
    - Raised excise duty on petroleum products in stages.
    - Revised natural gas pricing formula.
    - Overhauled subsidy regime with more targeted transfers (e.g., cooking gas subsidy replaced by direct transfers).
    - Expenditure Management Commission established and submitted an interim report.
  - Note: "Fiscal consolidation so far has largely been achieved by reduction in expenditure. The realization of revenues has not fully matched the targets set."

### Growth, inflation, and short-term outlook
- Growth:
  - Recovery: GDP growth rebounded to 5.5 percent in the first half of FY 2014/15 (earlier IMF text); alternative series and government data:
    - Revised series: GDP growth for 2013-14 estimated at 6.9 percent (vis-à-vis 5.0 percent in the old series).
    - Advance Estimates for 2014-15: GDP growth placed at 7.4 percent; first three quarters (April-December) of 2014-15 growth of 7.4 per cent versus 7.0 per cent in same period last year.
    - IMF projection: Growth projected at 5.6 percent for FY 2014/15, picking up to 6.3 percent in FY 2015/16 (at factor cost).
- Inflation:
  - CPI inflation declined from 9.5 percent in FY 2013/14 to 5 percent in December 2014 (later noted CPI was 5 percent in December 2014 and had been 11.2 percent in November 2013 under another series).
  - IMF projection: CPI inflation projected to move up to about 6¼ percent by March 2015 and hover slightly above 6 percent over FY 2015/16.
  - Drivers: economic slack, tight monetary stance, lower global commodity prices, government efforts to contain food inflation, favorable base effects.
- Headwinds and constraints:
  - Weaknesses in corporate and bank balance sheets will weigh on credit growth.
  - Fiscal restraint and a tight monetary stance act as near-term headwinds, offsetting positive commodity terms of trade.

### IMF Executive Board assessment, risks, and policy recommendations
- Executive Board summary:
  - Welcomed authorities’ policy initiatives to reduce external vulnerabilities and improve outlook.
  - Noted limited room for countercyclical macroeconomic policy due to still-high fiscal deficits and upside risks to inflation.
- External risk management:
  - Main external risk: surge in global financial market volatility.
  - Recommended policy toolkit if external pressures re-emerge: maintain rupee flexibility, judicious foreign exchange intervention, tightening of monetary conditions, and additional fiscal adjustment.
- Monetary policy framework:
  - Directors welcomed progress in reducing inflation and recommended remaining tight monetary policy to consolidate gains.
  - Recommended further efforts to strengthen the monetary policy framework, including a move towards flexible inflation targeting.
- Fiscal policy recommendations:
  - Commended government's commitment to fiscal consolidation and deregulation measures.
  - Encouraged articulating and implementing specific supporting measures to enhance quality and sustainability of consolidation.
  - Suggested fiscal space for growth-enhancing capital spending could be obtained by further rationalizing fuel, fertilizer, and food subsidies; and raising tax revenues to pre-global financial crisis levels, particularly by introducing a well-designed goods and services tax and enhancing tax administration.
- External financing and reserves:
  - Directors assessed international reserves as adequate; recommended limiting foreign exchange intervention to preventing disruptive movements and improving the external financing mix by attracting stable, non-debt creating capital flows, particularly foreign direct investment.
- Structural reforms to boost potential growth:
  - Address supply bottlenecks in energy, mining, and power sectors.
  - Bolster business climate, ease restrictive labor laws, raise agricultural productivity, and address skills mismatches to make growth more inclusive and generate jobs.
- Financial sector recommendations:
  - Strengthen prudential regulation for banks’ asset quality classification.
  - Address concentration risks, augment capital buffers, improve corporate governance at public sector banks, and strengthen the insolvency framework.
  - Welcomed RBI measures to enhance bank supervision, monitoring, and financial inclusion.

### Selected economic indicators (highlights from table)
- Real GDP (at factor cost): 2014/15 5.6; 2015/16 6.3.
- Consumer prices - Combined: 2014/15 6.7; 2015/16 6.3.
- Central government deficit (percent of GDP): 2014/15 -4.4; 2015/16 -4.1.
- General government deficit (percent of GDP): 2014/15 -7.1; 2015/16 -6.8.
- Gross reserves (end-period, in billions of U.S. dollars): 2014/15 340.8; 2015/16 390.9 (table projections).
- Current account balance (in percent of GDP): 2014/15 -1.8; 2015/16 -1.7.
- Exchange rate (rupee/U.S. dollar, end-period): 2014/15 61.8 (table note: for 2014/15, as of 29 January 2015).

*Press Release No. 15/104, March 11, 2015 — IMF Executive Board Concludes 2015 Article IV Consultation with India*

### 9. Reflecting the easing of inflationary pressures, the Reserve Bank of India reduced the

### 9. Reflecting the easing of inflationary pressures, the Reserve Bank of India reduced the

### Monetary policy and inflation
- The Reserve Bank of India reduced the policy rate by 25 basis points in January 2015.
- The RBI left the policy rate unchanged in February 2015.
- The RBI indicated further monetary policy measures will depend on developments in both the disinflationary process and on the fiscal front.

### External sector and capital flows
- India’s current account deficit (CAD) declined from 4.8 per cent of GDP in 2012-13 to 1.7 per cent in 2013-14 and is expected to decline further to 1.3 per cent in 2014-15.
- Improvement in the current account has been underpinned by a sharp decline in gold imports and in oil prices.
- Foreign exchange reserves are at US$ 328 billion (as of January 30, 2015), up by US$ 52 billion from the level at end-August 2013.
- Portfolio inflows in the recent period have been much higher than the current account deficit, enabling reserve accumulation.
- Liberalization of outflows for residents:
  - Limit on remittances by Indian entities for overseas direct investment (ODI) under the automatic route was reversed in July 2014 (previously reduced in August 2013 from 400 to 100 per cent of net worth).
  - In early February 2015, the limit of foreign exchange remittance for individuals was enhanced from US$ 125,000 per person per year to US $ 250,000 per person per year. This limit is available to individuals without end-use restrictions, except for prohibited transactions such as lotteries.

### Exchange rate policy
- Objective: maintain orderly conditions in the market.
- The rupee’s exchange rate is determined by market forces of demand and supply.
- The Reserve Bank of India intervenes mainly to contain excessive volatility.
- Staff indicate India’s foreign exchange intervention strategy is not guided by the need to enhance growth or reduce inflation in India.

### Financial sector health and policy actions
- Capital adequacy:
  - Banks in India remain well capitalized with the CRAR at 12.8 per cent.
  - Capital adequacy ratio of public sector banks is around 12 per cent and is well above the regulatory requirement.
- Government capital injections:
  - Government infused capital of Rs. 586 billion in public sector banks in the last four years (2011-14).
  - Government plans to further infuse Rs. 112 billion in 2014-15.
  - Government is planning to dilute its stake in some public sector banks to 52 per cent.
- Asset quality and stress tests:
  - Growth slowdown affected banks’ asset quality; high indebtedness of some corporates has impacted bank balance sheets.
  - Evidence that several corporates are deleveraging and debt equity ratios seem to be stabilizing.
  - RBI stress tests in the baseline scenario suggest gross non-performing assets ratio of commercial banks may decline to 4.0 per cent by March 2016 from 4.5 per cent as at end-September 2014.
- RBI framework for distressed assets:
  - Introduced a framework outlining a corrective action plan to incentivize early identification of viable problem accounts, timely restructuring, and prompt recovery or sale of unviable accounts.
- Credit growth and market conditions:
  - Recent slowdown in credit growth due to a combination of factors, with bank risk aversion only one factor.
  - Comfortable capital adequacy ratios should allow banks to increase credit flows to support recovery.
  - Buoyant secondary markets should enable banks to raise capital from the market.
- NBFC regulation:
  - Regulatory regime for NBFCs has been tightened to bring it in broad alignment with that for commercial banks.

### Financial inclusion and banking sector expansion
- Pradhan Mantri Jan Dhan Yojana (launched August 2014):
  - Aims to open bank accounts for poor families, embedding debit card, credit facility, and accident and life insurance cover.
  - In about 6 months, a record number of 126 million bank accounts have been opened as against the target of 100 million.
  - Large-scale account opening should facilitate direct benefit transfers and improve public expenditure management.
- New banks and licensing:
  - Two new private banks were issued licenses in 2014.
  - Framework for licensing differentiated banks (payment banks and small finance banks) has been put in place.
  - RBI has received 72 applications for small finance banks and 41 applications for payment banks; final selection will be made on the recommendations of two committees constituted by the RBI.

### Structural reforms and supply-side measures
- FDI limits relaxed in sectors: railway infrastructure, construction, defence, and insurance.
- Diesel prices deregulated.
- Gas prices increased and linked transparently and automatically to international prices.
- Coal sector rationalized through disinvestment of Coal India Ltd and reallocation of cancelled coal blocks through auction.
- Progress toward legislative action for introduction of the goods and services tax (GST).
- Some flexibility introduced in labor laws.
- Measures to address supply-side bottlenecks and to skill youth with emphasis on employability and entrepreneurial skills.
- ‘Digital India’ program planned to provide broadband connectivity to village level, improved access to services through IT-enabled platforms, and greater transparency in government processes.
- Government stepping up efforts to implement a program of disinvestments.

### Medium-term prospects and policy goals
- Recent policy initiatives (land acquisition, mining activity, FDI liberalization, predictability of tax regime) expected to improve the investment climate.
- National strategy announcements: ‘Make-in-India’, completion of industrial corridors, building 100 smart cities, proposal to set up 10 coastal economic regions.
- Project appraisal and approval processes liberalized; stalled projects cleared expected to restart.
- Indian stock markets have outperformed many peers, aiding capital raising for investment.
- Moderation in inflation should encourage financial savings.
- Authorities’ endeavor: achieve a sustained growth of 8 per cent or above along with macro-economic stabilization in an environment of lower and stable inflation, fiscal consolidation, a manageable external situation, and continued financial deepening and development.

### Conclusion and policy space
- The Indian economy is in much better shape compared with a year earlier:
  - External sector vulnerability addressed and more resilient.
  - Inflation and inflation expectations moderated significantly.
  - Fiscal deficit contained and fiscal consolidation continues.
  - The economy is on a recovery path and was the only major emerging economy whose growth rate was revised upwards recently by the Fund for 2014.
- The recovery should gather further momentum as recent measures take full effect.
- With underlying vulnerabilities receded, there is some room for countercyclical macroeconomic policies to respond to domestic and external shocks.
- The challenge is to maintain macroeconomic conditions to achieve high growth of 8 per cent and above over an extended timeframe spanning a couple of decades.

### Annex — Changes in National Accounts compilation by CSO (January 2015)
- Key changes introduced by the Central Statistics Organization (CSO):
  - i) Headline growth rate will now be measured by GDP at market prices (consistent with international practice); earlier headline used GDP at factor cost.
  - ii) Coverage of the economy improved with more comprehensive coverage of the corporate sector and different segments in the financial sector and improved coverage of activities of local bodies and autonomous institutions.
  - iii) Base year shifted from 2004-05 to 2011-12.
- CSO released data for three years 2011-12 to 2013-14 based on the new 2011-12 series. Back data for earlier years in the new series are expected to be released later.

*Based on the supplied content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1561.pdf_