Public Information Notice: IMF Concludes Article IV Consultation with India

June 30, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 19, 2000, the Executive Board concluded the Article IV consultation with India.1


During the past decade, India has been among the fastest growing economies in the world. The economy recovered rapidly from a balance of payments crisis in 1991—in large part reflecting a favorable supply response to structural reforms—and growth reached in excess of 7 percent in the mid-1990s. The economy also weathered the Asian crisis well, owing to a strong external position, flexible exchange rate management, and cautious capital account liberalization. While economic activity slowed in 1997/98, in the subsequent two years growth recovered, inflation eased, and the external position remained comfortable.

Although real GDP growth is estimated to have moderated to 6 percent in 1999/2000, from 6¾ percent in 1998/99, this reflected a slowing of agricultural production after the previous year's bumper harvest. Activity in the industrial and services sectors strengthened during the year, buoyed by a revival of exports and a pickup in domestic demand resulting from improved agricultural incomes and continued fiscal stimulus. Industrial production and exports continued to grow strongly into 2000/01, which, with expectations of normal monsoon, suggest that real GDP growth in 2000/01 will exceed the 6¼ percent rate forecast in the May 2000 WEO. Wholesale price inflation fell to below 3½ percent in 1999/00, largely in response to improved supply conditions for a number of key agricultural commodities. More recently, however, hikes in administered prices of fuel and commodities have led to a rebound in inflation to 6½ percent in May 2000 (12-month basis).

The current account deficit narrowed to 1 percent of GDP in 1998/99, from 1¼ percent of GDP in 1997/98, as the adverse effect of the Asia crisis on merchandise exports was more than offset by a decline in imports, which fell in response to slower industrial activity and the decline in world oil and gold prices. Despite the subsequent sharp rise in oil prices, the current account deficit is estimated to have increased only to around 1¼ percent of GDP in 1999/00, reflecting a strong recovery of merchandise exports and continued sluggishness in non-oil imports. Private capital inflows, which had dipped in response to the financial market turmoil in the region as well as to international sanctions imposed in early 1998, recovered strongly in 1999 and into 2000, spurred in part by global investor demand for information-technology (IT) stocks. Due to these factors, gross foreign exchange reserves have risen to over $37 billion (six months of imports of goods and services) by end-May 2000.

The fiscal position has deteriorated significantly in recent years, erasing much of the consolidation that was achieved following the 1991 balance of payments crisis. The deficit of the consolidated public sector—defined to include the central and state governments, central public enterprises, and the oil pool account—increased steadily from 8¼ percent of GDP in 1995/96 to an estimated 11 percent of GDP in 1999/00, reflecting deterioration at both the central and state levels. Slippages from the central government's 1999/00 budget were especially severe, with the center's deficit reaching 7 percent of GDP, compared with a budget target of 5¾ percent of GDP. 2 The shortfall reflected unanticipated defense outlays related to the security situation in the Kargil area of Jammu and Kashmir, the lingering effects of the 1997 Fifth Pay Commission awards on pension outlays, increased food subsidies, and higher interest payments. The states' fiscal deficit is estimated to have reached 4½ percent of GDP in 1999/00, mainly owing to pressures to match central government pay awards and to growing debt service payments. In addition, delays in raising energy prices also eroded the surplus of the oil pool account.

The central government's 2000/01 budget suggested that deficit reduction in the coming year would be marginal at best—measures to raise gross tax receipts and cut food and fertilizer subsidies were offset by increased military outlays and transfers to the states, leaving the central government's deficit close to 7 percent of GDP in 2000/01. However, important reforms to the tax system were introduced: the number of tariff bands was reduced, the excise tax system was moved closer to a single-rate VAT, and the phased elimination of the exemption of export income from taxation was begun.

With pressures on the exchange rate having abated by late 1998, the focus of monetary policy shifted toward supporting the industrial recovery. In early 1999, the Reserve Bank of India (RBI) reduced the banks' cash reserve ratio (CRR) by 1 percentage point and lowered the Bank Rate and repo rate by 1 and 2 percentage points, respectively. In October, the RBI announced an additional 1 percentage point reduction in the CRR, and on April 1, 2000, it introduced further 1 percentage point cuts in the Bank Rate, the repo rate, and the CRR. These latter moves followed government announcements of reductions in the yields on postal saving and provident fund deposits in late 1999 and early 2000.

In May, market pressures led to a 2½ percent depreciation of the rupee against the U.S. dollar—owing, in part, to uncertainty about foreign investment flows, the continued rise in inflation, and monetary tightening in the United States. In response, the RBI introduced a number of administrative measures to discourage speculation, and stated its willingness to intervene in the foreign exchange market directly, as needed.

Longer-term bond yields have declined since late 1998 in response to the monetary easing. Signs of industrial recovery and the global boom in IT stock prices also helped Indian equity prices to recover strongly from late 1998, and they reached new highs in February 2000. Stock prices fell sharply during March-May, partly reflecting concerns about budget measures and spillovers from foreign equity markets, but have rebounded significantly during June.

Executive Board Assessment

Executive Directors commended the Indian authorities for the remarkable performance achieved in recent years despite the difficult domestic and external environment. Directors noted that this performance, which owed much to the deft handling of monetary and exchange rate policies, had helped insulate India from the regional crisis, achieve high real economic growth, and strengthen the external position. Directors observed that the structural reforms implemented subsequent to the 1991 crisis had helped provide the foundation for strong growth during the 1990s.

Executive Directors agreed that the new government's strong commitment to delivering a higher rate of economic growth so as to reduce poverty more rapidly was achievable, provided that determined efforts were undertaken to strengthen the fiscal position and to accelerate the implementation of structural reforms. Directors considered that the presently favorable economic environment presented the authorities with a unique opportunity to press ahead with reforms in key areas. In this regard, they emphasized the need for a more rapid deregulation of the industrial and agricultural sectors in order for India to benefit fully from the growing globalization of goods and capital markets.

In the fiscal area, Directors acknowledged that important structural initiatives have been included in the government's budget for 2000/2001, but noted that the center's deficit will be broadly unchanged as a share of GDP and that the prospects of consolidation by the states remain unclear. As a result, the consolidated public sector deficit is likely to remain over 10 percent of GDP.

While different views were expressed regarding the speed of fiscal adjustment, Directors stressed the need for a well-defined timetable for deficit reduction over the medium term and urged the authorities to take the actions necessary to further strengthen the credibility of their medium-term fiscal consolidation targets. Directors agreed that eliminating the revenue deficits of the state and central governments would help assure fiscal sustainability, while protecting needed investment in infrastructure and social sectors. Directors supported the authorities' goal of introducing fiscal responsibility legislation, but stressed that this should include strict requirements for fiscal transparency and credible enforcement mechanisms, and be extended to the states.

Directors underscored the need for efforts to reverse the erosion of the tax-to-GDP ratio. While the 2000/2001 budget had taken useful steps in this direction, there remained considerable scope for further improvements in tax administration, including at the state level, and for broadening the tax base, in particular, by reducing exemptions and bringing more sectors, including services, fully into the tax net.

Directors also highlighted the need for expenditure reforms by the center and the states, to support deficit reduction and to facilitate increased budgetary allocations for infrastructure and priority social expenditures. In particular, they encouraged the newly formed Expenditure Reforms Commission to quickly define measures to improve targeting of subsidies and to begin implementing the cuts in civil service staffing recommended by the Fifth Pay Commission. Mechanisms are also needed to identify and control off-budget activities, including contingent liabilities associated with government pensions, loan guarantees, and new insurance programs. The authorities were also encouraged to treat privatization receipts as below-the-line financing in their fiscal accounts.

Directors emphasized the importance of strengthening fiscal discipline among the states. They saw advantages to hardening states' budget constraints by linking central government transfers to their fiscal performance, by adjusting their borrowing limits for funds obtained from small savings and provident funds, and by increasing market borrowing. Directors agreed that states should also be encouraged to balance their revenue deficits, including through fiscal responsibility legislation at the state level. In this connection, the recent signing of Memoranda of Understanding by eleven states was a welcome development.

Directors welcomed the Reserve Bank of India's (RBI) focus on inflation risks in its recent monetary and credit policy statement. They agreed that the scope for further easing appeared to have been exhausted, and they suggested that the authorities should be prepared to act to avoid an intensification of price pressures. Directors generally acknowledged that the conditions for establishing a formal inflation target were not yet in place. Against this background, most Directors considered that the current RBI multiple indicator approach to monetary policy was appropriate, although some Directors cautioned that this approach left monetary policy without a well-defined nominal anchor. Directors underscored that clearer statements by the RBI of its inflation objective would help buttress the credibility of its commitment to price stability.

Directors noted that India's flexible exchange rate policy had served it well during the regional crisis, and that flexibility would be needed in the period ahead to allow the real effective exchange rate to adjust to changing circumstances, including progress toward trade liberalization, the stance of fiscal policy, and shifts in the external environment and investor sentiment. Against this background, a few Directors expressed concern that recent RBI administrative measures in response to foreign exchange market developments seemed at odds with the central bank's stated policy of allowing the exchange rate to adjust flexibly to market forces. Directors also encouraged the authorities to eliminate all remaining current account payments restrictions at the earliest opportunity.

Directors were encouraged by signs that trade liberalization had regained momentum, particularly with measures to eliminate quantitative import restrictions in early 2001 and recent tariff reforms. Nonetheless, they noted that the level of protection in India was still high, and they encouraged continued tariff reduction, albeit coupled with improvements in customs administration and the withdrawal of exemptions to avoid adverse fiscal effects. At the same time, however, it would also be important to resist pressures to resort to other forms of nontariff protection, including anti-dumping and countervailing measures. Directors noted that efforts by major economies to ease trade restrictions would provide an environment more conducive for India to achieving rapid progress in trade liberalization. Directors agreed with the authorities' cautious approach on capital account liberalization, but underscored that faster progress in liberalizing foreign direct investment flows could have significant benefits, including for infrastructure development.

Directors welcomed recent initiatives in the area of structural reform, including in the electricity, insurance, and telecommunications sectors, but stressed that with increased market opening and trade liberalization, deeper reform was essential to facilitate needed restructuring and employment generation. In the industrial sector, they highlighted the need for dereservation of small-scale industries, increased labor market flexibility, bankruptcy reform, as well as improved effectiveness of Debt Recovery Tribunals. Reforms to boost agricultural efficiency and incomes were also viewed as critical, given the still large share of the population employed in this sector. Directors also stressed the importance of ensuring that proposed pension reforms avoid imposing a fiscal burden.

Some Directors acknowledged the progress that had been made in the area of financial sector reforms in recent years, and encouraged the authorities to maintain the momentum toward bringing prudential norms in the banking sector fully up to international standards and establishing a framework for intervening in undercapitalized banks. Directors added, however, that the key prerequisite for the longer term health of the financial system was divestment of the public sector banks, and they encouraged action toward reducing the government's shareholdings to the newly established minimum. Directors encouraged the government to continue its policy of reforming the administered interest rates of long-term saving instruments such as the small savings and the provident fund.

Directors welcomed India's subscription to the SDDS, as well as the authorities' participation in analysis of financial sector stability and fiscal transparency. They looked forward to the FSSA report, which they expected will help the authorities sharpen their diagnosis of the financial sector problems. Directors also noted the scope for improving economic data and for surveillance purposes, and they hoped that these issues would be addressed by the National Statistical Commission.

India: Selected Economic Indicators 1/

  1996/97 1997/98 1998/99 1999/00 2/

In percent
Domestic Economy        
Change in real GDP at market prices 7.0 4.6 6.8 5.9
Change in industrial production 5.5 6.6 3.9 8.1
Change in wholesale prices 3/ 4.7 4.3 6.0 3.4
Change in consumer prices 3/ 10.0 8.3 8.9 4.8
In billions of U.S. dollars
External Economy        
Exports, f.o.b. 34.1 35.7 34.3 38.8
Imports, c.i.f. 48.9 51.2 47.5 51.7
Current account balance -4.5 -5.5 -4.0 -5.7
(In percent of GDP) -1.2 -1.3 -1.0 -1.3
Direct investment 2.7 3.5 2.4 2.2
Portfolio investment, net 3.3 1.8 -0.1 3.6
Capital account balance 11.9 10.0 8.3 11.5
Gross official reserves 3/ 26.4 29.4 32.5 38.0
(In months of imports) 4/ 5.3 6.0 6.0 6.4
External debt (in percent of GDP) 3/ 24.4 23.1 23.4 22.1
Short-term debt (in percent
of GDP) 3/ 5/
1.8 1.2 1.0 1.0
Debt service ratio (in percent of current receipts) 22.4 19.2 18.1 20.1
Change in real effective exchange rate (in percent) 3/ 8.4 -0.6 -3.6 1.7
In percent of GDP
Financial Variables        
Central government balance 6/ 7/ -4.9 -5.9 -6.8 -7.0
Consolidated public sector balance 6/ -8.7 -8.5 -9.7 -11.1
Change in broad money (in percent) 3/ 15.2 18.0 19.2 13.6
Interest rate (in percent) 3/ 8/ 8.0 7.4 8.8 9.2

1/ Data are for April-March fiscal years, and are those that were available at the time of the Board meeting.
2/ Preliminary estimates.    
3/ End of period.    
4/ Imports of goods and services projected over the following twelve months.
5/ Private sector; contracted maturity basis.    
6/ Excluding divestment receipts from revenues.
7/ Including onlending from small saving collections in expenditures and net lending.
8/ 91-day Treasury Bill rate.    

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

2The staff's definition of the deficit differs from the official definition in that it includes onlending of small savings deposits to the states as an expenditure item, and excludes divestment receipts from revenues.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100