For India, Strong Growth Persists Despite New Challenges

IMF News, February 22, 2017

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India remains one of the fastest growing emerging market economies.
Growth is expected at 6.6 percent in this fiscal year (fiscal year 2016/17).
Growth is expected at 7.2 percent in 2017/18.
The halving of global oil prices that began in late 2014 boosted economic activity, improved the external current account and fiscal positions, and helped lower inflation.
The upcoming implementation of the goods and services tax will help raise India’s medium-term growth to above 8 percent by enhancing the efficiency of production and movement of goods and services across Indian states.

The demonetization initiative affected notes with a total value of about 15 trillion rupees, which amounted to 86 percent of all cash in circulation.
Because payment transactions in India are primarily cash-based and electronic payments infrastructure is limited, the shortage of cash disrupted economic activity, with smaller businesses and rural regions particularly badly affected.
Effects are expected to gradually dissipate by March 2017 as cash shortages ease.
Measures such as temporarily allowing use of old banknotes for purchases of fuel and agricultural inputs have helped mitigate the negative impact.
The IMF expects the slowdown to be limited and relatively short-lived and the financial system to come through unscathed, but warns that potential loan repayment risks should be monitored carefully given an already elevated level of non-performing loans.

A key concern is the health of the banking system, which is still dealing with a large amount of bad loans.
There are heightened corporate vulnerabilities in several key sectors.
More than 90 percent of Indian workers remain employed in low-productivity informal sector jobs.
Women’s participation in the labor force is low at around 25 percent—the lowest among emerging markets.
Progress on health, nutrition, and sanitation has been less encouraging; income inequality has risen; and employment growth has been sluggish.

Maintain the reform momentum to support a stronger, sustainable recovery.
Monitor and manage banking-sector risks and corporate vulnerabilities closely, especially potential loan repayment strains.
Use the demonetization initiative to:
- Increase the size of the formal economy.
- Broaden financial intermediation.
- Widen the tax base and help reduce the fiscal deficit.
- Enhance bank liquidity.
- Promote greater financial inclusion.
Pursue labor market reforms at both center and state levels to encourage better quality job creation and raise female labor force participation.
Improve targeting and efficiency of subsidy and social spending programs through greater use of Aadhaar unique beneficiary identification, direct benefit transfers, and information technology.
Raise agricultural productivity and enhance market efficiency to increase supply of high-value foods, enhance returns to farmers, and dampen food inflation pressures.
Continue strengthening institutions and policymaking capacity (example: implementation of flexible inflation targeting and creation of the Monetary Policy Committee has strengthened monetary credibility and price stability).

The IMF will work with Indian authorities to build capacity for policymaking.
The South Asia Regional Training and Technical Assistance Center (SARTTAC), headquartered in New Delhi, will serve Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka.
SARTTAC will combine technical assistance and training, provide training to government and public sector employees, enhance skills, improve the quality of policy inputs, and provide technical assistance on macroeconomic and fiscal management, monetary operations, financial sector regulation and supervision, and macroeconomic statistics.
SARTTAC is expected to become the focal point for planning, coordinating, and implementing the IMF’s capacity development activities in the region.

For India, Strong Growth Persists Despite New Challenges — IMF Country Focus, February 22, 2017.