IMF Executive Board Concludes 2019 Article IV Consultation with India

IMF News, December 23, 2019

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Growth slowed to 5.0 percent in the April-June 2019 quarter (y/y), a six-year low.
Average inflation moderated to 3.4 percent in FY2018/19; through August, inflation remained below the mid-point of the Reserve Bank of India (RBI)’s medium-term inflation target band of 4 percent ± 2 percent.
The deceleration of consumption and investment was exacerbated by weaknesses in the non-bank financial sector and corporate and environmental regulatory uncertainty.
The U.S. dollar value of non-oil merchandise exports expanded by 6.6 percent in FY2018/19.
The growth of bank credit decelerated to 10 percent (y/y) in August 2019, from 14 percent (y/y) in December 2018.

In FY2018/19, the current account deficit (CAD) widened to 2.1 percent of GDP.
Foreign direct investment (FDI) financed about half of the CAD.
The rupee depreciated by about 3.4 and 5.9 percent on average in real and nominal effective terms in FY2018/19.
Gross reserves declined by US$12 billion during FY2018/19 to US$413 billion (7 months of imports), while the net forward position fell by US$34 billion.
Gross reserves rose to US$429 billion by end‑August 2019 on renewed portfolio inflows and they remain adequate.
India’s external debt remains low at 19 percent of GDP.

Macro-financial risks from banking sector weaknesses have decreased somewhat.
Steps have been taken to enhance monitoring of NBFCs and alleviate liquidity pressures faced by some NBFCs.
Capital injections from the government budget and initial results from the Insolvency and Bankruptcy Code (IBC) have improved public sector banks (PSBs) capital position and asset quality.
The plan to merge several PSBs reduces their number to 12 but does not change the large presence of the government in the banking system.
Directors recommended that the PSB merger plan be accompanied by deep operational restructuring and far‑reaching governance reforms to improve efficiency, risk management, and credit allocation.
Directors welcomed strengthened monitoring and regulation of non‑bank financial companies and recommended enhancing availability of timely and granular data.

Despite revenue shortfalls relative to ambitious targets, the central government broadly adhered to its headline fiscal deficit objective in FY2018/19.
There was a small improvement in the on‑budget fiscal balance in FY2018/19, achieved through substantial on‑budget revenue‑expenditure compression and financing some obligations off budget.
The public sector borrowing requirement (PSBR) remained high; PSBR includes borrowing by most central public sector undertakings (PSUs).
India’s general government debt remained high, at about 69 percent of GDP.
The FY2019/20 central government budget envisages a reduction in the fiscal deficit of 0.1 percent of GDP (a reduction by 0.2 percent of GDP in the structural primary balance, both IMF definition) but is based on overly optimistic revenue targets; the recent reduction of corporate income tax rates makes achieving the budget targets increasingly unlikely.
Directors called for credible medium‑term fiscal consolidation driven by subsidy‑spending rationalization and tax‑base enhancing measures to reduce debt and free up financial resources for private investment.
Directors called for more robust revenue projections and enhanced fiscal transparency and budget coverage.

Growth is projected at 6.1 percent in FY2019/20.
Over the medium term, growth is projected to gradually rise to a medium-term potential of 7.3 percent with continued commitment to inflation targeting, macro‑financial and structural reforms, implementation of GST and IBC, liberalizing FDI flows, and improving ease of doing business.
Inflation is projected to remain around 3.4 percent.
The current account deficit is projected to narrow marginally, to 2.0 percent of GDP.
The balance of payments would return to surplus on returning capital inflows thanks to more accommodative global financial conditions.

Risks are tilted to the downside.
Key domestic risks: tax revenue shortfalls; delays in structural reforms; perception of increased risk aversion among banks; PSB consolidation could divert focus and weigh on near‑term credit growth.
Main external risks: higher oil prices; a sharp rise in risk premia in global financial markets; rising protectionism globally.
The rise in protectionism and retreat from multilateralism could affect India directly through trade and indirectly through confidence and financial market effects. Trade diversion toward India from the U.S.-China tariff escalation could occur, but the macroeconomic impact is expected to be small given India’s relatively low trade openness and less diversified exports base.

Directors noted India’s rapid economic expansion in recent years and the slowdown in the first half of 2019; with risks tilted to the downside, they called for continued sound macroeconomic management.
Near‑term policy recommendations:
- Focus on monetary policy and broad‑based macro‑structural reforms to address cyclical weakness.
- Maintain an easing bias in monetary policy at least until the projected recovery takes hold; welcome monetary policy easing undertaken so far.
- Continue action to improve the monetary transmission mechanism to enhance policy effectiveness and enable the central bank to achieve the medium‑term inflation target.
- Maintain exchange rate flexibility; continue two‑way foreign exchange intervention limited to disorderly market conditions.
Structural and reform priorities:
- Reinvigorate reform agenda using the new government’s mandate to boost inclusive and sustainable growth.
- Complement business climate improvements with continued labor, product market, land, and other reforms to increase labor market flexibility, enhance competition, and reduce corruption.
- Further trade and investment liberalization.
- Follow up on FSAP recommendations.
Social and supply-side priorities:
- Harness demographic dividend by creating more and better jobs and enhancing female labor force participation.
- Land reform remains essential to raise agricultural productivity and meet infrastructure development targets.

Nominal GDP (in billions of U.S. dollars): 2,719
GDP per capita (U.S. dollars) (IMF staff est.): 2,038
Headcount ratio at $1.90 a day (2011): 21.2
Growth (Real GDP at market prices):
- 2015/16: 8.0
- 2016/17: 8.2
- 2017/18: 7.2
- 2018/19: 6.8
- 2019/20 (Est./Proj): 6.1
- 2020/21 (Proj): 7.0
Consumer prices - Combined:
- 2015/16: 4.9
- 2016/17: 4.5
- 2017/18: 3.6
- 2018/19: 3.4
- 2019/20 (Proj): 4.1
Gross reserves (in billions of U.S. dollars, end-period):
- 2015/16: 360.2
- 2016/17: 370.0
- 2017/18: 424.5
- 2018/19: 412.9
- 2019/20 (Proj): 434.0
- 2020/21 (Proj): 449.1
General government debt:
- 2015/16: 68.8
- 2016/17: 69.4
- 2017/18: 69.1
- 2018/19: 69.8

Press Release No. 19/488, December 23, 2019 — IMF Communications Department