Transcript of Press Call on the 2019 India Article IV Staff Report
IMF News, December 23, 2019
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Bibliographic details
- Published: December 23, 2019
Overview
- Press conference call held by the International Monetary Fund on the Staff Report of this year's Article IV Consultations with India.
- Participants named: Ranil Salgado, Assistant Director, Asia Pacific Department (Mission Chief for India); Keiko Utsunomiya, Senior Communications Officer, IMF Communications Department.
- Embargo and release timing stated: content of this call and related documents are under embargo until 5:00 p.m. Washington, D.C. Time today; the content of this call will be made available for at least 24 hours and related documents will be released at 5:00 o'clock today, Washington, D.C. Time.
Growth performance and recent developments
- India has been among the world’s fastest-growing economies in recent years, lifting millions out of poverty.
- India is now in the midst of a significant economic slowdown.
- Growth in the second quarter of FY 2019/20 came in at a six-year low of 4.5 percent (y/y).
- Composition of growth in that quarter: private domestic demand expanded by only 1 percent.
- Most high-frequency indicators suggest weak economic activity has continued into December.
Factors behind the slowdown
- Abrupt reduction in non-bank financial companies’ (NBFC) credit expansion and associated broad-based tightening of credit conditions appears to be an important factor.
- Weak income growth, especially rural, affecting private consumption.
- Private investment hindered by financial sector difficulties (including in the public sector banks (PSBs)) and insufficient business confidence.
- Implementation issues with structural reforms, such as the nation-wide goods and services tax (GST), may also have played a role.
Projections and updates
- The IMF is revisiting the growth projections in the Staff Report (completed in early October) and plans to make changes when it releases the January update of the World Economic Outlook.
- Current Staff Report / October WEO projections quoted during the call: 6.1 percent this year, 7 percent next year.
- The IMF stated it will revise these projections downward in the January WEO Update but did not provide revised numeric projections during the call.
Policy recommendations — near-term and medium-term
- General strategy:
- Address current downturn and return India to a high growth path through urgent policy actions.
- Near-term policy mix should support economic activity and restore confidence while recognizing significant fiscal constraints.
- Medium-term focus on growth-enhancing structural reforms; government urged to reinvigorate the reform agenda early in its term.
- Monetary policy:
- Given the sharper-than-expected slowdown and negative output gap (growth below potential), there is room to cut the policy rate further, especially if the economic slowdown continues.
- Constraint: should inflationary pressures increase (stemming from the recent increase in food inflation and one-off prospective price increases in the auto and telecom sectors or resulting from fiscal pressures), the RBI will have limited room for further cuts.
- Actions already taken: repo rates reduced by 135 basis points since February; steps by the Reserve Bank of India to improve the monetary policy transmission mechanism noted as important.
- Fiscal policy:
- Limited room for stimulus; stress on the need for medium-term fiscal consolidation given the high level of general government debt and the high interest bill.
- Broader measures of the government deficit—namely the public sector borrowing requirement (PSBR) and the extended central government deficit—show fiscal policy has been more accommodative than apparent from headline deficits.
- Short-term measures to support growth: focus on the composition of expenditures and rationalizing GST.
- Medium-term measures: focus on domestic revenue mobilization, decreasing (on- and off-budget) expenditures on subsidies, and enhancing fiscal transparency to reduce uncertainty.
- IMF will publish a Country Focus article on the topic of fiscal measures referenced.
- Financial sector:
- A comprehensive set of measures needed to restore sector health and enhance credit provision.
- Steps recommended include resolving balance sheet issues in commercial banks, the corporate sector, and NBFCs including Housing Finance Companies (HFCs).
- Acknowledgement that steps have been taken, especially for public sector banks (PSBs), but further PSB reform is needed to shift operations towards more commercially-oriented decision-making and to improve accountability and risk management.
- On NBFCs: improved monitoring and regulation, especially of larger NBFCs, are welcome; more information on smaller NBFCs is needed to better understand the impact of reduced credit on private demand, especially for MSMEs and in rural areas.
- Insolvency and Bankruptcy Code application to financial institutions noted as a good initial step.
- Passage of the Financial Resolution and Deposit Insurance Bill (currently under reconsideration) would provide a more appropriate longer-term framework.
- Structural reforms:
- Urgent need for measures to enhance efficiency of credit allocation and governance reforms in the banking sector to strengthen confidence and support medium-term growth.
- Recommended reforms include labor, land, and product-market reforms aimed at enhancing competition and governance.
- Measures to improve human capital (education and health) highlighted as critical elements of India’s structural-reform strategy.
Communications and Q&A highlights
- IMF emphasized it will revise projections in the January timeframe.
- On the immediate steps to address unemployment and sector-specific weakness (e.g., automobile sector): IMF reiterated monetary easing already undertaken and the need to boost confidence through a substantial structural reform agenda.
- No specific revised numeric growth forecasts were provided on the call; only that revisions will be downward relative to the Staff Report figures.
Transcript of Press Call on the 2019 India Article IV Staff Report.