## India's Economy: Stamina Is The Name Of The Game

_IMF Blog, February 21, 2013_

## Source details

**Canonical URL:** [India's Economy: Stamina Is The Name Of The Game](https://www.imf.org/en/blogs/articles/2013/02/21/indias-economy-stamina-is-the-name-of-the-game)

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## Bibliographic details
- Authors: Laura Papi
- Published: February 21, 2013

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### Overview
- 2013 began with improved financial-market sentiment: the rupee strengthened and the Bombay Stock Exchange index (Sensex) crossed the 20,000 mark for the first time in two years. Industrial production has started picking up.
- The IMF assessment: the slowdown to a decade low is mainly due to structural factors, so structural reforms must be central to the solution.

### Causes of the slowdown
- Structural factors emphasized:
  - Supply bottlenecks.
  - Uncertainty about policies.
  - Lengthy delays in investment project approvals and implementation.
- Contributing factors (but not the main culprits):
  - Subdued global growth.
  - Higher real interest rates.
- Balance-sheet and macro weaknesses noted:
  - One of the highest fiscal deficits and inflation among emerging markets.
  - Weakened external position.
  - Deterioration in banks’ and corporates’ balance sheets.
- Implication: no quick fix; reviving investment requires structural measures plus lower fiscal deficit and inflation and strengthened bank and corporate balance sheets.

### Policy actions taken by authorities (as described)
- Public statements calling for reform:
  - Prime Minister (addressing the nation, September 21, 2012): “We need a revival in investor confidence, domestically and globally… the time has come for hard decisions.”
  - Finance Minister P. Chidambaram (Economic Editors’ Conference, October 9, 2012): “Without reforms, we risk a sharp and continuing slowdown of the economy which we cannot afford…”
- Measures implemented or initiated:
  - Restructuring debts and reducing losses of state power distribution companies.
  - Facilitating large investment projects with the Cabinet Committee on Investment.
  - Liberalizing Foreign Direct Investment.
  - Reducing uncertainty in tax policy.
  - Finance Minister presented a roadmap to reduce government deficits.
  - Containing fuel subsidy spending and rolling out cash transfers to improve spending efficiency over time.

### Remaining challenges and priorities
- Supply-side bottlenecks persist: negative growth in mining and low electricity output growth indicate ongoing problems.
- Essential areas to address:
  - Resolve problems in the power sector (fuel linkages, pricing, financial health of distribution companies).
  - Progress on inflation reduction and government debt and deficit reduction to boost investment.
- Emphasis on implementation: measures have boosted financial markets and confidence, but their impact depends on successful implementation and follow-up.
- Analogy: reviving investment in India is “going to be a marathon not a sprint.” Stamina to carry out the reforms is required.

### Growth scenarios and projections
- Planning Commission Draft 12th Plan scenarios (contingent on reform progress):
  - 8 percent growth with strong and wide-reaching policy implementation.
  - 5-5.5 percent growth with policy logjam.
- IMF projection:
  - Real GDP growth of 6 percent for the 2013-2014 fiscal year.
  - Gradually increasing to about 6.5-7 percent over the next 5 years.
- Outlook for inflation and the current account:
  - Recovery expected to be gradual and inflation and the current account deficit to remain elevated for some time.
  - Modest progress expected on these variables alongside gradual reduction of government deficits.

### Key findings and policy recommendations
- Findings:
  - Structural constraints are the main drivers of the slowdown and the persistent weakness in investment.
  - Elevated inflation and a sizable current account deficit are partly symptoms of supply bottlenecks.
- Policy recommendations:
  - Prioritize structural measures that lift obstacles to investment (especially in the power sector).
  - Reduce the fiscal deficit and inflation to create conditions for investment revival.
  - Strengthen banks’ and corporates’ balance sheets so firms can access financing once investment conditions improve.
  - Ensure successful implementation and follow-up of recent reform measures to translate confidence gains into sustained investment and growth.

*Laura Papi, February 21, 2013. Rahul Anand is an Economist in the IMF's Asia Pacific Department.*

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## References

- [economy](http://www.imf.org/external/pubs/ft/survey/so/2013/CAR020613A.htm)

_Source: https://www.imf.org/en/blogs/articles/2013/02/21/indias-economy-stamina-is-the-name-of-the-game_