Transcript of Conference Call on the Completion of 2017 Article IV Consultation with India
IMF News, February 27, 2017
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Bibliographic details
- Published: February 27, 2017
Timeline and procedural overview
- Article IV Consultation mission conducted in the first two weeks of November.
- Papers completed in the first week of January.
- IMF Executive Board considered the papers on the 25th of January.
- Transcript dated Washington, D.C., February 27, 2017; documents embargoed until 9:00 a.m. Washington D.C. time on the publication day.
Growth performance and outlook
- Staff estimate of large terms-of-trade gain: "something in the order of 13 percent cumulative increase since 2013/14."
- Growth revisions due to currency exchange initiative (demonetization):
- Growth lowered to 6.6 percent in this fiscal year.
- Growth projected to rebound to 7.2 percent in the next fiscal year.
- Medium-term path: potential to accelerate to "above 8 percent" in the next "three or four years or so" if reforms (notably GST) are implemented robustly.
- Role of domestic demand:
- Private consumption identified as "the key macro engine driving India growth."
- Demonetization led to cash shortages cascading into lower private consumption; characterized as a temporary adverse shock expected to dissipate once cash circulation normalizes.
Inflation and monetary stance
- CPI inflation described as "pretty subdued" reflecting:
- Collapse in global commodity prices.
- Positive supply-side measures.
- Relatively tight monetary stance.
- Near-term CPI target:
- Authorities expected to achieve "less than the 5 percent CPI inflation benchmark by March of this year."
- Medium-term inflation objective:
- Target of "4 percent CPI inflation, plus/minus the 2 percent band."
- Policy needs highlighted:
- Continued supply-side reforms, particularly in agriculture, to dampen repeated food price increases and keep inflation durably low.
- Measures to relieve impediments to monetary transmission.
Fiscal stance and recommendations
- Assessment:
- "Current debt and deficit levels afford little room for fiscal policy maneuver in case of shocks."
- Recommendation: "a substantial, gradual reduction in fiscal deficits and debt levels is advisable."
- Recent and announced targets:
- Union government consolidation resumed in the current fiscal year.
- Deficit target for the current fiscal year: "3.5 percent of GDP under the authority’s definition."
- Announced deficit target for fiscal year 2017-18: "3.2 percent of GDP."
- Commitment by Finance Minister to reduce the deficit to "3 percent of GDP in the following years."
- Anchor and debt target:
- Recommendation to "anchor the deficit path with a medium-term public debt target."
- IMF staff estimate of a "safe level of debt" around "the 60 to 65 percent of GDP mark."
- Revenue and expenditure policy tools:
- GST seen as a "key pillar for fiscal consolidation" — staff recommendation: a rate structure "uniform across the territory, has few exemptions," include "key production inputs like electricity or real estate," and "few ratebuckets."
- Enhance quality of spending: continue moves toward direct benefit instruments and further removal of subsidies.
External sector
- Current account and reserves:
- Current account deficit expected to remain "compressed at something around 1.1 percent of GDP for this fiscal year."
- Reserves at "around $360 billion as of the end of calendar 2016," representing "about eight months of import cover."
- Medium-term projection:
- Current account deficit widening to "about 2 percent of GDP as domestic demand strengthens."
- External risks:
- Main risk: enhanced global financial market volatility; India expected to be better positioned to withstand volatility than during the "taper tantrum" in mid-2013.
Risks and the impact of demonetization
- Characterization of demonetization impact:
- Short-term: "adverse temporary shock" reducing consumption and lowering growth in this fiscal year and the next.
- Medium-term: could be positive if it accelerates move to non-cash payments, enhances tax compliance, widens the tax base, increases bank liquidity, and boosts financial inclusion.
- Interaction with other reform measures:
- Demonetization viewed as part of broader reforms increasing transparency and tax compliance (GST, voluntary income disclosure schemes, double taxation avoidance treaties).
- Quantified effects retained in staff estimates:
- Growth revisions explicitly stated above (6.6 percent this fiscal year; 7.2 percent next fiscal year).
- Potential rebound to "above 8 percent" in the medium term under favorable implementation.
Banking sector, asset quality, and resolution
- Asset Quality Review (AQR) and non-performing loans (NPLs):
- Recognition phase: AQR moving loans from restructured status to formal NPL recognition; AQR expected to conclude in March 2017.
- Staff expectation: NPLs to "keep rising in the near term and then gradually diminish."
- Stress-scenario fiscal cost of recapitalizing public banks: "something of the order of maybe 1 to 1.5 percent of GDP" (not part of baseline).
- Resolution and institutional reforms:
- New bankruptcy code introduced; expected to accelerate asset resolution but "will take time" to operationalize legal and accounting mechanisms.
- RBI schemes mentioned: SDR scheme, S4A scheme, and other measures to accelerate resolution.
- Staff note that progress on resolution thus far "has been relatively slow."
- Discussion of bailout affordability:
- Staff observed that a banking bailout could be "affordable and manageable under a reasonable scenario of 40 percent provisioning" and "not too drastic even at 70 percent" provisioning, subject to design and implementation considerations.
- IMF staff emphasize the importance of design if a centralized "bad bank" approach is considered; outcomes depend on institutional setting and specific design.
Structural reforms and inclusive growth
- Reforms acknowledged and judged significant:
- Implementation of GST (pending specifics).
- Introduction of the new bankruptcy code.
- Linking Aadhaar identification with bank accounts for direct benefit transfers and improving financial inclusion.
- Recommended next-phase reforms:
- Complete and robust implementation of GST.
- Completion of the UDAY Scheme and reform of public power distribution sector to strengthen operational efficiency of energy distribution companies.
- Labor market reforms to increase flexibility and improve job creation prospects — critical given demographic trends (about "100 million young people who are going to join the labor force over the next decade or so").
- Further agricultural sector reforms and improvements in food storage, handling, and transport to reduce food inflation pressures (food accounts for "55 percent of the consumption basket").
- Strengthen business environment at center and state levels; develop corporate debt markets as alternative financing channels.
- Gender and social inclusion:
- Staff work on gender issues, including Box 7 on the "worsening girl deficit" (zero to six years age group).
- Government flagship Beti Bachao program described with a relatively modest expenditure of "about $28 million."
- Recommendation: greater coordination and a more holistic approach; more can and should be done to address socioeconomic drivers of son preference and to enhance girls’ education, health outcomes, and financial inclusion.
Key policy recommendations (summary bullets)
- Maintain monetary discipline and complete supply-side reforms, particularly in agriculture, to achieve durable low inflation and the medium-term 4 percent CPI target (plus/minus 2 percent).
- Continue gradual fiscal consolidation; anchor deficit path with a medium-term public debt target (staff estimate: "60 to 65 percent of GDP").
- Implement GST with a uniform rate structure, few exemptions, and inclusion of key production inputs.
- Accelerate recognition and resolution of bank NPLs:
- Complete the AQR (end-March 2017).
- Operationalize bankruptcy code and strengthen resolution frameworks.
- Consider well-designed centralized approaches (e.g., bad bank) if appropriate; ensure clear design and institutional arrangements.
- Prioritize labor market reforms and completion of existing reform initiatives (GST, UDAY) to harness demographic dividends and support job creation.
- Strengthen social and gender-focused programs to raise female labor force participation and address the girl deficit; enhance programs that improve education, health, and financial inclusion for women and girls.
Transcript of Conference Call on the Completion of 2017 Article IV Consultation with India — Washington, D.C., February 27, 2017