Transcript of Conference Call on the Completion of 2017 Article IV Consultation with India

February 27, 2017


Paul Cashin, IMF Mission Chief for India
Andreas Bauer, IMF’s Senior Resident Representative for India
Volodymyr Tulin, Senior Desk Economist
Ting Yan, Communications Officer, Communications Department

MS. YAN: Hi. Good morning and good evening, everybody. My name is Ting Yan. I’m with the IMF Communications Department. Thank you very much for joining us today for this conference call on India’s Article IV Consultation.

You may have seen the Staff Report and press release under embargo on the IMF Press Center. Let me remind you that this call, together with the documents, will be embargoed until 9:00 a.m. Washington D.C. time today, which is 7:30 p.m. in India.

Here with me today is Mr. Paul Cashin, IMF Mission Chief for India, and Mr. Andreas Bauer, IMF’s Senior Resident Representative for India who is calling from our India office. Also with me here is Mr. Volodymyr Tulin, Senior Desk Economist of the IMF.

So we will first have Mr. Cashin talk briefly on the key conclusions of the Article IV Report for about five minutes and then we will take your questions.

MR. CASHIN: Thank you very much and good morning and good evening to those on the line. I just wanted to go through first the timeline of the production of the report. So we did the Article IV Consultation mission in the first two weeks of November. The papers were completed in the first week of January, and we went to our IMF Executive Board on the 25th of January with those papers and they’re being published today.

Before we turn to Q&A, and I’ll also turn to Mr. Bauer to talk about some of the fiscal issues, I’d like to provide you with a quick summary of some of the key findings in the Staff Report. As we note in the Staff Report the Indian economy has recorded strong growth in recent years helped by a large terms of trade gain which we estimate is something in the order of 13 percent cumulative increase since 2013/14. There were also multiple positive policy actions including implementation of key structural reforms, a normal monsoon and reduced external vulnerabilities.

CPI inflation has remained pretty subdued, given the collapse in global commodity prices, and the range of positive supply-side measures that the government has introduced, as well as a relatively tight monetary stance. There has been fiscal consolidation of the Union government level, which resumed in the current fiscal year, and has been complemented by many measures to enhance the quality of public spending. And we illustrate those in Annex Number 5 of the Staff Report where we look at the government’s multiple expenditure reforms. And Mr. Bauer will talk a little bit about the fiscal issues at the end of my remarks.

Broadly speaking we see external vulnerabilities pretty much in check, with the current account deficit expecting to remain compressed at something around 1.1 percent of GDP for this fiscal year. We also see reserves at around $360 billion as of the end of calendar 2016, which represents about eight months of import cover. Nonetheless, persistently high inflation expectations and large fiscal deficit remain the key macro challenges for India. And so we read India as having limited policy space to support growth through demand measures.

In terms of major risks, they’re certainly tilted to the downside as we illustrated on the Staff Report. On the external side the main risks are, of course, enhanced global financial market volatility which we’ve seen in the recent past as well. We think India will not be completely unaffected by increased volatility, but definitely they’re in a better position to withstand such volatility then they were, for example, at the time of the tapper tantrum in the middle of 2013.

As to key domestic risks, one of them certainly stems from the government’s currency exchange initiative, which is illustrated in the Staff Report in several boxes and pieces of analysis. The initiative has definitely had an adverse impact on the economy in terms of cash shortages then cascading into lower private consumption, which had been and continues to be the key macro engine driving India growth. Nonetheless, we think the shock will be temporary and that’s why we have in our medium-term numbers India resuming its growth path of potentially above 8 percent, and I’ll talk a little bit about that a little bit later.

The other key domestic risk is on the nexus between corporate and public bank balance sheets. Particularly on the high NPLs of public sector banks cascading into lower private credit growth. So that’s also a downside risk, but on the upside, as long as oil and particularly commodity prices remain relatively low that’s, of course, a net positive for India. And if we see larger than expected gains from implementation of the GST, that’s also an upside risk.

As I mentioned, the post-November 8 cash shortage is coming about because of the currency exchange initiative. We would certainly hope that action is increasingly taken, which it is, to increase cash in circulation and avoid payment disruptions. But nonetheless, we lowered our growth numbers for this fiscal and next to 6.6 percent in this fiscal year and growth will rebound a little bit to 7.2 percent in the next fiscal year. Mostly, as I said previously, these growth changes have come about due to temporary disruptions to private consumption.

We also see the government achieving its near term inflation benchmarks. We have them certainly coming in at less than the 5 percent CPI inflation benchmark by March of this year. But continued supply side reforms, particularly in agriculture to dampen repeated food price increases, are definitely needed to keep inflation durably low. In addition, there has been further continued fiscal consolidation and relieving impediments to monetary transmission which the government has been working on as well. These initiatives were all needed to achieve the medium term target of 4 percent CPI inflation, plus/minus the 2 percent band.

On the external side we have the current account deficit widening a little bit over the medium term to about 2 percent of GDP as domestic demand strengthens. An important feature of the Staff Report which we did put a lot of work into is, first, recognizing the strong efforts of the government in terms of structural reforms. I think the key main structural reforms that have been implemented include the impeding GST implementation, as well as the introduction of the new bankruptcy code which will certainly help on asset resolution.

And the big effort that the government has undertaken is linking Aaadhaar identification with bank accounts to make direct benefit transfers to eligible recipients, which has also helped to improve financial inclusion. Those steps have been very important, but additional steps will be needed to accelerate India’s growth path, and we would look for steps to be taken to increase the efficiency of labor and product markets and undertake further agricultural sector reforms. We also have several boxes in the Staff Report outlining some of the key issues in that direction.

And with those remarks I’ll turn now to Mr. Bauer to give a summary of the fiscal issues that we had in the report. Andreas?

MR. BAUER: Yes. I think you have all been focused a lot in the last few weeks on the fiscal side, so just a minute on this topic. I think in terms of the overall assessment it reads probably quite similar to what you saw last year. We continue to think that the current debt and deficit levels afford little room for fiscal policy maneuver in case of shocks.

And, therefore, we feel that a substantial, gradual reduction in fiscal deficits and debt levels is advisable. We do see the union government on a gradual consolidation path, which is welcome. The deficit target for the current fiscal year, 3.5 percent of GDP under the authority’s definition, is certainly within reach. The Article IV report doesn’t discuss the budget that was just announced, because it was finished beforehand, but we can say that the announced deficit target for fiscal year 2017-18 of 3.2 percent of GDP is also clearly going in the right direction. And we also welcome the commitment expressed by the Finance Minister in the budget speech to a further reduction of the deficit to 3 percent of GDP in the following years.

In terms of the fiscal responsibility framework, we are recommending to anchor the deficit path with a medium-term public debt target, and you can find some work and thinking how much that debt level would be in the selected issues’ volume of the Article IV consultation. We estimate that a safe level of debt could be around the 60 to 65 percent of GDP mark. We haven’t seen, of course, the FRBM commission report yet. It hasn’t been made public, but there have been statements from officials stating that there was a 60 percent of GDP debt target recommended. From our perspective, that would, of course, be welcome.

GST has been mentioned. For us it’s a key pillar for fiscal consolidation, a big step forward. Of course, we still have to wait andsee some of the specifics, which are still pending. Our key recommendation here remains to have a rate structure that is uniform across the territory, has few exemptions; especially key production inputs like electricity or real estate should be part of the tax base. And hopefully we would have few ratebuckets.

Finally, there is also, of course, the issue of enhancing the quality of spending. There has been progress on subsidies, but we look forward to an even greater move toward direct benefit instruments and to the further removal of subsidies. I think this is the big picture regarding our advice on the fiscal side.

MS. YAN: Thank you very much, Andreas and Paul. So now we are ready to answer your questions.

OPERATOR: Thank you. Ladies and gentleman, if you would like to ask a question today press star then one on your touchtone phone. You will hear a tone indicating that you’ve been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone today please pick up the handset before pressing the numbers. Once again, if you do have a question today please press star then one at this time.

And our first question comes from the line of Ritu Singh from CNBC TV. Please go ahead.

QUESTIONER: Hi. My name is Ritu from CNBC. I just had a question on the note that moved from the central government. If you could elaborate a little more. I think don’t you say the short terms effects may be negative, but the medium term impact would be more positive. Would you elaborate on that? What is the impact that you assessed in your report of the effects of demonetization and what is the longer term impact?

MR. CASHIN: Sure. WE illustrated the effects of demonetization in the Staff Report, where we had a quite detailed box. Of course, the initiative commenced during the Article IV consultation itself (on November 8), but nonetheless, we did our best to estimate what the impact would be on consumption and growth for our Staff Report. As I illustrated earlier, we’ve lowered our growth number for this fiscal year from 7.6 percent down to 6.6, and with a reduction in the next fiscal year as well.

As we mentioned in the Staff Report, most of India’s current high rates of growth has been driven by catchup (countries with low per capita incomes typically grow faster than those with high per capita incomes) and mostly through domestic demand and mostly, again, through private consumption. So the shortage of cash, given that India is among the world’s most cash dependent economies, certainly has had an impact on consumption spending. I know that many other official and unofficial estimates were that the impact of demonetization would be of the order of magnitude that we calculate.

It’s worth bearing in mind that we still see this impact as being a temporary adverse shock directly affecting this fiscal year and a little bit next fiscal year’s growth. But beyond that, we fully expect once sufficient cash is in the economy that will again power consumption and growth. We would then expect growth to resume its previous medium term path which, with the implementation of particularly a robust goods and services tax (GST) -- which it looks like we’re heading towards such a robust GST, and we’ve been pretty conservative in our estimates of the positive growth impact of the GST. But we can easily see India rising with growth accelerating to above 8 percent in the next three or four years or so, which would have India’s growth back on the previous path that we had them on.

So, again, we expect demonetization to be an adverse temporary shock to be sure. And I think it would be fair to put the demonetization initiative in the context of other reforms that have been undertaken to increase transparency and enhance tax compliance in the economy. We’ve seen, of course, the GST which will widen the tax base. There have also been several voluntary income disclosure schemes which have also increased tax compliance, and double taxation avoidance treaties with both Mauritius and Singapore.

So in that sense, the demonetization initiative is part of that path of reforms enhancing transparency and tax compliance. And we would certainly expect, as I said, this shock to be temporary, and then if we see, which we’re beginning to see in the numbers, evidence of a move away from cash payments to non-cash payments, this will also help enhance the tax base which will help reduce the fiscal deficit and increase bank liquidity, which we’ve certainly seen. And, of course, this should also spur greater financial inclusion. Demonetization could, eventually, have a positive impact on medium term growth, but we’re just getting the numbers back now on what the short term impact has been, so we’ll wait on further macroeconomic numbers as to what we see in terms of the medium term impact.

QUESTIONER: I had one more question on the float of the Indian Banks. You said that you see another 1 percentage point increase in the growth non-performing assets of banks by March 2017. How large is the extent of the problem that is still to be addressed after the RBI’s asset quality review is completed?

MR. CASHIN: Sure. As we said in the report, yes, we’re expecting non-performing loans to keep rising in the near term and then gradually diminish. Part of that is due to the AQR process which you mentioned. We’re seeing a move from banks’ restructured assets into formal recognition as non-performing loans, which we think is good. So the asset recognition phase is proceeding.

The next phase of cleaning bank balance sheets would be on resolution of poor-performing bank assets -- so in answer to your question, I think our perception is that once we reach the end of the AQR process in March 2017 that the vast majority of bank non-performing loans will have been recognized. So we’re fairly confident in that. But, of course, the next phase is the more important phase which is our resolution of the bad asset situation.

And there have been several schemes introduced by the Reserve Bank of India to accelerate the resolution phase. The SDR scheme. The S4A scheme. Other schemes. Nonetheless, progress has thusfar been relatively slow in resolving bad bank assets. And I think an important piece of the puzzle that I mentioned earlier is that the government has introduced for the first time formal bankruptcy laws, a bankruptcy code, in India. Of course, you can’t initiate a full bankruptcy mechanism at the drop of a hat. So it will take time before all the resolution mechanisms, including legal and accounting mechanisms, are put in place, but we expect that will also accelerate asset resolution processes in India.

And we mentioned in the Staff Report and of course the Minister of Finance has mentioned in the past budget speech and also in the current budget speech, that there have been fiscal allocations toward recapitalizing public sector banks. We have an illustration in the Staff Report of a stress scenario that involves the capital costs in recapitalizing public banks. It’s not part of the baseline (expect path of the evolution of the macroeconomy), but even under a relatively stressful scenario in terms of increases in non-performing loans, something of the order of maybe 1 to 1.5 percent of GDP would be required from the public sector to increase bank capital .

OPERATOR: All right. So our next question comes from the line of Douglas Busvine from Reuters. Please go ahead.

QUESTIONER: Good morning, good evening. Douglas Busvine from Reuters. You make some estimates in your selected issues and staff report about a banking bail out. You say it’s basically affordable and manageable under a reasonable scenario of 40 percent provisioning, and it’s not too drastic even at 70 percent.

But I’m seeing some very interesting debate in India over the last 24 hours and the new governor of the Central Bank, Urjit Patel has made a stronger appeal to fix the banking problem, and also Arvind Subramanian, the chief economic advisor to the government has spoken out. Really I just wondered what your view is on these statements. Do you support the goal? And how much the government really needs to step it up? Because it seems to me that this government hasn’t really committed significant funds or taken any particularly effective action to address this problem?

MR. BAUER: Okay. Maybe I give a responseto you and Paul maybe can add. But, I mean, you would have seen from our report, of course, that the issue of addressing the balance sheets of both the corporate sector and the banking system is of high priority. We see this as a high priority.

In terms of the instruments, the RBI has put a number of instruments on the table, in what one could describe as a decentralized workout approach. You know, country experience has been that in some countries a more centralized approach in terms of cleaning up balance sheets has been applied through a “bad bank” and it has been useful in some cases. The experience is a little bit mixed, really success has depended on both the institutional setting and also the specific design.

So I think a clear positive that both the RBI and the government are putting a strong focus now on addressing the balance sheet problems. And, certainly, we’re looking forward to see how any centralized approach, if it moves forward, would be designed because that will be, for us, the key factor, really, for -- to determine the possible success of such an approach. But clearly, it’s very positive that the authorities are focusing on this issue and shifting up gear to address the problem.

QUESTIONER: Thanks very much.

MR. CASHIN: Yeah. I guess I’d just like to quickly add maybe some of the points that people didn’t hear previously. We’re quite pleased with the progress of the AQR process which is the recognition phase of the bank bad assets. That’s proceeding quite well in our estimation.

But a key piece of the puzzle will be the new bankruptcy code which has been introduced. That will be an important part of the asset resolution phase which is now where we’re turning to. And we think that will help quite a deal in terms of resolving these bad assets. And as well, augmenting capital buffers in the PSBs will be quite important there as well, and further development of corporate debt markets, of course, gives an alternative financing channel for corporates rather than the dominant bank financing channel. And we have several pieces in the Staff Report on how to enhance corporate debt markets. I’ll probably leave it at that point.

QUESTIONER: Thanks very much.

OPERATOR: Thank you. Our next question comes from the line of Olaf Gersalin from DOO. Please go ahead.

QUESTIONER: Yes, hello. I have a totally different question. You also labeled in your report on two pages on what you call India’s girl deficit and point out, among other things, that more coordination is needed and then more holistic approach. However, what you also mentioned in the Staff Report and said about Beti Bachao initiative, BBP, that’s modest at $28 million, I think a year. Do you think that the government needs to spend more here in this area?

MR. CASHIN: Yes. We put a lot of work in the report on looking at a couple of issues of which you’ve just highlighted. We did a lot of work and we’re one of the Fund’s pilot countries in looking at gender issues more broadly. Also, we’ve done a lot of work on how to enhance female labor force participation in India.

And in the boxes that you illustrated, and particularly in Box 7 which looks at the worsening girl deficit. We noted the numbers there in terms of the declining number of girls as a ratio to boys (in the zero to six years age group) in India. A key part of resolving this issue is moving families away from the socioeconomic causes of preferring the boy child over the girl child. And part of this process would be enhancing girls’ education and health outcomes, and thereby help skew family preferences back more towards an even keel in terms of more equal preferences for girls and boys.

We mentioned the Beti Bachao Scheme in our Staff Report, which is the main government scheme to enhance girls’ education. It involves as we noted a relatively modest amount of expenditure at about $28 million. Clearly more could and is being done in this direction. Nonetheless, this is just the main scheme being administered under the auspices of the Ministry of Women and Child Development. I know the government has many other programs and schemes trying to enhance the education of girls and enhance their employability. We mentioned those in the relevant box of the Staff Report as well, but the Beti Bachao scheme is the government’s flagship scheme. But, of course, more can and should be done to rebalance the preference for the boy child relative to the girl child.

We also spent a good deal of time in the Staff Report illustrating the cross-state differences in terms of the sex ratio (number of girls per 1000 boys) that you see in the states of India, particularly the information coming out of the official Census of India numbers. I know the government is fully aware of this and certainly very keen to move in the direction of raising the ratio of girls to boys, and we gave full illustration to the avenues through which they’ve been doing that in the Staff Report. Another important dimension of this issue is enhancing women and girls’ financial inclusion. That’s also been progressing, certainly through the Jan Dhan Yojana Scheme increasing financial inclusion, which will also help raise the assets and education profile of girls and women.

QUESTIONER: Thank you.

MODERATOR: Ladies and gentleman, once again, if you would like to ask a question today or have a comment for today’s call please press start then one at this time.

Our next question comes from the line of Lali Ja from PBI. Please go ahead.

QUESTIONER: Hi. Thank you for doing this research and outreach on the Indian economy. But can you tell me what should be the next phase of economic reforms in India from your perspective? And is the government doing enough for an inclusive growth that you can address the challenges of poverty? Thank you.

MR. CASHIN: Okay. Yes. I might turn to my colleague Mr. Tulin in a second, but as I mentioned earlier, we emphasized the many reforms the government is undertaking in the section on structural reforms which begins on Page 22 of the Staff Report. This illustrates the considerable progress that the Indian government has done thus far on reforms, certainly in comparison with other OECD countries. India’s not an OECD country of course, but the OECD does do comparisons within and without the OECD, and India has done the most reforms of all the countries in the OECD and large emerging market economies, certainly over the last three/four years in terms of implementing promised reforms.

But nonetheless, we also looked at what type of reforms need to be additionally done. In last year’s and this year’s Staff Report we emphasized labor market reforms. Of course, this is a conjoint responsibility of the states and the center. There’s been a little bit of progress at the state level in terms of labor market reforms, but more can certainly be done.

The other main emphasis on reforms we put in the Staff Report was on agriculture reforms because we think these are, indeed, macro critical. Particularly because if the government, and particularly the Central Bank, is to achieve its 4 percent medium term inflation target, further agriculture reforms will be needed. In a country like India where food is basically 55 percent of the consumption basket, unless you get your food and agriculture house in order there will always be upward pressure on food inflation and CPI inflation from those dimensions, so it is a macro critical policy, and we’ve previously written a great deal on the whole food and agriculture public distribution (PDS) system.

Improving the very inefficient way in which food is stored, handled, and transported in India are some of the needed agriculture marketing reforms that are being put in place, but more can certainly be done in those directions.

I might turn to my colleague, Mr. Tulin now. He might like to emphasize the labor market reforms, I think in particular.

MR. TULIN: I think that I might add at the beginning is there are quite a few reforms that are underway at the moment, so I think one of the priorities that we see is that those reforms are completed in a robust way. Just to name a few things that are key in our view is, of course, implementation of the goods and services tax (GST). I think the second one would be the completion of the UDAY Scheme, involving reform of India’s public power distribution sector. We’d like to see strengthening of the operational efficiency of the energy distribution companies.

And I think in that regard with respect to labor market issues for some of these reforms that are already underway we clearly would like to see the focus shifting towards greater labor market flexibility because, in our view, such reforms could significantly enhance the economic impact of other product market reforms that are already underway. I think it’s important to remember that India has strong demographic dividends in the pipeline. They have about 100 million young people who are going to join the labor force over the next decade or so. So it’s important that, you know, India creates an economic environment that’s conducive for job creation. And in that regard we see, you know, labor market reforms as a key next priority.

I think, of course, those should also be complemented by more general, gradualist approach towards strengthening the business environment both at the center and state level. And we’ve seen some important progress that’s already been taken in this direction.

MS. YAN: Do we have more questions?

OPERATOR: Ms. Yan, there are no other questions. Please go ahead.

MS. YAN: Oh, okay. So if we don’t have any more questions we’ll just wrap up. Andreas and Paul, do you have anything to add?

MR. CASHIN: No. I think we’ve pretty much answered all the questions. The papers will be --

MS. YAN: Yeah.

MR. CASHIN: -- released at 9:00 a.m.?

MS. YAN: Yeah. So let me remind you again that this call and the documents will be embargoed until 9:00 a.m. Washington D.C. time which is 7:30 p.m. India time. So thank you very much, everyone, and thank you Andreas, Paul and Volodymyr. Good bye.

MR. CASHIN: Thank you.

IMF Communications Department


Phone: +1 202 623-7100Email: