IMF Executive Board Concludes 2009 Article IV Consultation with India

Public Information Notice (PIN) No. 10/18
February 4, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 25, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with India.1


India’s economy is one of the first in the world to recover after the global crisis. Prompt fiscal and monetary easing, combined with the fiscal stimulus already in the pipeline and the return of risk appetite in financial markets, have brought growth close to pre-crisis levels. Leading indicators suggest the output gap will continue to close. Capital inflows are back on the rise, and financial markets have regained most of the lost ground.

Growth is projected to rise from 6¾ percent in 2009/10 (April-March) to 8 percent the following year. Agriculture is likely to contract by about 1 percent in 2009/10 due to the drought, but nonagricultural GDP growth is expected to gather momentum. Private consumption would benefit from better employment prospects and less uncertainty, and investment would be boosted by robust corporate profits, rising business confidence, and favorable financing conditions. With India’s long-term prospects remaining strong and private sector balance sheets sound, we expect growth to be back at potential in 2010/11 even if advanced economies grow below trend.

Near-term risks are broadly balanced. On the upside, an acceleration of reforms and capital inflows could spur investment. On the downside, the main risks are elevated inflation and financing constraints arising from—among other things—the fiscal deficit, which could put breaks on the recovery. Tail risks include asset price bubbles and a sudden stop in capital inflows caused by turmoil in global financial markets.

India’s medium-term growth prospects remain bright. India was not at the center of the global crisis and growth is well balanced and mainly reliant on domestic drivers. Risks to this favorable outlook stem primarily from difficulties in implementing productivity-enhancing reforms and continued supply bottlenecks.

Executive Board Assessment

Executive Directors congratulated the authorities on their strong record of sound macroeconomic policies and decisive actions leading to India’s early and vigorous recovery from the global crisis. Directors noted that India’s rapid recovery has brought fiscal and monetary policy trade-offs to a head earlier than in other countries. Longer-term priorities are financial sector reforms to facilitate infrastructure investment, and fiscal consolidation. Directors were reassured by the authorities’ vigilant monitoring and action plans to address the challenges ahead.

Directors commended the Reserve Bank of India (RBI) for starting the first phase of exit from monetary accommodation and generally considered that conditions are ripe for a progressive normalization of the monetary stance. They noted that this will require fine judgments by the RBI, and favored a gradual approach to ensure the recovery reaches its full potential. Given long transmission lags and the low policy rates, most Directors advised a timely start of the withdrawal of monetary stimulus, which would help anchor inflation expectations and soften the impact on long-term interest rates. More extended guidance from the RBI on future inflation may also help in this regard.

Directors recognized the challenges the authorities face in managing capital inflows, and welcomed their intention to continue to employ a range of measures. Most Directors considered that rupee appreciation would help contain inflation and manage capital inflows, although a few Directors argued for caution in this area. Sterilized intervention could help reduce excessive exchange rate volatility, provided it does not generate further inflows. Directors also supported the RBI’s approach to use prudential measures in case asset bubbles were to develop. Given the need to develop India’s financial markets, several Directors advised a tightening of capital controls only as a last resort.

Directors noted that India’s financial system has weathered the global crisis well. They supported the initiatives to further strengthen the capital of public banks and financial regulation, and the higher provisioning requirements recently introduced. While appreciating India’s self-assessment of the financial sector, they noted that the assessment of financial stability could be further strengthened via multifactor stress tests and an independent evaluation of compliance with international standards. Directors also encouraged the authorities to improve mechanisms for dealing with distressed assets and the insolvency framework.

Directors concurred that infrastructure investment is a priority and encouraged the authorities to maintain the momentum of reforms to ensure that the financial system will provide adequate funding. They stressed the importance of developing a vibrant corporate bond market and reforms that would foster greater participation by pension funds and the insurance sector in funding infrastructure. Several Directors also considered that further opening the local debt market to foreign investors could help in enhancing liquidity. A few other Directors advised a more cautious approach in view of the volatility and vulnerabilities associated with capital flows. Directors considered that public institutions have an important role to play in establishing the overall framework for infrastructure financing and in filling market gaps, while carefully managing risks to the public sector.

Directors welcomed the authorities’ announcement to lower the deficit starting from the next budget. With the recovery becoming entrenched and given India’s high debt, they encouraged the authorities to lay out a concrete strategy for reducing debt through durable reforms, which would boost credibility and foster growth. Most Directors considered that anchoring India’s medium-term fiscal framework with a debt target would be helpful.

Directors looked forward to the introduction of the Goods and Services Tax and the new Direct Tax Code. They encouraged the authorities to phase out regressive subsidies and introduce market-based pricing for petroleum products. Over time, the subsidies on products consumed predominantly by the poor should be replaced with targeted support. Directors welcomed the government’s focus on raising the quality of public spending and service delivery, and the announcements regarding privatization.

India: Selected Economic Indicators, 2005/06–2010/11 1/

  2005/06   2006/07   2007/08   2008/09   2009/10 2010/11
              Prel.   Proj. Proj.

Growth (y/y percent change)

  • Real GDP (at factor cost)

9.5   9.7   9.0   6.7   6.7 8.0
  • Industrial production

8.2   11.5   8.5   2.7   ... ...

Prices (y/y percent change, average)

  • Wholesale prices (1993/94 weights)

4.4   5.4   4.7   8.3   3.1 6.4
  • Wholesale prices (1993/94 weights, end of period)

4.1   6.7   7.7   0.8   8.1 5.5
  • Consumer prices - industrial workers (2001 weights)

4.4   6.7   6.2   9.1   11.2 8.8

Saving and investment (percent of GDP)

  • Gross saving 2/

34.3   35.8   37.6   37.4   37.5 38.2
  • Gross investment 2/

35.5   36.9   39.1   40.0   39.4 40.4

Fiscal position (percent of GDP) 3/

  • Central government deficit

-4.6   -4.4   -3.3   -8.0   -7.6 -6.2
  • General government deficit

-7.2   -6.3   -4.7   -11.0   -11.2 -9.4
  • General government debt 4/

84.0   80.8   78.3   78.2   81.7 81.2

Money and credit (y/y percent change, end-period) 5/

  • Broad money

21.2   21.5   20.9   18.8   18.7
  • Credit to commercial sector

32.2   25.8   20.9   17.0   11.8

Financial indicators (percent, end-period) 5/

  • 91-day treasury bill yield

6.1   8.0   7.2   5.0   3.3
  • 10-year government bond yield

7.5   8.0   7.9   7.0   7.2
  • Stock market (y/y percent change, end-period)

73.7   15.9   19.7   -37.9   86.2

External trade 6/

  • Merchandise exports (US$ billions)

105.2   128.9   166.2   175.2   145.8 178.0
  • y/y percent change

23.4   22.6   28.9   5.4   -16.7 22.1
  • Merchandise imports (US$ billions)

157.1   190.7   257.8   294.6   259.0 310.8
  • y/y percent change

32.1   21.4   35.2   14.3   -12.1 20.0
  • Net oil imports (US$ billions)

32.3   38.3   54.8   62.7   51.6 59.2

Balance of payments (US$ billions)

  • Current account balance

-9.9   -9.6   -17.0   -29.8   -24.0 -29.5

(in percent of GDP)

-1.2   -1.0   -1.5   -2.6   -1.9 -2.1
  • Foreign direct investment, net

3.0   7.7   15.4   17.5   15.8 17.4
  • Portfolio investment, net (equity and debt)

12.5   7.1   29.6   -14.0   25.8 19.8
  • Overall balance

15.1   36.6   92.2   -20.1   33.2 27.2

External indicators

  • Gross reserves (in billions of U.S. dollars, end-period)

151.6   199.2   309.7   252.0   300.7 327.9

(In months of imports) 7/

7.7   7.7   10.7   9.7   9.8 9.6
  • External debt (percent of GDP, end-period)

17.0   18.8   19.2   19.5   19.2 19.8

Of which: short-term debt 8/

3.3   3.8   7.2   7.5   7.4 8.1
  • Ratio of gross reserves to short-term debt (end-period) 8/

5.6   5.7   3.7   2.9   3.2 2.9
  • Gross reserves to broad money (percent; end-period)

24.8   26.1   31.0   26.8   ... ...
  • Debt service ratio 9/

10.1   4.9   5.3   5.4   5.5 6.2
  • Real effective exchange rate


(y/y percent change, period average for annual data)

4.5   -2.2   8.2   -7.1  
  • Exchange rate (rupee/US$, end-period) 5/

44.6   43.5   40.1   50.7   46.4

Memorandum item (in percent of GDP)


Subsidy related bond issuance 10/

0.5   1.0   0.6   1.8   0.3 0.4

Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Development Indicators; and IMF staff estimates and projections.
1/ Data are for April-March fiscal years.
2/ Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions.
3/ Divestment proceeds treated as below-the-line financing. Subsidy related bond issuance included in total expenditure and in the balance.
4/ Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and sovereign external debt at year-end exchange rates.
5/ For 2009/10, as of November 2009.
6/ On balance of payments basis.
7/ Imports of goods and services projected over the following twelve months.
8/ Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis.
9/ In percent of current account receipts excluding grants.
10/ Issued by the central government to FCI, the state-owned oil refining/distribution companies, and fertilizer companies as compensation for losses incurred from the provision of subsidies.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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