IMF Executive Board Concludes 2012 Article IV Consultation with India

Public Information Notice (PIN) No. 12/36
April 17, 2012

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 March 9, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2012 Article IV consultation with India.1


India’s growth remains one of the highest in the world, but a range of factors have weighed it down. Following a rapid recovery after the global financial crisis, the economy has slowed more than most other major emerging markets, as investment has been dampened by a confluence of cyclical and global factors, as well as by concerns about structural impediments. Consumption, particularly in rural areas, and exports, with increasing geographical destination diversity and sophistication, have been the bright spots. At the same time, inflation is elevated, and its recent moderation is primarily due to base effects. While monetary policy has been tightened, the fiscal deficit remains high. The unsettled global outlook has added to policy challenges. After the boom in capital inflows in 2010/11, rising global risk aversion has reduced the flow of capital. The rupee depreciated the most among major Asian currencies in 2011, partly due to India’s current account deficit. Concerns about global growth have harmed investor sentiment and advanced economies’ bank deleveraging has raised the cost of external finance.

Growth is projected at about 7 percent for 2011/12 and 2012/13, with inflation forecast to remain above the RBI’s comfort zone. Investment is anticipated to pick up modestly from the slump recorded in late 2011, and consumption should remain robust, but exports are expected to cool. Inflation is projected to fall in the near term, but to stay above the Reserve Bank of India’s objective. The current account is projected at 2.8 percent of GDP.

Growth risks are to the downside. The main domestic risk is a further weakening of private investment if government approvals do not accelerate, reform efforts are not reinvigorated, and inflation remains high and volatile. At the same time, external risks continue to be elevated as Euro area growth could underperform and bank deleveraging could intensify even in the absence of a new full-fledged global financial crisis. Inflation risks remain, as momentum indicators are mixed.

Executive Board Assessment

Executive Directors noted that sound macroeconomic policies and fundamentals enabled India to weather well the global economic crisis. Nevertheless, economic growth has slowed below trend in the last year due to cyclical and structural factors, and while inflation has come down, it is still high. Some Directors noted that it is difficult to attribute the current slowdown to structural factors. Downside risks prevail in light of the uncertain global environment, supply constraints and elevated funding costs. A major challenge will be to bring growth back to potential and ensure its inclusiveness, while further lowering inflation. Directors underscored that this will require a reinvigoration of structural reforms and fiscal consolidation.

Directors encouraged continued vigilance against inflation. They agreed that policy rates should be kept unchanged until inflation is clearly on a downward trend, given the uncertain outlook for growth. They encouraged the Reserve Bank of India to stand ready to raise policy rates if inflation starts to rise again, while it could consider cutting rates if the inflation momentum clearly eases.

Directors stressed that fiscal consolidation is crucial to crowd in private investment and lower inflationary expectations. They supported the planned reorientation of expenditure toward infrastructure and the social sectors, and highlighted the need to rationalize fuel and fertilizer subsidies and improve public expenditure management. They encouraged tax reform, especially the introduction of the goods and services tax.

Directors considered the flexible exchange rate regime to be an important buffer against external shocks, and supported the policy of intervening in the foreign exchange market only to contain volatility and to prevent disruptive movements. They welcomed the authorities’ moves toward further trade and gradual capital account liberalization.

Directors underscored the importance of structural reform to raise public and private investment and boost inclusive growth. While some progress has been made, many Directors were of the view that a more determined effort to remove structural impediments is required in several areas. On the other hand, some Directors felt that structural reforms were progressing at a measured pace. Continuing to develop infrastructure, which in turn requires facilitating land acquisition and mining, would ensure that India’s growth potential remains intact. Financial sector development and reform are needed to improve access to credit and diversify funding sources. Addressing skill mismatches, increasing labor market flexibility, and improving agricultural productivity are crucial to support formal job creation and reduce poverty.

Directors welcomed the FSSA’s finding that India’s financial system is broadly stable, albeit with room for improvement in the regulatory and supervisory framework, and encouraged development of a prioritized action plan to implement key recommended reforms. They welcomed measures to increase the quantity and quality of bank capital, strengthen inter-regulatory cooperation, and clarify supervisory responsibilities. They encouraged close monitoring of asset quality and provisioning; continued development of domestic bond markets; a gradual reduction of credit concentration limits, with due regard to development needs for financing, and a reduction in mandatory holdings of government securities by financial institutions, while ensuring adequate liquidity buffers for financial stability.

India: Selected Economic Indicators, 2007/08–2012/13 1/
I. Social Indicators

GDP (2010/11)


Poverty (Percent of population)


Nominal GDP (billions of U.S. dollars):



Headcount ratio (2005):


GDP per capita (U.S. dollars):



Undernourished (2000):


Population characteristics (2010)


Income distribution (2005, WDI)


Total (in billions):



Richest 10 percent of households:


Urban population (percent of total):



Poorest 20 percent of households:


Life expectancy at birth (years):



Gini index:

II. Economic Indicators
  2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2/
        Prel. Est. Proj.  

Growth (y/y percent change)


Real GDP (at factor cost)

9.3 6.7 8.4 8.4 6.8 7.0  

Real GDP (at factor cost, calendar year basis)

9.4 7.3 8.0 8.4 6.8 7.1  

Industrial production

15.5 2.5 5.3 8.2  

Prices (y/y percent change, average)


Wholesale prices (2004/05 weights)

4.7 8.1 3.8 9.6 8.7 7.2  

Wholesale prices (2004/05 weights, end of period)

7.7 1.6 10.4 9.7 6.8 7.0  

Consumer prices - industrial workers (2001 weights)

6.2 9.1 12.4 10.4 8.1 8.5  

Saving and investment (percent of GDP)


Gross saving 2/

36.4 31.7 33.5 31.3 31.3 30.4  

Gross investment 2/

37.7 34.0 36.3 34.0 34.0 33.4  

Fiscal position (percent of GDP) 3/


Central government deficit

-3.1 -6.8 -6.5 -6.1 -5.9 -5.8  

General government deficit

-4.4 -9.0 -9.9 -8.8 -8.1 -7.7  

General government debt 4/

74.6 75.4 71.3 66.7 66.2 65.7  

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


Broad money

21.4 19.3 16.8 16.0 16.0 18.2  

Credit to commercial sector

21.1 16.9 15.8 21.3 18.8  

Financial indicators (percent, end-period) 6/


91-day treasury bill yield

7.2 5.0 4.4 7.3 8.6  

10-year government bond yield

7.6 7.0 7.8 8.0 8.4  

Stock market (y/y percent change, end-period)

19.7 -37.9 80.5 10.9  

External trade 7/


Merchandise exports (US$ billions)

166.2 189.0 182.4 250.5 274.2 307.4  

y/y percent change

28.9 13.7 -3.5 37.3 9.5 12.1  

Merchandise imports (US$ billions)

257.6 308.5 300.6 381.1 428.2 489.1  

y/y percent change

35.1 19.8 -2.6 26.7 12.4 14.2  

Balance of payments (US$ billions)


Current account balance

-15.7 -27.9 -38.2 -45.9 -47.6 -56.3  

(in percent of GDP)

-1.3 -2.3 -2.8 -2.7 -2.8 -3.0  

Foreign direct investment, net

15.9 22.4 18.0 9.4 18.8 22.3  

Portfolio investment, net (equity and debt)

27.4 -14.0 32.4 30.3 11.1 24.1  

Overall balance

92.1 -20.1 13.4 13.1 5.5 17.1  

External indicators


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

309.7 252.0 279.1 304.8 298.6 315.7  

(In months of imports) 8/ 9/

10.3 8.4 7.2 6.8 5.7 5.5  

External debt (in billions of U.S. dollars, end-period) 8/

224.4 224.5 261.0 298.4 337.4 384.7  

External debt (percent of GDP, end-period)

18.1 18.4 19.2 17.7 19.7 20.7  

Of which: short-term debt 9/

6.8 6.7 6.7 6.9 8.0 8.7  

Ratio of gross reserves to short-term debt (end-period) 9/

3.7 3.1 3.1 2.5 2.2 2.0  

Debt service ratio 10/

5.3 5.1 4.9 4.7 5.6 5.8  

Real effective exchange rate


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

8.7 -6.8 8.0 11.6  

Exchange rate (rupee/US$, end-period) 6/

40.3 51.2 45.5 45.0  

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 and license auction proceeds treated as below-the-line financing. Subsidy related bond issuance classified as expenditure.

4/ Includes combined domestic liabilities of the center and the states, inclusive of MSS bonds, and external debt at year-end exchange rates.

5/ For 2011/12, as of October 2011.

6/ For 2011/12, as of October 2011.

7/ On balance of payments basis.

8/ Imports of goods and services projected over the following twelve months.

9/ Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis.

10/ In percent of current account receipts excluding grants.

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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