IMF Executive Board Concludes 2014 Article IV Consultation with India

imfFebruary 20, 2014

On January 27, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India.

India’s growth has slowed markedly, reflecting global developments and domestic supply constraints, while inflation remains stubbornly high. Led by falling infrastructure and corporate investment, the slowdown has generalized to other sectors of the economy. The financial positions of banks and corporates have deteriorated. The combination of persistently-high inflation, sizeable current account and fiscal deficits intensified the global liquidity tightening-induced balance of payment pressures experienced during the summer, which resulted in significant portfolio debt outflows, and pressures on currency, equity and bond markets. Along with improving external conditions, positive policy steps taken by the authorities have improved market sentiment. The current account deficit, after reaching a record high in FY2012/13 (fiscal year ending March), is narrowing fast, and capital inflows have picked up. While recent policy initiatives have reduced vulnerabilities, the policy space remains strictly circumscribed because of high deficits and debt, and elevated inflation.

Growth is projected at 4.6 percent for fiscal year 2013/14, and should pick up to 5.4 percent in 2014/15 (at factor cost). Stronger global growth, improving export competitiveness, a favorable monsoon, and a confidence boost from recent policy actions should deliver a modest growth rebound. However, fiscal restraint and a tighter monetary stance will act as headwinds, slowing the recovery. CPI inflation is expected to remain near double-digits well into next year, driven by high food inflation that feeds quickly into wages and core inflation; entrenched inflation expectations; the pass through from a weaker rupee; and ongoing energy price increases. WPI inflation is forecast to remain above the Reserve Bank of India’s comfort zone, given that supply constraints will ease only gradually. The current account deficit should narrow in fiscal year 2013/14 to about 3.3 percent of GDP, supported by rebounding exports, higher remittances, rapidly-shrinking gold imports, weakening domestic demand, and broadly stable oil prices.

The principal risk facing India is the inward spillover from global financial market volatility. Protracted economic and financial volatility (triggered by advanced economies’ exit from unconventional monetary policies), a lengthy Euro area growth slowdown, and higher oil prices are the main external risks. Slow progress on structural reforms, high inflation, failure to ease supply constraints, and resorting to expansionary fiscal policy are key domestic downside risks. On the upside, going beyond announced reforms or faster-than-envisaged legislative progress would lead to higher growth and reduce economic vulnerabilities.

Executive Board Assessment2

Executive Directors commended the Indian authorities for their ability to maintain macroeconomic and financial stability amid a challenging macroeconomic landscape. Directors welcomed ongoing efforts, including recent policy initiatives, to reduce external vulnerabilities, rebuild buffers, and revive investment. They noted, however, that growth has slowed markedly and inflation remains persistently high, while spillovers from global financial market volatility continue to pose a significant risk. Against this backdrop, Directors underscored the need to rein in inflation, prudently consolidate the fiscal position, and accelerate structural reforms to address supply bottlenecks and promote sustainable and inclusive growth.

Directors supported the central bank’s policies of rupee flexibility and limited foreign exchange intervention. They welcomed the gradual, cautious move toward further external liberalization. Directors considered that these measures are important tools to deal with capital account pressures, which, if they were to re-emerge, should be complemented by judicious use of reserves, tightening of monetary conditions, and additional fiscal adjustment. Directors encouraged continued efforts to improve the financing of the current account deficit. Measures to facilitate foreign direct investment inflows and deepen domestic capital markets should continue to help reduce external vulnerabilities.

Given entrenched double-digit inflation expectations, Directors recommended that the authorities maintain the monetary policy stance appropriately tight, and stand ready to raise the policy rate further so as to bring down inflation to more sustainable levels. They welcomed recent initiatives to strengthen the monetary policy framework with a clear communication strategy, aimed at enhancing the effectiveness of monetary policy.

Directors commended the government’s commitment to fiscal consolidation and supported its medium-term targets. To this end, they emphasized the need for a comprehensive package of measures, comprising both tax and subsidy reforms, to ensure the quality and sustainability of consolidation. Rationalizing fuel and fertilizer subsidies and introducing the goods and services tax are essential to create fiscal space, while safeguarding priority capital spending and targeted social programs, particularly health and education.

Directors stressed that reviving growth and raising the long-term growth potential require broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources. They also saw as key priorities reforms aimed at boosting agricultural productivity and supporting formal job creation, by relaxing labor laws and addressing skills mismatches.

Directors recognized that India’s financial system is well capitalized and supervised, and welcomed progress in implementing the recommendations of the FSAP Update. They welcomed in particular recent measures to enhance supervision and increase bank provisioning. Directors noted nevertheless that deteriorating corporate financial positions and weakening bank balance sheets, especially among public banks, warrant close monitoring. They encouraged the authorities to further strengthen prudential regulation of banks’ asset quality classification and concentration risks, and pay due regard to the inter-linkages between corporate vulnerabilities and banking system health. Steps are also needed to modernize the legal and insolvency framework.


India: Selected Economic Indicators, 2009/10–2014/15 1/
I. Social Indicators
GDP (2012/13)   Poverty (percent of population)  
Nominal GDP (in billions of U.S. dollars): 1,842 Headcount ratio at $1.25 a day (2010): 32.7
GDP per capita (U.S. dollars): 1,501 Undernourished (2011):   17.5
Population characteristics (2012/13)   Income distribution (2010, WDI)
Total (in billions): 1.2 Richest 10 percent of households: 28.8
Urban population (percent of total): 32 Poorest 20 percent of households: 8.5
Life expectancy at birth (years): 65 Gini index (2010):   33.9
II. Economic Indicators
  2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Prel. Proj. Proj.
Growth (in percent)
Real GDP (at factor cost) 8.6 9.3 6.2 5.0 4.6 5.4
Industrial production 5.3 8.2 2.9 1.1
Prices (percent change, period average)
Wholesale prices (2004/05 weights) 3.8 9.6 8.9 7.4 6.4 6.7
Wholesale prices (2004/05 weights, end of period) 10.4 9.7 7.7 5.7 7.4 6.3
Consumer prices – industrial workers (2001 weights) 12.4 10.4 8.4 10.4 10.5 8.6
Saving and investment (percent of GDP)
Gross saving 2/ 33.7 34.2 30.8 30.8 31.5 31.8
Gross investment 2/ 36.5 36.8 35.0 35.6 34.8 34.9
Fiscal position (percent of GDP) 3/
Central government deficit -7.0 -6.4 -6.0 -5.1 -5.3 -5.6
General government deficit -9.8 -8.4 -8.5 -7.8 -7.7 -8.0
General government debt 4/ 72.5 67.4 67.0 67.6 67.3 67.3
Structural balance (% of potential GDP) -9.5 -9.0 -9.1 -7.9 -7.5 -7.8
Structural primary balance (% of potential GDP) -4.7 -4.4 -4.5 -3.3 -2.8 -2.8
Money and credit (y/y percent change, end-period)
Broad money 16.9 16.1 13.2 13.8 13.6 14.7
Credit to commercial sector 5/ 15.8 21.3 17.0 14.2 16.3
Financial indicators (percent, end-period)
91-day treasury bill yield (end-period) 5/ 4.4 7.3 9.0 8.2 8.6
10-year government bond yield (end-period) 5/ 7.8 8.0 8.6 8.0 8.8
Stock market (y/y percent change, end-period) 80.5 10.9 -10.5 8.2
External trade 6/
Merchandise exports (in billions of U.S. dollars) 182.4 250.5 309.8 306.6 319.4 340.6
(Annual percent change) -3.5 37.3 23.7 -1.0 4.2 6.6
Merchandise imports (in billions of U.S. dollars) 300.6 381.1 499.5 502.2 497.4 523.2
(Annual percent change) -2.6 26.7 31.1 0.5 -1.0 5.2
Terms of trade, goods (annual percent change) -0.7 -2.5 -3.1 -1.7
Balance of payments (in billions of U.S. dollars)
Current account balance -38.2 -45.9 -78.2 -88.2 -61.6 -59.9
(In percent of GDP) -2.8 -2.7 -4.2 -4.8 -3.3 -3.1
Foreign direct investment, net 18.0 9.4 22.1 19.8 23.1 25.0
Portfolio investment, net (equity and debt) 32.4 30.3 17.2 26.9 -5.0 19.8
Overall balance 13.0 12.9 -13.1 3.4 4.5 17.8
External indicators
Gross reserves (in billions of U.S. dollars, end-period) 279.1 304.8 294.4 292.0 296.6 314.3
(In months of imports) 7/ 7.2 6.3 6.1 6.0 5.8 5.7
External debt (in billions of U.S. dollars, end-period) 260.9 305.9 345.5 390.0 459.1 499.6
External debt (percent of GDP, end-period) 19.1 17.9 18.4 21.2 24.8 25.9
Of which: Short-term debt 8/ 6.6 7.0 7.4 8.9 10.5 10.7
Ratio of gross reserves to short-term debt (end-period) 8/ 3.1 2.6 2.1 1.8 1.5 1.5
Debt service ratio 9/ 5.0 5.1 5.8 4.2 5.6 5.4
Real effective exchange rate
(based on annual average level) 8.0 11.6 -3.4 -2.4
Exchange rate (rupee/U.S. dollar, end-period) 5/ 45.5 45.0 50.3 54.4 61.7
Sources: Data provided by the Indian authorities; CEIC Data Company Ltd; Bloomberg L.P.; World Bank, 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 2013/14, as of December 5, 2013.            
6/ On balance of payments basis.            
7/ Imports of goods and services projected over the following 12 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.            

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.

2 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: