Here are major highlights from IMF’s 2018 IV report on the Indian economy:
Following disruptions caused by November 2016 demonetization and July 2017 GST rollout, the economy is stabilizing. Real GDP growth slowed to 6.7% in FY2018 (April 2017-March 2018) but is expected to increase to 7.3% in FY2019 and 7.5% in FY2020 on account of strengthening investment and robust private consumption.
Headline inflation averaged 3.6%, a 17-year low, due to low food prices thanks to favorable monsoon rainfall, agricultural sector reforms (pulses buffer stock, national agriculture market, crop insurance, irrigation), subdued domestic demand, and currency appreciation. It is expected to increase to 5.2% in FY2019 owing to the recent depreciation of the Indian rupee along with higher oil prices, housing rent allowances and agricultural minimum support prices.
Current account deficit is expected to increase to 2.6% of GDP due to rising oil prices and strong import demand. Remittances are expected to increase slightly. High forex reserves and strong FDI inflows have helped contain external vulnerabilities. External position remains broadly consistent with fundamentals.
Fiscal consolidation is expected as FY2019 Union Budget targets fiscal deficit of 3.3% of GDP (but a 3.6% GDP in IMF terms). India’s Fiscal Responsibility and Budget Management Review Committee recommended the government to cap public debt level to 60% of GDP by FY2023. Considering the general elections to be held by May 2019, the government is accelerating implementation of ongoing reforms rather than initiating new ones.
Monetary policy is expected to remain tight on account of higher inflationary pressures as output gap narrows to -0.3% of potential GDP. India follows an inflation-targeting monetary policy framework (helps lower sticky inflation expectations), which dictates it to maintain CPI inflation between 2% and 6%. More needs to be done to improve NPAs and recapitalized public sector banks. The recent fraud at a public sector bank indicates how vulnerable is the financial sector to poor governance and operations.
India’s GDP is US$2,602 billion; per capita GDP is US$1,942; total population is 1.32 billion (with 33.1% residing in urban areas); poverty headcount ratio at $1.90 a day is 21.2; and Gini index is 35.2.
Risks to the economy are on the downside. Key external risks include higher global oil prices and tighter financial conditions. Key internal risks include tax revenue shortfalls and delays in addressing the twin bank-corporate balance sheet problems. The plan to recapitalize PSBs announced in October 2017 will add at least 0.8% of GDP to public debt (financed through recapitalization bonds).
Structural reforms are needed in labor, land and product markets.
Here is a collection background issue papers covering GST, fiscal discipline in Indian states, FDI, labor market reforms and agricultural sector reforms.