Sunday, December 29, 2019

IMF's assessment of Indian economy

Here are the highlights from the IMF’s latest Article IV report on Indian economy, including macroeconomic assessments, which are based on data available through 16 October 2019. For national accounts estimate till second quarter of FY2020, see this blog post.

Macroeconomic development
  • GDP growth: The deceleration of consumption and investment and weaknesses in the non-bank financial sector along with corporate and environmental regulatory uncertainty have contributed to the slowdown
  • Inflation: Weak demand as well as low food prices thanks to favorable monsoon rainfall moderated inflation to a low level.
  • External sector: External vulnerabilities eased due to lower oil prices and renewed portfolio inflows. The Indian rupee depreciated both in REER and NEER terms. Gross reserves can cover 7 months of imports. 

Macro-financial risks from banking sector have decreased, thanks to enhanced monitoring of NBFCs. Capital position of public sector banks and asset quality have improved due to capital injection by government and the implementation of insolvency and bankruptcy code (IBC).

Central government largely adhered to its headline fiscal deficit objective despite revenue shortfalls. Headline general government fiscal deficit narrowed thanks to decline in fiscal deficits of the states. The high public sector borrowing requirements implies that general government debt is also high at about 69% of GDP. Since India’s debt, denominated in domestic currency, is largely held by residents with relatively long maturity period, debt build up is generally sustainable. That said, current fiscal deficit target is ambitious due to overly optimistic revenue targets and reduction of corporate income tax rates. 


Macroeconomic outlook is subdued and uncertain. FY2020 growth is projected at 6.1% on account of strong investment and private sector consumption. The lagged effect of monetary policy loosening in the previous periods and recent measures to facilitate monetary policy transmission will also support economic activities. 
  • Growth is projected to rise to its medium-term potential of 7.3% over the medium term. It is conditional on continued commitment to inflation targeting, gradual macro-financial and structural reforms and implementation of reforms initiated earlier. 
  • Inflation is projected to be around 3.4% on account of subdued demand offsetting base effects of low food prices. 
  • Current account deficit is projected to remain around 2% of GDP. Higher capital inflows would mean balance of payments surplus. India’s external position is broadly consistent with fundamentals and desirable policy settings. 


Risks are titled to the downside. 
  • Tax revenue shortfalls, delays in structural reforms, and subdued credit growth due to risk aversion among banks are the major domestic risks. 
  • High oil prices, a sharp rise in risk premia in global financial markets, and rising protectionism globally are the main external risks. 


Medium-term fiscal consolidation, subsidy-spending rationalization and tax-base enhancing measures are needed to reduced debt and to avoid crowding out of private investment. 

To counter the cyclical weakness of the economy, monetary policy should be eased until a recovery takes hold. Fiscal stimulus should be avoided given the fiscal space at risk. Exchange rate flexibility should be maintained. External debt is about 19% of GDP and debt is projected to remain sustainable thanks to favorable growth-interest rate differential and that public debt is primarily denominated in domestic currency and held by residents.

Credible fiscal consolidation path is needed to reduced debt, free up financial resources for private investment, and reduce the interest bill. Additional measures to boost revenues could be expansion of property taxation, increase in coal cess, and equal tax treatment of agricultural and non-agricultural income. 

Enhance governance of PSBs and efficiency of their credit allocation. Inflation targeting is contributing to macroeconomic stability, anchoring inflation expectations, and improving economic well-being of low-income households. Forward guidance accompanied by market development can be an effective instrument in shaping market expectations.