IMF completes Article IV consultation with India


The International Monetary Fund (IMF) has completed its Article IV consultation with India.

The full press release as published on the IMF website is as follows;

“IMF Executive Board Concludes 2015 Article IV Consultation with India

Press Release No. 15/104

March 11, 2015

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with India on February 13, 2015.

India’s near-term growth outlook has improved, and the balance of risks is now more favourable, helped by increased political certainty, several positive policy actions, improved business confidence, and reduced external vulnerabilities. In response to the balance of payments pressures during the post-May 22, 2013 taper tantrum period, and against the background of still-limited policy space, the Indian authorities have maintained pro-cyclical fiscal and monetary policy stances. Consequently, India’s vulnerabilities have receded more than those of most emerging markets and sentiment has been revived, with growth rebounding to 5.5 percent in the first half of fiscal year (FY) 2014/15 (ending in March), and the recovery strengthening gradually. Furthermore, CPI inflation has declined from 9.5 percent in FY 2013/14 to 5 percent in December 2014, reflecting economic slack, a tight monetary stance, lower global commodity prices, government efforts to contain food inflation, and favorable base effects. Robust capital inflows in conjunction with the sharp current account deficit correction (largely due to the contraction in gold imports) have provided for an increase in international reserves of about $30 billion over the last year, reaching US$320 billion (representing about 6½ months of import coverage) at end-December 2014.

Growth is projected at 5.6 percent for FY 2014/15, picking up to 6.3 percent in FY 2015/16 (at factor cost), as a result of the revival in industrial and investment activity. However, weaknesses in India’s corporate and bank balance sheets will weigh on credit growth, and fiscal restraint and a tight monetary stance will act as headwinds in the near term, offsetting the positive growth impact of the improved commodity terms of trade. CPI inflation is projected to move up to about 6¼ percent by March 2015 and hover slightly above 6 percent over the course of FY 2015/16, as growth picks up, slack dissipates, and favourable base effects unwind. The current account deficit is expected to remain contained at around 1¾ percent of GDP in FY 2015/16, helped by significantly lower oil import prices, shrinking gold imports, and rebounding exports.

Despite the reduction in India’s external imbalances and strengthening of buffers, the spillover impact from global financial market volatility to India could be very disruptive, including from any unexpected developments in the course of U.S. monetary policy normalization, particularly against the backdrop of recent large capital inflows. External risks also emanate from a prolonged period of weak global growth, which could dampen Indian exports. Domestic risks include a supply-driven spike in inflation, further deterioration in bank asset quality and continued stress in corporate financial positions, as well as slower-than-expected progress in addressing supply-side bottlenecks, which could weigh on growth and stoke inflation. On the upside, expedited structural reforms and faster implementation of cleared investment projects could lead to stronger growth, as would sustained low global energy prices.

Executive Board Assessment2

Executive Directors welcomed the authorities’ comprehensive policy initiatives, which have helped reduce India’s external vulnerabilities and improve the economic outlook. Among these initiatives are recent policy measures to revive investment, reduce inflation, consolidate the fiscal position, and improve the ease of doing business. Directors noted, however, that significant external and domestic risks remain while room for countercyclical macroeconomic policy support is limited by still-high fiscal deficits and upside risks to inflation.

Directors considered that the main external risk facing India is a surge in global financial market volatility. They agreed that, should external pressures re-emerge, rupee flexibility should continue to be an important shock absorber, complemented by judicious foreign exchange intervention, tightening of monetary conditions, and additional fiscal adjustment.

Directors welcomed the progress made in reducing inflation, supported by a tight monetary stance and government efforts to contain food inflation. Nonetheless, Directors noted that, in light of high inflation expectations and upside risks to inflation, monetary policy should remain tight to consolidate past gains. Directors concurred that further efforts are needed to strengthen the monetary policy framework, including a move towards flexible inflation targeting.

Directors commended the government’s commitment to strengthening the fiscal position further, and welcomed recent reforms, including the deregulation of diesel prices. They supported the authorities’ medium-term fiscal targets and encouraged the authorities to articulate and implement specific supporting measures, which could be used also to enhance the quality and sustainability of fiscal consolidation. In this regard, fiscal space for higher growth-enhancing capital spending and social expenditures could be obtained by further rationalizing fuel, fertilizer, and food subsidies; and raising tax revenues to pre-global financial crisis levels, in particular by introducing a well-designed goods and services tax and enhancing tax administration.

Directors noted that India’s international reserves are assessed to be adequate and foreign exchange intervention should continue to be limited to preventing disruptive movements in the exchange rate. They emphasized the importance of further improving the external financing mix by enhancing the environment for attracting stable, non-debt creating capital flows, particularly foreign direct investment.

Directors stressed that boosting potential growth would require addressing long-standing supply bottlenecks, especially in the energy, mining, and power sectors, as well as bolstering the business climate. Directors agreed that further easing of restrictive labor laws, raising the productivity of the agriculture sector, and addressing skills mismatches would make growth more inclusive and assist with job creation.

While acknowledging that India’s financial system is well-capitalized and supervised, Directors noted that deteriorating corporate financial positions and worsening bank asset quality could weigh on financial sector soundness. They welcomed the RBI’s ongoing measures to enhance bank supervision and monitoring, and commended the RBI’s efforts to broaden financial inclusion. Directors encouraged the authorities to further strengthen prudential regulation for banks’ asset quality classification; address concentration risks; augment capital buffers; improve corporate governance at public sector banks; and strengthen the insolvency framework.”

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