IMF Executive Board Concludes 2021 Article IV Consultation with India
October 15, 2021
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with India.
India was among the fastest-growing economies in the world in the decade before the pandemic, lifting millions out of poverty. While the economy was moderating prior to the COVID-19 shock, the pandemic implied unprecedented challenges. Two COVID-19 waves caused a health and economic crisis however, the economy is gradually recovering. Following the first wave, GDP contracted an unprecedented 7.3 percent in FY2020/21. The second wave resulted in another sharp fall in activity, albeit smaller and shorter, and recent high frequency indicators suggest an ongoing recovery. Inflation pressures have been elevated, yet inflation eased to 5.6 percent in July, returning to within the RBI’s inflation target of 4±2 percent, driven by softer food prices and base effects.
The authorities’ economic response, which was swift and substantial, has included fiscal support, including scaled-up support to vulnerable groups, monetary policy easing, liquidity provision, and accommodative financial sector and regulatory policies. Despite the pandemic, the authorities have continued to introduce structural reforms, including labor reforms and a privatization plan.
Growth is projected at 9.5 percent in FY2021/22 and 8.5 percent in FY2022/23. Headline inflation is projected at 5.6 percent in FY2021/22, amid elevated price pressures. The contraction in economic activity, lower revenue, and pandemic-related support measures are estimated to have led to a widening of the fiscal deficit to 8.6 and 12.8 percent of GDP in FY2020/21 for the central and general governments, respectively. Fiscal policy continues to support the economy in FY2021/22. Despite policy support, bank credit growth has remained subdued, while large corporates have benefited from easier conditions in capital markets. Net inflows and improvement in the current account have supported an increase in foreign exchange reserves. The current account balance is projected to return to a deficit of about 1 percent of GDP in FY2021/22, due to a gradual recovery in domestic demand and higher oil prices.
The economic outlook remains clouded due to pandemic-related uncertainties contributing to both downside and upside risks. A persistent negative impact of COVID-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth. While India benefits from favorable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital. At the same time, the recovery could also be faster than expected. Faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic. In addition, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential.
Executive Board Assessment
They welcomed the recent economic recovery and noted that India is projected to be one of the fastest growing major economies for this year and beyond. Directors commended the authorities’ response to the pandemic which includes scaled-up support to vulnerable groups, monetary policy easing and liquidity provision, accommodative financial sector and regulatory policies, and continued structural reforms. Directors encouraged the authorities to maintain the scaled-up vaccination momentum, continue with policy accommodation until the recovery is fully entrenched, and accelerate structural reforms to achieve a more inclusive and sustainable growth, while keeping public debt vulnerabilities in check.
Directors agreed that addressing the health crisis remains a near-term policy priority. In that context, they welcomed the recent increase in vaccinations. They also positively noted India’s contributions to the global fight against the pandemic as a vaccine producer.
Directors indicated that further fiscal support underpinned by targeted spending on social protection, employment support and health spending is warranted until the recovery is secure. They encouraged the authorities to increase public expenditure in infrastructure, education, health, and social safety nets which can also help achieve the Sustainable Development Goals and boost potential growth. Fiscal space can be enhanced through a credible and clearly communicated medium-term fiscal consolidation strategy, enhancements in expenditure efficiency, improved public financial management and revenue enhancing measures, as well as the privatization agenda.
Directors agreed that maintaining accommodative monetary policy remains appropriate, although elevated inflation pressures need to be closely monitored. Looking ahead, a well-communicated plan for a gradual reduction in monetary policy support as the recovery strengthens would foster orderly market transitions.
Directors also welcomed the authorities’ commitment to maintain exchange rate flexibility, which can serve as the main shock absorber, with foreign exchange interventions limited to addressing disorderly market conditions.
Directors agreed that financial sector policies have moderated the adverse impact of the pandemic. While targeted support to viable corporates should continue, they indicated that policies facilitating the exit of non-viable firms are also warranted. Directors observed that ensuring adequate bank capitalization and effective NPL resolution will enable the financial system to further increase its resilience and better support the recovery.
Directors commended the authorities for advancing structural reforms despite the pandemic and stressed the need for their steadfast implementation. Long-standing reform priorities include ongoing labor and land reforms, infrastructure investment, improvements in governance, continued trade and investment liberalization, and improving education outcomes. Such reforms would not only help maximize India’s long-term growth and demographic dividend, but also help alleviate poverty and inequality, and deepen the country’s integration into global value chains. India’s progress toward transitioning to a greener and more inclusive economy is welcome.
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Table 1. India: Selected Social and Economic Indicators, 2017/18-2022/23 1/ |
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2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
|
|
Est. |
Projections |
|||||
|
Growth (in percent) |
||||||
|
Real GDP (at market prices) |
6.8 |
6.5 |
4.0 |
-7.3 |
9.5 |
8.5 |
|
Prices (percent change, period average) |
||||||
|
Consumer prices - Combined |
3.6 |
3.4 |
4.8 |
6.2 |
5.6 |
4.9 |
|
Saving and investment (percent of GDP) |
||||||
|
Gross saving 3/ |
29.1 |
30.0 |
29.8 |
30.2 |
29.2 |
29.5 |
|
Gross investment 3/ |
31.0 |
32.1 |
30.7 |
29.3 |
30.2 |
30.8 |
|
Fiscal position (percent of GDP) 4/ |
||||||
|
Central government overall balance |
-3.8 |
-3.9 |
-4.8 |
-8.6 |
-7.3 |
-6.2 |
|
General government overall balance |
-6.2 |
-6.4 |
-7.4 |
-12.8 |
-11.3 |
-9.7 |
|
General government debt 5/ |
69.7 |
70.4 |
74.1 |
89.6 |
90.7 |
88.9 |
|
Cyclically adjusted balance (% of potential GDP) |
-6.6 |
-6.8 |
-7.4 |
-8.9 |
-9.4 |
-9.1 |
|
Cyclically adjusted primary balance (% of potential GDP) |
-1.7 |
-1.9 |
-2.7 |
-3.9 |
-4.0 |
-3.7 |
|
Money and credit (y/y percent change, end-period) |
||||||
|
Broad money |
9.2 |
10.5 |
8.9 |
11.7 |
6.9 |
8.7 |
|
Domestic Credit |
7.7 |
11.8 |
8.3 |
8.1 |
8.2 |
9.1 |
|
Financial indicators (percent, end-period) |
||||||
|
91-day treasury bill yield (end-period) |
6.2 |
6.2 |
4.4 |
3.3 |
… |
… |
|
10-year government bond yield (end-period) |
7.4 |
7.4 |
6.7 |
6.2 |
… |
… |
|
Stock market (y/y percent change, end-period) |
11.3 |
17.3 |
-23.8 |
68.0 |
… |
… |
|
External trade (on balance of payments basis) |
||||||
|
Merchandise exports (in billions of U.S. dollars) |
309.0 |
337.2 |
320.4 |
296.3 |
360.8 |
378.1 |
|
(Annual percent change) |
10.3 |
9.1 |
-5.0 |
-7.5 |
21.8 |
4.8 |
|
Merchandise imports (in billions of U.S. dollars) |
469.0 |
517.5 |
477.9 |
398.5 |
520.5 |
555.3 |
|
(Annual percent change) |
19.5 |
10.3 |
-7.6 |
-16.6 |
30.6 |
6.7 |
|
Terms of trade (G&S, annual percent change) |
-2.8 |
-2.1 |
1.6 |
1.3 |
-6.6 |
0.9 |
|
Balance of payments (in billions of U.S. dollars) |
||||||
|
Current account balance |
-48.7 |
-57.2 |
-24.6 |
24.0 |
-29.1 |
-43.2 |
|
(In percent of GDP) |
-1.8 |
-2.1 |
-0.9 |
0.9 |
-1.0 |
-1.4 |
|
Foreign direct investment, net ("-" signifies inflow) |
-30.3 |
-30.7 |
-43.0 |
-44.0 |
-46.4 |
-51.1 |
|
Portfolio investment, net (equity and debt, "-" = inflow) |
-22.1 |
2.4 |
-1.4 |
-36.1 |
-26.1 |
-34.5 |
|
Overall balance ("-" signifies balance of payments surplus) |
43.6 |
-3.3 |
59.5 |
87.3 |
46.6 |
52.4 |
|
External indicators |
||||||
|
Gross reserves (in billions of U.S. dollars, end-period) |
424.5 |
412.9 |
477.8 |
577.0 |
641.5 |
694.0 |
|
(In months of next year's imports (goods and services)) |
7.9 |
8.2 |
11.1 |
10.6 |
11.0 |
11.0 |
|
External debt (in billions of U.S. dollars, end-period) |
529.3 |
543.1 |
558.4 |
570.0 |
633.5 |
694.6 |
|
External debt (percent of GDP, end-period) |
20.0 |
20.1 |
19.5 |
21.4 |
21.8 |
21.7 |
|
Of which: Short-term debt |
8.3 |
8.8 |
8.4 |
9.2 |
9.5 |
9.7 |
|
Ratio of gross reserves to short-term debt (end-period) |
1.9 |
1.7 |
2.0 |
2.4 |
2.3 |
2.2 |
|
Real effective exchange rate (annual avg. percent change) |
3.5 |
-5.0 |
3.3 |
-0.9 |
… |
… |
|
Exchange rate (rupee/U.S. dollar, end-period) |
65.0 |
69.2 |
75.4 |
73.5 |
… |
… |
|
Memorandum item (in percent of GDP) |
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|
Fiscal balance under authorities' definition |
-3.5 |
-3.4 |
-4.6 |
-9.2 |
-7.0 |
-5.9 |
|
Sources: Data provided by the Indian authorities; Haver Analytics; 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/ Based on the percentage share of consumption that accrues to subgroups of the population indicated by deciles noted. 3/ Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions. 4/ Divestment and license auction proceeds treated as below-the-line financing. |
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[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. This year’s discussions were virtual. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
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