deckingraj
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ANother good real...Though it's a long PDF and report is from 2006 yet worth sharing..
http://www.imf.org/external/pubs/ft/scr/2007/cr0763.pdf
Public Information Notice (PIN) No. 07/9
FOR IMMEDIATE RELEASE
January 25, 2007
IMF Executive Board Concludes 2006 Article IV Consultation with India
On December 20, 2006, the Executive Board of the International Monetary Fund (IMF) concluded
the Article IV consultation with India.1
Background
India’s economy has continued to grow above trend, with average growth of 8 percent in the last
three years. Growth is broad based, with robust consumption, investment, and exports. With
manufacturing expanding at over 10 percent y/y, industry has joined services as an engine of
growth. A normal monsoon is supporting agriculture. Staff projects growth of about 9 percent this
year, further moderating toward trend in 2007/08. WPI inflation is contained within the RBI’s
indicative projection range of 5−5½ percent, partly reflecting gradual hikes in policy rates since
late 2005, limited pass-through of higher world oil prices to domestic LPG and kerosene, and cuts
in import duties. However, high food prices are contributing to CPI inflation (industrial workers)
exceeding 6 percent. Staff projects WPI inflation to remain in the 5−5½ percent range in the near
term.
The investment recovery and consumption boom continue to widen the external current account
deficit. In 2005/06, buoyant imports have offset rising goods and services exports, pushing up the
trade deficit to 6½ percent of GDP and the current account deficit to 1¼ percent of GDP. While
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. 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.
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
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exports are growing apace, robust domestic demand is expected to contribute to a further
widening in both deficits this year.
Strong capital inflows comfortably financed the current account deficit. In 2005/06, inflows
remained dominated by portfolio flows and external commercial borrowings, particularly
convertible bonds. While gross FDI inflows have begun to rise, they have been partly offset by a
pickup in outward investment by Indian corporates. So far this fiscal year, capital inflows have
remained strong and reserve coverage has remained stable at around 7½ months of imports of
goods and services. While more reliance on debt and portfolio inflows has increased exposures
to changes in international investor sentiment, India’s large reserves and low external debt limit
this risk.
The exchange rate has exhibited two-way flexibility and in real effective terms is broadly around
its 2004/05 level. In the first half of 2006, the rupee depreciated against the U.S. dollar, against a
backdrop of tightening global liquidity and a widening current account deficit. The RBI limited its
intervention in foreign exchange markets to easing exchange rate volatility and smoothing
domestic liquidity pressures that arose from the redemption of external bonds. Since then the
rupee has regained ground against the dollar and the RBI continued to intervene only
occasionally, both buying and selling dollars.
Financial markets continue to soar. Net foreign investor inflows rebounded after the May/June
2006 stock market correction and stock prices recovered smartly, reaching new historical highs.
PE ratios are now high relative to other countries and India’s recent past. Meanwhile, real estate
prices continue to grow at a rapid clip on the back of a credit boom. To curb speculative
pressures, the RBI has tightened prudential standards further, including by raising general
provisioning requirements and boosting risk-weights on high-growth areas, including real estate,
to above Basel norms. Indicators of financial soundness (backward looking) suggest that banks’
balance sheets and income remain healthy.
Following three years of reduced deficits, fiscal consolidation “paused” in 2005/06. The general
government deficit was broadly unchanged at around 7½ percent of GDP, with a modestly rising
central government deficit broadly offset by a falling states deficit. All but five states enacted
fiscal responsibility laws (FRLs) and nine states subsequently received debt relief under the new
facility introduced last year by the Twelfth Finance Commission. General government debt
remains high―over 80 percent of GDP―reflecting both budget deficits and off-budget subsidies
for oil and food. Consolidation has resumed in 2006/07. The state and central government
budget deficit targets of 2.7 percent of GDP and 3.8 percent of GDP, respectively, are consistent
with the minimum reductions required under their fiscal responsibility legislations. Staff projects
the general government deficit to overperform budget estimates by 0.2 percent of GDP on the
back of strong revenue growth.
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Executive Board Assessment
Executive Directors commended the authorities on India’s continued outstanding economic
performance—reflected inter alia in strong growth, enhanced resilience to shocks, and
increasing integration with the global economy. The favorable conjuncture and outlook provide a
good opportunity to accelerate key reforms to support the government’s vision of reducing
poverty and creating employment by boosting growth. Directors endorsed the government’s
reform priorities of fiscal consolidation, financial sector development, and removal of structural
bottlenecks as the appropriate means to achieve these objectives.
While recognizing the difficulty in gauging inflation pressures during a period of financial
deepening and other structural reforms, Directors agreed that vigilance is needed to guard
against any potential risks of overheating. They supported the central bank’s stance of
continued gradual removal of monetary accommodation. Overperformance on the 2006/07
budget could support this policy stance by channeling the anticipated revenue windfall to deficit
reduction. Directors concurred that India’s policy of a market determined exchange rate is
appropriately promoting flexibility, preserving monetary policy independence, and giving the
private sector incentives to manage currency exposures as the capital account opens further.
They supported the authorities’ gradual approach to capital account liberalization, in step with
fiscal consolidation and financial deepening.
Directors commended the improvement in government finances, but called for further progress
in reducing public debt to make room for social and infrastructure spending. To achieve the
target of bringing the central government’s revenue deficit to balance by 2008/09, they
recommended steps to broaden the tax base by eliminating corporate income tax incentives,
paring exemptions, and reforming interstate taxation to pave the way for a national goods and
services tax. On expenditure reform, Directors encouraged the authorities to implement the
recommendations of government committees on subsidies, including the introduction of an
automatic market-based mechanism for petroleum goods and better targeting of kerosene
subsidies. Consideration should also be given to hardening state budget constraints, given that
a number of states still face sizable adjustments.
Directors welcomed the strengthening of financial sector supervision, with prudential norms
generally in line with international best practices. They advised continued vigilance to guard
against pressures on asset quality in the face of rapid credit growth. Useful steps to expose
potential vulnerabilities will be comprehensive stress tests and the authorities’ self assessment
of financial stability and development, while the future implementation of Basel II will give banks
incentives to enhance risk management.
Directors saw the ongoing deepening and broadening of India’s financial markets as key to
fostering growth and facilitating greater capital account openness. Recent initiatives to develop
money and government securities markets and strengthen regulation of derivatives activities are
welcome. Directors encouraged the authorities to press ahead with measures that will further
deepen markets, including the expansion of short selling, the consolidation of benchmark
issues, and the streamlining of issuance requirements for corporate bonds. To broaden India’s
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investor base and improve channels for funding longer-term investment, the limit on FDI in
insurance should be raised and private participation in the pension system permitted.
Directors urged greater progress in addressing structural obstacles to job-intensive, inclusive
growth. To help meet India’s infrastructure needs, steps should be taken to strengthen
implementation capacity and develop strong and independent regulators, as these would bolster
investor interest and underpin the authorities’ public private partnership initiative. Directors
encouraged the consideration of steps to maximize the contribution of Special Economic Zones
to India’s growth strategy while limiting potential revenue losses. More broadly, efforts should
continue to improve the business climate and reform education, as well as to alleviate rural
poverty through promoting agricultural growth.
Directors welcomed the government’s commitment to multilateral trade liberalization and
supported India’s intention to play an active role in restarting multilateral trade talks. They
welcomed the unilateral extension of duty free, quota free access to the least-developed
countries and the continued reduction in trade tariffs. Rapid economic growth provides an
opportunity to move tariffs more quickly towards ASEAN levels
http://www.imf.org/external/pubs/ft/scr/2007/cr0763.pdf
