By Dr. Gyan Pathak
Differences persists among Directors within International Monetary Fund (IMF) regarding Staff’s recent reclassification of India’s de facto exchange rate regime for the period December 2022 to October 2023 as “stabilized arrangement” from “floating”, which meant Reserve Bank of India’s interventions in the foreign exchange market “likely exceeded levels necessary to address disorderly market conditions” and the comparative stability thus achieved does not reflect improvements in India’s external position. India’s economic performance was praised but they broadly said “India has potential for even higher growth, with greater contributions from labour and human capital, if comprehensive reforms are implemented.”
During the Article IV assessment, Directors noted that India is one of the fastest growing economies globally, and called for continued “appropriate policies” to sustain economic stability and for further progress in key structural reforms to unleash India’s significant potential. Policy recommendations in the Staff report says that India’s policy priorities should focus on replenishing fiscal buffers, securing price stability, maintaining financial stability, and accelerating inclusive growth through comprehensive structural reforms while preserving debt sustainability.
Many Directors noted the divergence of Indian authorities’ view with that of IMF staff while encouraging continued staff engagement on the issue for resolving the differences. However, directors broadly commended RBI’s proactive monetary policy actions and strong commitment to price stability, agreeing that the current neutral monetary policy stance, anchored on a data dependent approach, is appropriate and should gradually bring inflation back to target. Directors agreed that exchange rate flexibility should remain the first line of defence in absorbing external shocks, with foreign exchange interventions limited to addressing disorderly market conditions.
The conclusion of the IMF Executive Board is worth noting because it not only praises the government in India but also warns the underlying risks. India’s economy showed robust growth over the past year, while headline inflation has, on average moderated, although it remains volatile.
Employment has surpassed the pre-pandemic level, and while informal sector continues to dominate, formalization has progressed. The financial sector has been resilient—strongest in several years—and largely unaffected by global financial stress in early 2023. The current account deficit in FY2022/23 widened as the post-pandemic recovery of domestic demand and transitory external shocks outweighed the impact of robust services exports and proactive diversification of critical oil imports. While the budget deficit has eased, public debt remains elevated and fiscal buffers need to be rebuilt.
IMF said that India’s growth is expected to remain strong, supported by macroeconomic and financial stability. Real GDP is projected to grow at 6.3 percent in FY2023/24 and FY2024/25. Headline inflation is expected to gradually decline to the target although it remains volatile due to food price shocks. The current account deficit is expected to improve to 1.8 percent of GDP in FY2023/24 as a result of resilient services exports and, to a lesser extent, lower oil import costs. Going forward, the country’s foundational digital public infrastructure and a strong government infrastructure program will continue to sustain growth.
Risks to the outlook are balanced. A sharp global growth slowdown in the near term would affect India through trade and financial channels. Further global supply disruptions could cause recurrent commodity price volatility, increasing fiscal pressures for India. Domestically, weather shocks could reignite inflationary pressures and prompt further food export restrictions. On the upside, stronger than expected consumer demand and private investment would raise growth. Further liberalization of foreign investment could increase India’s role in global value chains, boosting exports. Implementation of labour market reforms could raise employment and growth.
Directors welcomed the authorities’ near-term fiscal policy, which focuses on accelerating capital spending while tightening the fiscal stance. While acknowledging that India’s debt composition helps mitigate debt sustainability risks, Directors recommended ambitious medium-term consolidation efforts given elevated public debt levels and contingent liability risks. In that context, improving revenue mobilization and spending efficiency would allow for continued improvements in digital and physical infrastructure and targeted social support. Directors also encouraged the authorities to put in place a sound medium-term fiscal framework to promote transparency and accountability and align policies with India’s development goals.
India’s declining systemic financial risks were acknowledged by the directors, but broadly called for continued supervision and the use of prudential tools to preserve financial stability and manage emerging vulnerabilities, including rapid growth in unsecured personal loans. They advised further strengthening of regulatory and supervisory standards and encouraged public banks to continue building capital buffers.
It was noted that continuing with comprehensive structural reforms can help further leverage India’s favourable demographics and encouraged the authorities to promote job-rich, inclusive, and greener growth. They emphasized that improving labour market functioning, increasing female labour force participation, and making progress on health, education, land, and agricultural reforms remain critical to sustaining strong and inclusive growth.
Directors also agreed that strengthening governance and the regulatory framework would foster transparency and safeguard public accountability further. Continued progress on designing and implementing climate policies is also critical to meet the authorities’ net zero emissions target date.
Directors acknowledged the authorities’ continued efforts to foster new bilateral trade agreements. However, they broadly stressed that recent restrictive trade policies should be phased out and encouraged further liberalizing the FDI regime and improving the investment climate.
The IMF Staff reports also mentioned domestic risks and said that pressure to address cost of living increases may lead to fiscal slippages or under-execution of government capex to meet the budgeted fiscal deficit, which could slow growth. Weather shocks could weigh on agricultural output and raise food prices, reigniting inflationary pressures. Rapid and persistent growth of personal loans could lead to financial sector stress in a future downturn. Uncertainty related to upcoming elections could negatively impact investment. (IPA Service)
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