IMF Executive Board Concludes 2017 Article IV Consultation with India
On January 25, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with India.
The Indian economy has recorded strong growth in recent years, helped by a large terms of trade gain, positive policy actions including implementation of key structural reforms, a return to normal monsoon rainfall, and reduced external vulnerabilities. Inflation has remained low after the collapse in global commodity prices, a range of supply-side measures, and a relatively tight monetary stance.
The post-November 8, 2016 cash shortages and payment disruptions caused by the currency exchange initiative have undermined consumption and business activity, posing a new challenge to sustaining the growth momentum. Growth is projected to slow to 6.6 percent in FY2016/17, then rebound to 7.2 percent in FY2017/18, due to temporary disruptions, primarily to private consumption, caused by cash shortages. Tailwinds from a favorable monsoon, low oil prices and continued progress in resolving supply-side bottlenecks, as well as robust consumer confidence, will support near-term growth as cash shortages ease. The investment recovery is expected to remain modest and uneven across sectors, as deleveraging takes place and industrial capacity utilization picks up. With temporary demand disruptions and increased monsoon-driven food supplies, inflation is expected at about 4.75 percent by early 2017—in line with the Reserve Bank of India’s inflation target of 5 percent by March 2017. Supply-side reforms, particularly in agriculture, continued fiscal consolidation, and relieving impediments to monetary transmission are crucial to retain low inflation in the medium term. The current account deficit is expected widen to about 2 percent of GDP over the medium term as domestic demand strengthens further and commodity prices gradually rebound. Continued progress in reforms bodes well for a marked improvement in medium-term prospects, with the adoption of the Goods and Services Tax poised to raise India’s medium-term GDP growth to above 8 percent.
Directors welcomed the authorities’ strong progress on structural reforms, and encouraged them to prioritize labor market reforms at both the center and state levels. They also urged continued efforts to reduce poverty and inequality, increase female labor force participation, and make further efforts to improve financial inclusion. They noted the importance of further trade liberalization and enhancing the business environment to help boost exports and attract greater FDI flows.
Press-release at the official IMF web-site