IMF Executive Board Concludes 2016 Article IV Consultation with India

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with India on February 12, 2016.
The Indian economy is on a recovery path, helped by a large terms of trade gain (about 2.5 percent of GDP), positive policy actions, and reduced external vulnerabilities. Since late 2014, a collapse of global oil prices has boosted economic activity in India and underpinned a further improvement in the current account and fiscal positions, and engendered a sharp decline in inflation. Due to its further-reduced vulnerabilities and improved growth prospects, India has experienced large foreign direct investment inflows in 2015. As a result, and in conjunction with the continued much-smaller current account deficit (largely due to continued low global commodity prices), international reserves have increased by $46.7 billion since end-March 2014, standing at US$350.4 billion at end-December 2015. Nonetheless, persistently high household inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures. Furthermore, anemic exports as well as headwinds from weaknesses in India’s corporate financial positions and public bank balance sheets weigh on the economy.
Growth is projected at 7.3 percent for fiscal year FY2015/16, picking up to 7.5 percent in FY2016/17 (at market prices), supported by stronger domestic demand. With the revival of sentiment and picking up of industrial activity, an incipient upturn in private investment is expected to help broaden the recovery.
While the balance of risks has improved, economic risks remain tilted to the downside. On the external side, despite the reduction in imbalances and strengthening of buffers, the impact from intensified global financial market volatility could be disruptive, including from unexpected developments in the course of U.S. monetary policy normalization or China’s growth slowdown. Absent disruptive global financial market volatility, slower growth in China would have only modest adverse spillovers to India, given weak trade linkages. Domestic risks include continued weaknesses in corporate financial positions and public bank asset quality, as well as setbacks in the reform process, which could weigh on growth, accelerate inflation and undermine sentiment. On the upside, further structural reforms could lead to stronger growth, as would a sustained period of low global energy prices.
Executive Directors commended the authorities for their appropriate policy actions that—along with favorable terms of trade—have underpinned India’s improved economic performance and reduced external vulnerabilities. They welcomed in particular recent measures aimed at increasing public infrastructure spending, rationalizing subsidies, creating more flexible labor and product markets, and enhancing financial inclusion.
Directors saw as priorities for the authorities to accelerate reforms to remove supply-side bottlenecks, especially in the agricultural and power sectors; and to facilitate land acquisition. Further reforms are also essential to boost employment in the formal sector, encourage female labor force participation, and enhance labor market flexibility more broadly.
Press-release at the official IMF web-site