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Transcript of Press Call on the 2019 India Article IV Staff Report

December 23, 2019

MS. UTSUNOMIYA: Hello to everyone. Thank you for joining us today, with a
short notice. My name is Keiko Utsunomiya, I’m a Communications Officer at
the International Monetary Fund. This is a Press Conference Call on the
Staff Report of this year’s Article IV Consultations with India.

On the other line, I have Mr. Ranil Salgado, Assistant Director at the IMF
Asia and Pacific Department. He is the Mission Chief for India. He is going
to give you short opening remarks, and then we’ll take questions from you.

One thing that I would like to remind you of is the content of this call,
as well as the related documents that have been made available, are under
embargo until 5:00 p.m. Washington, D.C. Time today.

With that, Ranil?

MR. SALGADO: Thank you, Keiko. And good evening to those in India, and good
morning to those here in Washington. As Keiko mentioned, I’ll start with
some opening remarks.

India has been among the world’s fastest-growing economies in recent years,
lifting millions out of poverty. However, India is now in the midst of a
significant economic slowdown. Growth in the second quarter of FY 2019/20
came in at a six-year low of 4.5 percent (y/y), and the composition of
growth indicates that private domestic demand expanded by only 1 percent in
the quarter. Most high-frequency indicators suggest that weak economic
activity has continued into December.

We see several possible factors behind the slowdown.

  • The abrupt reduction in non-bank financial companies’ (NBFC) credit
    expansion and the associated broad-based tightening of credit conditions
    appears to be an important factor.
  • Weak income growth, especially rural, has been affecting private
  • Private investment has been hindered by the financial sector difficulties
    (including in the public sector banks (PSBs)) and insufficient business
  • Finally, some implementation issues with important and appropriate
    structural reforms, such as the nation-wide goods and services tax (GST),
    may also have played a role.
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As a result, we are currently revisiting the growth projections in the
Staff Report, which was completed in early October, and plan to make
changes when we release the January update of the World Economic Outlook.

Addressing the current downturn and returning India to a high growth path
requires urgent policy actions. The near-term policy mix needs to be
mindful of supporting economic activity and restoring confidence, while
recognizing significant fiscal constraints. In the medium-term, realizing
India’s substantial growth potential depends critically on the
implementation of growth-enhancing structural reforms. On the latter, we
believe the government needs to reinvigorate the reform agenda, with
evidence globally indicating it is important to take advantage of its new
mandate early in its term.

On our policy recommendations:

  • On monetary policy, given the sharper-than-expected
    slowdown and negative output gap (growth below potential), there is
    room to cut the policy rate further, especially if the economic
    slowdown continues. However, should inflationary pressures increase
    (stemming from the recent increase in food inflation and one-off
    prospective price increases in the auto and telecom sectors or
    resulting from fiscal pressures), the RBI will have limited room for
    further cuts.
  • On fiscal policy, we see limited room for stimulus and
    stress the need for medium-term fiscal consolidation, given the high
    level of general government debt and the high interest bill. In
    addition, as we noted in the Staff Report, broader measures of the
    government deficit, namely the public sector borrowing requirement
    (PSBR) and the extended central government deficit, show that fiscal
    policy has been more accommodative than would appear if looking only at
    the headline deficits. We will publish a Country Focus article on this
    topic. That said, steps could be taken to support growth including, in
    the short term, by focusing on the composition of expenditures and
    rationalizing GST and, over the medium term, by focusing on domestic
    revenue mobilization, decreasing (on- and off-budget) expenditures on
    subsidies, and enhancing fiscal transparency and thus reducing
  • Regarding the financial sector, a comprehensive set of
    measures is needed to restore the health of the sector and enhance its
    ability to provide credit to the economy. These include steps to
    resolve balance sheet issues, including in the commercial banks, the
    corporate sector, and the NBFCs including Housing Finance Companies
    (HFCs). As we have noted in the Staff Report, steps have already been
    taken, especially for public sector banks (PSBs). But further steps are
    needed for PSB reform to shift their operations towards more
    commercially-oriented decision-making, along with measures to improve
    accountability and risk management. On NBFCs, improved monitoring and
    regulation, especially of larger NBFCs, are welcome developments.
    However, more information on smaller NBFCs is needed to better
    understand the impact of reduced credit on private demand, especially
    micro, small, and medium-size enterprises (MSMEs) and in rural areas.
    While the application of the Insolvency and Bankruptcy Code to
    financial institutions is also a good initial step, the passage of the
    Financial Resolution and Deposit Insurance Bill that is currently under
    reconsideration will provide a more appropriate framework over the
    longer term.
  • On structural reforms, measures to enhance efficiency
    of credit allocation and governance reforms in the banking sector are
    urgently needed to strengthen confidence and to put growth on a strong
    and sustainable footing over the medium-term. Labor, land, and
    product-market reforms aimed at enhancing competition and governance,
    along with measures to improve human capital (education and health),
    should be critical elements of India’s structural-reform strategy.
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And with that, I’ll hand it back to Keiko.

MS. UTSUNOMIYA: Thank you, Ranil.

Do you want to add anything?

MR. SALGADO: At least one thing I think we were trying to emphasize is that
we will be revising the projections that are in the Staff Report, so those
are changed. Those will change in January timeframe.

QUESTIONER: What do you expect the growth projections to be for next year,
and what do you think should be the immediate steps that are needed to deal
with issues like grow in unemployment, especially in sectors like
automobile. Thank you.

MR. SALGADO: I have mentioned we will be revising the growth forecast for
the January World Economic Outlook (WEO) Update. It will be a downward
revision relative to what we have in the Staff Report, but what we have in
the Staff Report, right now is what was presented also in the October World
Economic Outlook. That is for 6.1 percent this year, 7 percent next year.

However, we are, as I mentioned, revising that downwards. At this stage we
cannot yet indicate the numbers, but understand it will be a downward

In terms of the policy steps that we think are needed. We think, for
example, the steps taken in terms of reducing the repo rates by 135 basis
points since February has been quite important, and should help the economy
moving forward.

And also the steps taken by the Reserve Bank of India to improve the policy
— the monetary policy transmission mechanism.

In terms of the steps that needed, I think the focus is primarily on ways
to boost confidence in the economy, and we think a substantial structural
reform agenda to kind of reinvigorate confidence would be very helpful.

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MS. UTSUNOMIYA: Thank you, Ranil.

OPERATOR: There are no further questions in the queue at this time.

MR. UTSUNOMIYA: Okay. So, if there’s no question, this will conclude our
conference call this morning. The content of this call will be made
available for at least 24 hours. And the related documents will be released
at 5:00 o’clock today, Washington, D.C. Time. Thank you very much for
joining us, and see you next time.

IMF Communications Department

PRESS OFFICER: Keiko Utsunomiya,

Phone: +1 202 623-7100Email: