Growth is projected at 4.6 percent for fiscal year 2013/14, and should pick up to 5.4 percent in 2014/15 (at factor cost). Stronger global growth, improving export competitiveness, a favorable monsoon, and a confidence boost from recent policy actions should deliver a modest growth rebound. However, fiscal restraint and a tighter monetary stance will act as headwinds, slowing the recovery. CPI inflation is expected to remain near double-digits well into next year, driven by high food inflation that feeds quickly into wages and core inflation; entrenched inflation expectations; the pass through from a weaker rupee; and ongoing energy price increases. WPI inflation is forecast to remain above the Reserve Bank of
The principal risk facing
Executive Board Assessment2
Executive Directors commended the Indian authorities for their ability to maintain macroeconomic and financial stability amid a challenging macroeconomic landscape. Directors welcomed ongoing efforts, including recent policy initiatives, to reduce external vulnerabilities, rebuild buffers, and revive investment. They noted, however, that growth has slowed markedly and inflation remains persistently high, while spillovers from global financial market volatility continue to pose a significant risk. Against this backdrop, Directors underscored the need to rein in inflation, prudently consolidate the fiscal position, and accelerate structural reforms to address supply bottlenecks and promote sustainable and inclusive growth.
Directors supported the central bank's policies of rupee flexibility and limited foreign exchange intervention. They welcomed the gradual, cautious move toward further external liberalization. Directors considered that these measures are important tools to deal with capital account pressures, which, if they were to re-emerge, should be complemented by judicious use of reserves, tightening of monetary conditions, and additional fiscal adjustment. Directors encouraged continued efforts to improve the financing of the current account deficit. Measures to facilitate foreign direct investment inflows and deepen domestic capital markets should continue to help reduce external vulnerabilities.
Given entrenched double-digit inflation expectations, Directors recommended that the authorities maintain the monetary policy stance appropriately tight, and stand ready to raise the policy rate further so as to bring down inflation to more sustainable levels. They welcomed recent initiatives to strengthen the monetary policy framework with a clear communication strategy, aimed at enhancing the effectiveness of monetary policy.
Directors commended the government's commitment to fiscal consolidation and supported its medium-term targets. To this end, they emphasized the need for a comprehensive package of measures, comprising both tax and subsidy reforms, to ensure the quality and sustainability of consolidation. Rationalizing fuel and fertilizer subsidies and introducing the goods and services tax are essential to create fiscal space, while safeguarding priority capital spending and targeted social programs, particularly health and education.
Directors stressed that reviving growth and raising the long-term growth potential require broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources. They also saw as key priorities reforms aimed at boosting agricultural productivity and supporting formal job creation, by relaxing labor laws and addressing skills mismatches.
Directors recognized that
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