News Column

IMF: "India has restored macroeconomic and financial stability"

February 21, 2014



WASHINGTON (CIHAN)- India has restored macroeconomic and financial stability, but structural impediments to growth and persistently high inflation remain key concerns, the IMF says in its annual report on the state of the Indian economy.

Over recent months, India has taken substantive measures to narrow external and fiscal imbalances, tighten monetary policy, move forward on structural reforms, and address market volatility. This has reduced its vulnerability to shocks, says the recent IMF report.



Although spillovers from global financial market volatility continue to pose a significant risk, the Indian economy is now better placed to handle financial shocks than it was last summer. The current account deficit has contracted, the fiscal deficit target has been met, and investment project approvals are accelerating.



The report said that India has significant foreign exchange reserves to deploy in the event of external financing pressures. It also said that exchange rate flexibility, a tightening of liquidity conditions, and limited foreign exchange interventions had served India well in responding to the volatility of summer 2013.



The report stressed the need to foster an environment conducive to foreign direct investment to finance India's current account deficit. In the event of a resurgence of market volatility, the IMF stressed the importance of a well-communicated package of policy measures to minimize disruptive movements in the currency and bolster market confidence.



This would involve continued flexibility in the rupee, complemented by the judicious use of reserves, tightening of monetary conditions, additional fiscal consolidation efforts, and further easing of constraints on capital inflows.



India's growth, although among the highest in the world, has slowed in the last two years, the IMF said. Growth is projected at 4.6 percent in 2013/14, but with a modest pick up to 5.4 percent in 2014/15. Paul Cashin, IMF mission chief for India said there are "a number of speed bumps which have arisen which constrain the speed with which the economy can grow."



India's growth is expected to rise to its medium-term growth potential of about 6 percent once recently-approved investment projects are implemented and as global growth improves.



"The authorities have taken steps to alleviate this investment shortfall, and as those investments come into the economy we fully expect India would be able to resume its very high growth rates that it was several years ago," Cashin added.



The report noted that persistently high inflation is a key macroeconomic challenge for India. "India is a fast growing country, but one entity is growing faster than India's growth itself and that is Indian inflation which tends to erode the purchasing power of peoples' incomes," Cashin said.



Over the past several years it has induced double-digit inflation expectations, and given rise to a high demand for gold. It has also eroded households' financial savings and undermined the stability of the rupee. The report also highlighted the need to use headline CPI inflation as the principal nominal anchor for monetary policy.



The report commended the authorities' resolve to meet the budget deficit target for 2013/14, despite slowing growth, but highlighted the need to improve the quality of fiscal consolidation and make it more growth friendly. While the medium-term fiscal targets and resulting pace of consolidation are broadly appropriate, measures still need to be articulated and implemented to underpin the targeted fiscal adjustment, the IMF said.



On exchange rate, Cashin said "we would expect that given the rupee has already depreciated, and we've seen a big boost to export competitiveness coming around because of the depreciation. He added "the balance between exports and imports would become closer, so that Indian exports would become more competitive, and then you'll see less pressures on the rupee."



SHOTLIST:

20 FEBRUARY 2014, WASHINGTON, DC



Exterior IMF building

Street with tricycles and train

Street vendors, young people talking

Woman holding money

Harbor

Gold shop



SOUNDBITE (English) Paul Cashin, Assistant Director, Asia and Pacific Department, IMF:

"Yes. There's no doubt that the growth rates in India have slowed from their recent highs. This is a very important issue because of all the poor people in India, which are obviously wanting better standards of living. What has been the major cause of this growth slow-down? It's basically a number of speed bumps which have arisen which constrain the speed with which the economy can grow. What are these speed humps? It's basically lack of infrastructure investment, so lack of power generation, lack of roads, lack of rail which can strain the speed with which the economy can grow. The authorities have taken steps to alleviate this investment shortfall, and as those investments come into the economy we fully expect India would be able to resume its very high growth rates that it was several years ago."



SOUNDBITE (English) Paul Cashin, Assistant Director, Asia and Pacific Department, IMF:

"Hard as it is to believe, India is a fast growing country, but one entity is growing faster than India's growth itself and that is Indian inflation which tends to erode the purchasing power of peoples' incomes. For example, food inflation has been in double digits for the last five, six years, and we all know that onion prices have increased five times over the last decade.

Also, education has certainly risen, standards of education in India. This is very good, but what has not kept pace with the rate of growth is the rate of job creation. So until job creation begins to be boosted by such things as improving the business climate and great investment, as I mentioned earlier, then you'll begin to see job creation increase which will certainly, along with lower inflation, will improve the purchasing power, and the incomes of your average Indian."





SOUNDBITE: (English) Paul Cashin, Assistant Director, Asia and Pacific Department, IMF:

"Yes, this is an important question, obviously. Everyone's focused on the rupee dollar exchange rate which in the middle of last year has certainly came under a lot of pressure. We've seen the rupee rise from about 50 rupees to the dollar at the start of 2012. Now at the start of 2014 it's about 62 rupees to the dollar. What does that mean? Rupee is less competitive, but we would expect that given the rupee has already depreciated, and we've seen a big boost to export competitiveness coming around because of the depreciation. We would expect going forward that the balance between exports and imports would become closer, so that Indian exports would become more competitive, and then you'll see less pressures on the rupee."



DURATION: 02:47

CIHAN


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Source: Cihan News Agency (Turkey)


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