IMF hails India’s prudent macro-economic and vibrant monetary policies

It suggested further liberalisation of foreign investment in order to propel India' role in the global value chain and boosting exports in the process

In an observation that has a mixed opinion as regards India, the International Monetary Fund (IMF) while acknowledging that the country was on track to be one of the fastest growing major economies this year, thanks to prudent macro-economic policies, it cautioned that the global growth slowdown in the near term, particularly under trade and financial channels, could affect India.

This is stated in the staff report and statement released by IMF’s Executive Director for India after holding bilateral discussions with members for 2023, an annual feature under Article IV of the IMF's Articles of Agreement.

Other risks may arise from supply shock disruptions and price volatility of commodities, among other factors. As a consequence, there will be a bearing on fiscal pressure. The world body has also added that domestic climate change and weather shocks could add to inflationary pressures, which might lead to more food export restrictions. It notes that stronger than expected consumer demand and higher private investment could enhance growth. It suggested further liberalisation of foreign investment in order to propel India' role in the global value chain and boosting exports in the process. IMF has called for labour market reforms, rise in employment and growth.

In the staff report for 2023, it has stated that policy priorities should focus on replenishing fiscal buffers, securing price stability, maintaining financial stability and accelerating inclusive growth through structural reforms while preserving debt sustainability.

IMF has projected India's GDP growth at 6.3 per cent in both FY 2023/24 and FY2024/25 as against recent RBI's revised projection of seven per cent for 2023-24. IMF expects India's medium term growth outlook would be enhanced significantly by implementing broad ranging reforms like raising female Labour Employment Participation (LEP), productivity and enhancing reforms with creating high quality jobs. IMF feels that there is scope for India to catch up with the global labour productivity frontier and become more integrated in global value chains. Further IMF adds that high quality provision of health and education would help leverage demographics, reduce poverty and boost long-term growth.

As far as other growth-enhancing reforms, it feels that sustained public infrastructure and continuous removal of obstacles to private investment would also help boost growth.

The world body said that data improvements would help monitoring of economic and labour market dynamics and policy design. It called for advancing trade liberalisation, lifting trade restrictions and furthering the investment climate would help achieve the ambitious development objectives.

IMF expects current account deficit at 1.8 per cent of GDP in FY 2023/24 due to lower oil import costs and resilient service exports. It opines that subsequently the current account deficit is expected to widen and converge to its long-term norm of around 2.3 per cent of GDP due to robust imports induced by strong investment and normalisation of service exports. It opines that the country’s external position in FY 2022/23 was moderately stronger than that implied by medium -term fundamentals and desirable policies. The staff assessment finds that RBI has been using FXI to cushion the impact of external shocks, smooth market volatility, preclude emergence of disorderly market conditions (DMC) and opportunistically replenish its Fxs reserves.

The reports states that during December 2022-October 2023, the Rupee-US dollar exchange rate moved within a very narrow range, suggesting that FXI exceeded levels necessary to address disorderly market conditions. The observed stability of the exchange rate has prompted staff to reclassify India's de-facto exchange rate regime from " floating to "stabilized arrangement " for that period, while the de jure classification remained " floating ". In the Executive Board Assessment, it is stated that the staff’s recent re-classification of India's de facto exchange rate regime for the period December 2022 to October 2023, many Directors noted the divergence of views of the authorities and that of staff and encouraged continued staff engagement to resolve such issues. Some directors explicitly supported the authorities’ view that exchange rate stability reflects improvements in India's external position and that foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals.

However, there was significant divergence of views on the exchange rate and FXI assessments "the RBI strongly disagreed” with the staff assessment. "RBI strongly believes that such a view is incorrect as in their view, it uses data selectively. In RBI’s view, staff assessment is short-term and restricted to the last six to eight months without any rationale for the same and if a longer term view of 2-5 years is taken, staff assessment would fail. In the authorities view, therefore staff's reclassification of the de-facto exchange rate regime to stabilized arrangement is unjustified," the report said.

RBI has maintained that the exchange rate stability in 2023 reflects the strength of macroeconomic fundamentals and improvements in India's external position, particularly significant moderation in the current account deficit (CAD) and revival of capital flows on the back of comfortable foreign exchange reserves buffer. India's stand is that the macroeconomic stability led to stability to the exchange rate.

Other areas commented upon by IMF is regarding rapid growth in personal lending, (RBI has recently enhanced risk weight and banks have noted this risk and taking appropriate steps to moderate the growth of unsecured lending), relatively high share of bank holdings of government securities at around 22 per cent of assets could amplify macro-financial risks, interconnectedness between banks, NBFCs and Fintech companies, which can amplify financial stress and adverse spillovers and climate risks. These have already received the attention of RBI, which has issued green deposit guidelines and issued a draft paper for risk assessment of climate risks in balance sheet for the current and future portfolio and incorporate climate risks in credit policy. The Staff Appraisal and Executive Board Assessment is a good appraisal of fiscal, monetary and financial sector policies and suggestions for furthering growth opportunities by way of some structural reforms for invigorating inclusive and sustainable growth.

There are certain differences of opinion with regard to staff appraisal, particularly in the forex market. The central bank has clearly informed the IMF that it has no target for any exchange rate and it intervenes only when there is excessive volatility and the current strength of rupee is supported by strong macroeconomic fundamentals and adequate forex reserves and recent strong forex inflows. Overall the report is a good and positive feedback and acknowledges India's fiscal prudent policy, well managed monetary policy and the strongest GDP growth.

(The author is former Chairman & Managing Director of Indian Overseas Bank)