By Anjan Roy
If you have a political bent opposed to the Prime Minister you might just as well sniff a sort of complicity between the Narendra Modi government and the International Monetary Fund (IMF).
Particularly in the context of the parliament incidence involving some youth protestors, clamouring for decent jobs, and the cavalcade of criticisms from the opposition members for failures in economic management, the latest IMF review of the Indian economy will be a salivating piece of document for the government.
The IMF has just concluded its standard article four consultations with India .. IMF, under its agreement with the member countries, conducts an yearly review of the member’s economy and places these before its board of directors for approval. The procedure has just been finalised, in consultation with the union finance ministry officials.
Given the context of the global economy and virtual turmoil almost everywhere, the findings about the Indian economy are flattering. Excepting some divergences in opinion on the exchange rate regime followed by India, it is difficult to find fault with the IMF observations.
IMF forecasts for the Indian economy are ebullient. Overall growth is predicted to be 6.3 per cent in 2023-24 and 2024-25. Prices, which remain one of the big worries for the Reserve bank of India, is expected to converge towards its tolerance band. In 2023-24, the prices should show a rise of 5.4 per cent and next year by 4.6 per cent — both coming within the 4 per cent plus/minus 2 per cent of the central bank.
This is of critical importance. It sets the overall parameters for the central bank’s monetary policy. With prices remaining benign, RBI could at least follow a more proactive and encourage growth. Reserve Bank had earlier noted with some concern the trends in prices in its report. Price inflation was at 7.1 per cent as close to July-August this year. Since then, prices have shown softer prints.
However, it is prudent to note that the overall prices show a sobering trend in the post harvest winter months when food articles inflation show lower tendencies. Surely, by the time summer sets in next year, the prices should start firming again.
The IMF review is in line with the reserve Bank on another score: the overall savings and investments are showing improvements. This is important since savings and investments would determine the growth of the economy.
Gross savings are stable at around 30 per cent of the GDP while investments are mildly creeping up. Investment rate is expected to touch 32 per cent next year from around 31.5 per cent this year. RBI, in its report, had noted the robust investment figures. It took as proxy the equity prices of capital goods industry companies, which have shown healthy rise.
RBI had noted that the capital investment buoyancy is primarily due to stepped up public sector outlays, both by the centre and the state governments. The IMF seems to have concurred. At the same time IMF has commended the emphasis on sustainable fiscal profile. Fiscal deficit is set to come down to 5.8 per cent of GDP next year from 6 per cent in the current year.
In IMF’s views that the government has successfully followed a policy of “accelerating capital spending while tightening the fiscal stance.” That is too good to hear. This remains the crux of any macro-economic strategy.
While acknowledging that India’s debt composition helps mitigate debt sustainability risks, the IMF directors recommended “ambitious medium-term consolidation efforts given elevated public debt levels and contingent liability risks”.
The buoyant revenue collection figures should help achieve his apparently irreconcilable goal. Spending efficiency would allow for continued improvements in digital and physical infrastructure and improve the effectiveness of the investment outlays. Directors also encouraged the authorities to put in place a sound medium-term fiscal framework to promote transparency and accountability and align policies with India’s development goals.
On the external front, the situation is stable and moving towards being comfortable. Current account deficit is by and large stable at 1.8 per cent of GDP. The high point is the inflow: taking foreign direct investment and portfolio investments together, the country is expected to get around $80 billion in 2024-25 from around $63 billion in the current year.
However, given the developments in the US economy and also in China, these figures might turn out to be gross under-estimates. The US Federal reserve is indicating possible rate cuts. In early indications, the stock markets are rising and investors are moving from debt instruments to equities. In signs of these developments, Indian secondary markets are o course to receive substantial chunks of foreign institutional investments. The Indian equity market is soaring and soaring.
These developments will have major policy implications. The reserve Bank might have to intervene in the foreign exchange markets to stabilise the rates. After all, too much oscillations in response to quick money flows and outflows can undermine overall stability. This could call for interventions. Already, RBI’s foreign exchange reserves are running at a high plateau of $619 billion as of now. Next year the forex reserves are predicted to run close to $700 billion.
At these rates, the inflow should also contribute to money creation and pressure on assets prices primarily. These create an artificial sense of abundance and expansion. It is important to play the cautious note in these circumstances.
The question is will the government be dispensed to caution in the face of an approaching general election. The tendency would be for the authorities to exploit the sense of “ebullience”. Indeed, the government could not have got a better report on it has acquitted itself than the current IMF consultation feedback.
IMF Report Card for the Indian Economy
| 2023-2024 | 2024-2025 | |
| Growth (%) | 6.3 | 6.3 |
| Prices | 5.4 | 4.6 |
| Gross savings | 29.9 | 30.0 |
| Gross Investment | 31.7 | 31.9 |
| Fiscal deficit | -6.0 | -5.8 |
| Exports (Billion US dollar) | 436 | 460 |
| Imports | 701 | 751.7 |
| CAD (% of GDP) | -1.8 | -1.8 |
| FDI ($ b) | 32.8 | 44.4 |
| Portfolio ($ b) | 30.6 | 33.9 |
| Gross reserves | 619 | 673 |
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