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

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 consumption.

Private investment has been hindered by the financial sector difficulties (including in the public sector banks (PSBs)) and insufficient business confidence.

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.

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.

, 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 uncertainty.

, 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 uncertainty. 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.

, 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.

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 revision.

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.

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.