IMF attributes the slide in GDP - to an estimated 5.4 per cent in fiscal 2013 - “a far larger drop despite the poor outlook of global economy” - and a continuing decline in the coming year (at 6 per cent in fiscal 2014) to lower infrastructure investments and supply bottlenecks in coping with demand from high growth and higher incomes, especially for food, electricity and transportation.

India’s fiscal plight rules out any counter-cyclical measures while high inflation leaves means little room to cut interest rates, according to IMF, which says controlling rather than raising spending is priority. This is what Finance Minister Mr Chidambaram is bravely attempting to do — no matter the costs to the economy — with drastic cuts in budgeted spending, drives to collect more tax revenue, direct and indirect, scaling down of plan expenditure and deploying “game changers” like direct cash transfers .

He has to prove his credibility in containing fiscal deficit at 5.3 per cent of GDP and lower it to 4.8 per cent in the coming fiscal, in the Union Budget for 2013-14 he is to present to Parliament on February 28. That would be possible for him in line with his road-map for fiscal consolidation. But it remains to be seen what he would do, more positively, for addressing the “structural and supply-side factors”, so glaringly focussed in IMF’s 2013 Article IV Consultation with India, let alone soaring prices for the low-income masses. Otherwise, meaningful growth recovery would be elusive.

Macro-economic management will, however, remain tough for him as the current account deficit is projected at 4 per cent of GDP in fiscal 2013 (4.2 per cent in 2011-12) and may slightly ease around 4 per cent and 3.6 per cent in the current and next fiscal year. Inflation is forecast to remain “above the RBI’s comfort zone” of 4 to 4.5 per cent, IMF pointing out supply constraints which are likely to ease only gradually.

Maintaining policy interest rates unchanged until inflation is clearly on a downward trend is the best way for monetary policy to support growth, it said. The Executive Board directors in their assessment agreed that with financial conditions still relatively easy, it is advisable to maintain the current level of policy rates until inflation is clearly on a downward trend. They commended the RBI’s vigilance on inflation and expected that it will pay dividends for long-term growth. More guidance from RBI on future projected inflation may be helpful in anchoring inflation expectations, they said.

In their appraisal, IMF staff have warned about financial sector vulnerability with the recent rise in non-performing loans which would continue due to the current economic slowdown. In the long run, ensuring India’s financial system is able to underwrite strong growth will require pushing forward with financial reforms, such as developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt.

Meanwhile, tightening mechanisms to address deteriorating asset quality will promote healthier banks’ balance sheets, IMF said but supporting faster growth and reaching Basel III targets would also require capital injections in public banks. In addition, addressing concentration risks and supporting capital market development would lay the groundwork for a stronger recovery.

For the real sector of the economy, structural reforms, fiscal consolidation, and low inflation are seen as critical for a sustained recovery and to lower vulnerabilities. The slowdown has been due to structural and supply-side factors — with cyclical and global factors also contributing — while capital inflows “remain resilient suggesting that the financial channel has not been prominent in the transmission of external shocks”.

But, led by falling infrastructure and corporate investment, IMF notes, the slowdown has now generalized to exports and private consumption. The widening of current account deficit had caused the rupee to depreciate sharply before its recent stabilization. The financial positions of banks and corporates, both strong before 2009, have also deteriorated. With a high fiscal deficit and elevated inflation, the economy is in “a weaker position than before the global financial crisis. In recent months, the authorities have taken steps to reverse the slowdown, which have led to improved market sentiment”.

Overall, IMF expects for the near term “subdued growth and elevated inflation”. While the authorities have announced measures to revive growth which have boosted confidence, as investment has been particularly hit and supply constraints will likely be eased only gradually, the recovery is likely to be muted and inflation and the current account deficit are expected to fall only gradually. Delivering on structural reforms, fiscal consolidation, and low inflation are critical for a sustained recovery.

On reforms, IMF has called or a comprehensive overhaul of fuel subsidy to bring down budget deficit, through full cost-recovery pricing and greater efficiency of electricity discoms and addressing fuel linkages to power plants.. Greater policy predictability is needed to boost investor confidence. Legislative action such as the Goods and Services Tax (GST) and an effective land acquisition law are priorities.

The Directors on the Board welcomed the fiscal roadmap, underscoring the importance of the quality and sustainability of fiscal consolidation, and also noted the start of implementation of direct cash transfers using India’s impressive Unique Identification Number. They emphasised the need to raise tax revenues to pre-crisis levels and urged priority for the introduction of the Goods and Services Tax.

IMF has linked the current slowdown to not only the demand boost resulting from the earlier average 8.3 per cent growth in 2004-11and higher incomes, especially for food, electricity and transport, but also to concern about “corruption scandals which slowed approvals for new projects and supply bottlenecks becoming evident.

According to IMF projections, wholesale prices would be 7.8 per cent by end-March 2013 and 7.2 per cent in March 2014 while CPI would be 10.8 and 9.7 per cent for these two years respectively. Gross domestic savings are estimated to decline from 35.5 per cent of GDP in 2011-12 to 35 per cent in current year and rise to 35.5 per cent in 2013-14.

Gross fiscal deficit of the Centre is projected to decline from 6 per cent of GDP in 2011-12 to 5.8 per cent in the current year and 5.7 per cent in 2013-14. (IMF excludes disinvestment and licence auction proceeds for deficit calculation and treats them as “below-the-line” financing). For Centre and States combined, the deficit would be -8.7 per cent and -8.5 per cent for fiscal ‘13 and ‘14. India’s reserves which are already stationary at 290 billion dollars would hover round 284 billion dollars in the coming fiscal year.

India’s Executive Director on IMF Mr Rakesh Mohan said in a note appended to IMF Staff Appraisal that recent developments indicate inflation is beginning to moderate with an encouraging decline in core inflation. Authorities have initiated measures to reverse the negative sentiment and address supply side concerns. They also are committed to contain the fiscal deficit. Politically sensitive measures taken include adjustments in fuel prices. Despite recent slowdown, India’s medium to long-term growth prospects continue to be strong. Several measures taken already would help overcome supply constraints, encourage fresh investment and revert the economy to a high growth trajectory. (IPA Service)