On 15th of March, Mr Andreas Bauer, Senior Resident Representative of the International Monetary Fund for India, Nepal and Bhutan visited the academy. He presented the IMF’s findings on India’s economy and its future which were released after its recently concluded Article IV consultations with India.
He began his presentation by explaining the IMF’s role in the global economy. The IMF, he said, plays the role of a fire-fighter and provides financial assistance to countries during crisis and acts as a watchdog during rest of the time. This requires the IMF to assess the global economy and individual countries from time to time and its Article IV consultations with India are a part of its surveillance program.
After the Global Financial Crisis of 2008, growth rates have not picked up and the recovery has been slow. The world, he said, is just one shock away from a global recession. India has been a bright spot and is one of the fastest growing emerging economies despite the global slowdown. There are plenty of sources of growth in India and there is more scope to grow. India has also benefited from weak commodity prices and cheaper oil imports. However, India’s growth in the recent past has been consumption driven and investment has not picked up after the crisis. India had an investment boom prior to the crisis of 2008. However, these projects have not worked out due to multiple reasons such as administrative barriers and over-optimistic projections. This has led to declining asset quality and a substantial increase in bad loans. He talked about the need of having better asset quality management.
Mr Bauer spoke about the many internal challenges that India faces. Core inflation, he said, has not come down and the RBI has been struggling to control it. However, not all is in the realm of monetary policy. There are many issues that pertain to fiscal policy. India’s central government has achieved a significant level of reduction in fiscal deficit. However, this will not make much of a difference until states cut down on their deficit. States now control more amounts of resources than before and have been increasing their deficits. If India cuts down on its overall deficit, it will have greater degrees of freedom in its fiscal space.
He talked about subsidies and their management. He said that subsidies are being poorly targeted. There is also a need to increase social sector spending in areas like health and education. He applauded the government’s decision to use Aadhaar based targeted subsidies. He said that India is doing well on the reform front but there is more scope for reforms in the factor market. India needs more reforms in its labour laws, land acquisition rules and power sector. Reforms in these areas will boost manufacturing growth. He also spoke about the need for tax reforms. GST, he said, will improve India’s tax collection.
In the end, he spoke about demonetisation. He said that initially, the IMF had predicted a one percent fall in India’s GDP growth rate after demonetisation. This fall has now been reduced to half a percent as the impact of cash crunch has been less severe than expected. This has been so because India managed its payments chain and supply chain when cash in circulation was low. By exempting vehicles from tolls and allowing people to use demonetised notes at fuel stations, the disruption in supply chain was limited by the government. India is a relationship-based economy this allowed people to buy goods on credit during cash crunch. But he also said that gauging the exact level of impact of the shock will be only possible after four quarters. It will also be difficult to assess the impact of the shock on the informal economy.
He concluded his presentation by advising MDAE students to use IMF resources for research and also told them about the career opportunities at the IMF.
Date(s) - 15/03/2017