Demonetisation, GST will bring long-term benefits for Indian economy: IMF on Narendra Modi’s one-off policy moves

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The disruptive impact of demonetisation announced last year is a temporary phenomenon and the scrapping of the high-value currency would bring “permanent and substantial benefits”, according to the International Monetary Fund (IMF).

In an interview to CNBC TV18, IMF Economic Counsellor and Director of Research Maurice Obstfeld said that although demonetisation, as well as implementation of the Goods and Services tax (GST) caused short-term disruptions, both measures would bring long-term benefits.

“The costs of demonetisation are largely temporary and we see permanent and substantial benefits accruing from the move,” Obstfeld said.

Demonetisation caused long queues outside banks.

Demonetisation caused long queues outside banks.

“Both demonetisation and the GST introduction will bring long-term benefits, though these caused short-term disruption,” he said.

The IMF Chief Economist described GST as a “work in progress” to which the Indian economy is “gradually adjusting”.

With businesses going into a “destocking” mode on inventories in anticipation of the GST rollout from July 1, sluggish manufacturing growth, among other factors, pulled down growth in the Indian economy during the first quarter of this fiscal to 5.7 percent, clocking the lowest GDP growth rate under the Narendra Modi dispensation.

Breaking a five-quarter slump, however, a rise in manufacturing sector output pushed the growth rate higher to 6.3 percent during the second quarter (July-September) of 2017-18.

Obstfeld also listed some of the reforms being undertaken by the Indian government that have impressed the multilateral agencies.

“The government has taken important first steps like bringing in the Insolvency and Bankruptcy Code, which helped India improve its position substantially in the World Bank’s ‘Ease of Doing Business’ rankings,” he said.

He also mentioned the recent recapitalisation plan for state-run banks announced by the government and the Asset Quality Review of commercial banks earlier ordered by the Reserve Bank of India (RBI).

Both measures are designed to address the issue of massive non-performing assets (NPAs), or bad loans, accumulated in the Indian banking system that have crossed a staggering Rs 8.5 lakh crore.

In a report released in Washington on Thursday, the IMF cautioned that the high volume of NPAs and the slow pace of mending corporate balance sheets are holding back investment and growth in India even though structural reforms have helped the nation record stronger growth.

The IMF’s Financial System Stability Assessment (FSSA) for India said that overall “India’s key banks appear resilient, but the system is subject to considerable vulnerabilities”.

“The financial sector is facing considerable challenges, and economic growth has recently slowed down,” the report said.

“High non-performing assets and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth.”

“Stress tests show that… a group of public sector banks are highly vulnerable to further declines in asset quality and higher provisioning needs,” it added.

Source: FirstPost

Forex reserves jump by $1.2 bn to $401.94 bn

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India’s foreign exchange reserves rose by USD 1.2 billion to touch USD 401.942 billion in the week to December 1.

India’s foreign exchange reserves increased by USD 1.2 billion to touch USD 401.942 billion in the week to December 1, according to the RBI data.

The surge in reserves was aided by an increase in foreign currency assets, a major component of the overall reserves.

The reserves once again crossed USD 400 billion mark in the previous week, after they rose by USD 1.208 billion to USD 400.741 billion.

The foreign currency reserves increased by USD 1.151 billion to USD 377.456 billion for the reporting week, the RBI said today.

Expressed in the US dollar terms, foreign currency assets include the effect of appreciation or depreciation of the non- US currencies such as the euro, the pound and the yen held in the reserves.

After remaining stable for many months, gold reserves also rose by USD 36.5 million to USD 20.703 billion.

The special drawing rights with the International Monetary Fund rose by USD 4.9 million to USD 1.502 billion.

The country’s reserve position with the Fund also rose by USD 7.4 million to USD 2.280 billion, the Reserve Bank of India said.

 

Source: The Hindu Business Online

Forex reserves rose to $399.533 billion as on November 17

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India’s foreign exchange reserves rose by $240.40 million as on November 17 to $399.533 billion, data from the RBI shows. Foreign currency assets, which form a key component of reserves, rose by $220.40 million from the previous week to $375.096 billion.

India’s foreign exchange reserves rose by $240.40 million as on November 17 to $399.533 billion, data from the RBI shows.

Foreign currency assets, which form a key component of reserves, rose by $220.40 million from the previous week to $375.096 billion.

FCAs are maintained in major currencies like US dollar, euro, pound sterling, Japanese yen etc.

Movement in the FCA occur mainly on account of purchase and sale of foreign exchange by the RBI, income arising out of the deployment of foreign exchange reserves, external aid receipts of the government and revaluation of assets.

Gold reserves remained stable at $20.66 billion.

Special drawing rights (SDR) from the International Monetary Fund rose by $7.9 million from the previous week to $1.497 billion.

SDR is an international reserve asset created by the IMF and allocated to its members in proportion of their quota at the IMF.

The Reserve Position in the IMF rose by $12.1 million to $2.273 billion.

Source: Financial Express

India should prioritise public banking sector reforms: IMF

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Country's growth is expected to accelerate in the medium-term as temporary disruptions due to demonetization and GST.
Country’s growth is expected to accelerate in the medium-term as temporary disruptions due to demonetization and GST.

India must prioritise implementation of public banking sector structural reforms, enhance the efficiency of labour and product markets, and modernise agriculture sector to accelerate its growth, the IMF said Friday.

The country’s growth is expected to accelerate in the medium-term as temporary disruptions due to demonetisation and the Goods and Services Tax (GST) fade, the International Monetary Fund said in its Asia and Pacific Regional Economic Outlook Update.

The economic growth slowed in India in recent quarters due to the temporary disruptions from the currency exchange initiative demonetisation that took place in November 2016, and the recent rollout of the GST, it said.

 

The GST is a landmark tax reform that should help unify the domestic market and encourage businesses to move from the informal to the formal sector, the IMF noted.

Inflation has been low compared with the mid-point target in recent months, driven by lower food prices, allowing the central bank to cut its policy rate in August, it added.

“Growth in 2017 was revised downward to reflect the recent slowdown, but is expected to accelerate in the medium term as these temporary disruptions fade,” it said.

In India, growth was revised down to 6.7 per cent in FY2017 and to 7.4 per cent in FY2018.

“Growth will be underpinned by private consumption, which has benefited from low food and energy prices, as well as civil service allowance increases,” IMF said.

Headline inflation is projected to stay close to the midpoint of the target band (4 per cent 2 per cent) in FY2017, while moving to the upper half of the target band in the medium term as food prices recover, it said.

The current account deficit should remain modest, financed by robust foreign direct investment inflows, it noted.

According to the outlook, in India, priorities should be strengthening public banks loss-absorbing buffers, implementing further public banking sector structural reforms, and enhancing public banks debt recovery mechanisms.

“Reform efforts should aim at tackling supply bottlenecks, enhancing the efficiency of labour and product markets, and modernising the agricultural sector,” the IMF said, adding that labour market reforms should be a priority to facilitate greater and higher-quality job creation.

 

Source: Deccan Chronicle

IMF favors three structural reforms in India

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According to IMF’s Regional Economic Outlook, India’s growth slowed in recent quarters due to the temporary disruptions from the currency exchange initiative– demonetisation and GST.

The IMF has suggested a three- pronged approach for structural reform in India that includes addressing the corporate and banking sector weaknesses, continued fiscal consolidation through revenue measure, and improving the efficiency of labour and product markets.

Deputy Director Asia Pacific Department of IMF, Kenneth Kang, said the favorable outlook for Asia was an important opportunity for India to push forward with difficult reforms.

“As such, there should be three policy priorities in the area of structural reforms,” Kang, Deputy Director Asia pacific Department IMF told reporters at a news conference here.

“First priority is to address the corporate and banking sector weaknesses, by accelerating the resolution of non- performing loans, rebuilding the capital buffers for the public sector banks, and enhancing banks’ debt recovery mechanisms,” he said.Secondly, Kang said, India should continue with the fiscal consolidation through revenue measures, as well as further reductions in subsidies.

“And lastly, it’s to maintain the strong momentum for structural reforms in addressing the infrastructure gaps, improving the efficiency of labour and product markets as well as furthering agricultural reforms,” said Kang.

Responding to a question on labour market reforms, Kang suggested reforming the market regulations in order to create a more favorable environment for investment and employment.

“There is a need to reduce the number of labour laws which currently number around 250 across the central and the state level,” said Kang.He said India should also focus on closing the gender gap which may help a great deal in boosting the employment opportunities for women in India.

“Improvements in infrastructure can be one important way to facilitate the entry of women into the labour force. But in addition, there is a need to strengthening the implementation of specific gender regulations, as well as to invest more in gender-specific training and education,” Kang said.

According to IMF’s Regional Economic Outlook, India’s growth slowed in recent quarters due to the temporary disruptions from the currency exchange initiative– demonetisation– that took place in November 2016, and the recent roll-out of the Goods and Services Tax (GST).

The report, however, went on to say that the growth in 2017 was revised downward to reflect the recent slowdown, but is expected to accelerate in the medium term as these temporary disruptions fade.

IMF says global growth recovery an opportunity for Indian economy

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IMF expects the Indian economy to recover sharply in 2018 to grow at 7.4%, though 30 basis points lower than its earlier estimate in April.

The International Monetary Fund (IMF) on Tuesday pared its growth forecast for the Indian economy by half a percentage point to 6.7% for 2017, blaming the lingering disruptions caused by demonetisation of high value currencies last year and the roll out of the Goods and Services Tax (GST).

However, IMF said the structural reforms undertaken by the Prime Minister Narendra Modi-led government would trigger a recovery—above 8% in the medium term.

In its latest World Economic Outlook, IMF said the global economy is going through a cyclical upswing that began midway through 2016. It raised the global growth estimate marginally for 2017 to 3.6% while flagging downside risks. The upward revisions in its growth forecasts including for the euro area, Japan, China, emerging Europe, and Russia more than offset downward revisions for the United States, the United Kingdom, and India.

“In India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the midyear introduction of the countrywide Goods and Services Tax,” it said in the WEO.

However, IMF expects the Indian economy to recover sharply in 2018 to grow at 7.4%, though 30 basis points lower than its earlier estimate in April.

One basis point is one-hundredth of a percentage point.

In its South Asia Economic Focus (Fall 2017) released on Monday, the World Bank reduced India’s GDP growth forecast to 7% for 2017-18 from 7.2% estimated earlier, blaming disruptions caused by demonetisation and GST implementation, while maintaining at the same time that the Indian economy would claw back to grow at 7.4% by 2019-20.

Both the Asian Development Bank as well as the Organisation for Economic Cooperation and Development (OECD) have also cut their growth projections for India to 7% and 6.7%, respectively, for fiscal 2017-18.

IMF said a gradual recovery in India’s growth trajectory is a result of implementation of important structural reforms. GST, “which promises the unification of India’s vast domestic market, is among several key structural reforms under implementation that are expected to help push growth above 8% in the medium term,” it added.

The multilateral lending agency said India needs to focus on simplifying and easing labour market regulations and land acquisition procedures which are long-standing requirements for improving the business climate. It also called for briding the gender gap in accessing social services, finance and education to accelerate growth in developing countries like India.

IMF said given faster-than-expected declines in inflation rates in many larger economies, including India, “the projected level of monetary policy interest rates for the group is somewhat lower than in the April 2017 WEO.”

In its monetary policy review last week, the Reserve Bank of India (RBI) kept its policy rates unchanged and marginally raised its inflation forecast for rest of the year.

Highlighting the growing income inequality within and among emerging market economies, IMF said a country’s growth rate does not always foretell matching gains in income for the majority of the population. “In China and India, for example, where real per capita GDP grew by 9.6% and 4.9% a year, respectively, in 1993–2007, the median household income is estimated to have grown less—by 7.3% a year in China and only 1.5% a year in India,” it said.

Source: Live Mint

India growing pretty robustly: World Bank President Jim Kim

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Jim Kim said Japan, Europe and the US along with India were growing and there was a levelling-out in developing countries.

India has been growing “pretty robustly”, World Bank President Jim Yong Kim has said as he predicted a strong global growth this year.

Speaking at the Bloomberg Global Business Forum meeting here on Wednesday, Kim also called for more cooperation among the multilateral system, private sector and the governments to take advantage of the current win-win situation.

“That dormant capital will earn a higher return, where developing countries will have access to much more capital for the infrastructure needs, even for investing in health and education, investing in resilience to climate change and other factors,” Kim said.

He said Japan, Europe and the US along with India were growing and there was a levelling-out in developing countries.

“A country like India is growing, has been growing pretty robustly. We think, Japan is growing. Europe is growing in a much more healthy way. The United States continues to grow. There is a levelling-out in developing countries,” he said, adding that the growth will be more robust this year.

In June, the World Bank predicted a 7.2 per cent growth rate for India this year against 6.8 per cent growth in 2016. India remains the fastest growing major economy in the world, the World Bank officials had said.

“It used to be that commodity importers were doing much better than commodity exporters. But that’s levelling out. So the growth is relatively more evenly distributed,” Kim said.

He said in terms of indebtedness, the bank was watching very carefully the debt-to-GDP ratios of every single country.

“In Africa, the debt-to-GDP ratios are still very manageable…We would not be moving toward providing more financing for countries if we thought there was a real problem with over indebtedness in the countries. Because we follow this very closely, along with the IMF,” he said.

“We think that there are tremendous opportunities for investment. But sometimes, purely based on perception, investors in sovereign wealth funds – I’ve heard them say, Africa is risky. Right, as if Africa was a single country.

Africa’s not a single country and the risk profiles from country to country have enormous differences,” he said.

Source: Economic Times