IMF says India in midst of significant economic slowdown, calls for urgent policy actions
Washington: India is now in the midst of a significant economic slowdown, the International Monetary Fund has said, urging the government to take urgent policy actions to address the current prolonged downturn.
In its report released Monday, the IMF Directors noted that India's rapid economic expansion in recent years has lifted millions of people out of poverty. However, in the first half of 2019, a combination of factors led to subdued economic growth in India.
"The issue in India currently is the growth slowdown. We still believe it is mostly cyclical, not structural... because of the financial sector issues, we think, the recovery will be not as quickly quick as we thought earlier. That's the main issue," Ranil Salgado, Mission Chief for India in the IMF Asia and Pacific Department told PTI in an interview as it released its annual staff report on India.
With risks to the outlook tilted to the downside, the IMF Directors called for continued sound macroeconomic management. They saw an opportunity with the strong mandate of the new government to reinvigorate the reform agenda to boost inclusive and sustainable growth, the report said. The staff report was done in August when the IMF was not fully aware of India's current economic slowdown.
"India is now in the midst of a significant economic slowdown," Salgado told reporters over phone.
Growth in the second quarter of FY 2019/20 came in at a six-year low of 4.5 per cent (y/y), and the composition of growth indicates that private domestic demand expanded by only 1 per cent in the quarter. Most high-frequency indicators suggest that weak economic activity has continued into December, he said.
Salgado attributed this to 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 and 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, he said. 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, he added.
Responding to a question, Salgado said that the new growth projections for India, which will come out in January, would be significantly lower than the previous ones.
"By other measures, India still is doing well. Reserves have risen to record level. The current account deficit has narrowed. Inflation, although we have a little jump right now because of vegetable prices, we think (it) has been under control for the last few years. So, by other measures, India is doing quite well. The issue is primarily how to address the growth slowdown," Salgado said.
Responding to a question, he said that the IMF has been surprised on India's slowdown. But he responded in negative if this slowdown can be described as an economic crisis.
"I think that would be going too far to say that. What we have seen is a growth slowdown. It may be longer than we had originally anticipated. But other elements like on the external side, on inflation, those are under controlled," he told PTI.
In the short term, he said, the most critical thing is carrying out reforms in the financial sector.
"We have, what we used to call a twin balance sheet problem being in the commercial banks and corporate sector. Now we may add additional balance sheet issue, which is on the NDFs. I'm including housing finance companies in that sector that as well.
"So the most immediate thing would be to try to have some policies related to restoring the health of this sector," he said.
Some steps have already been meaning the improvements that should be soon in place in terms of regulation of the sector, there is more information related to the sector; the steps to have a process to its resolution by including them, at least initially in the IBC process.
"On that though, we think a more comprehensive financial sector resolution plan or act as needed. There were earlier thoughts in this area by the government and we think those should be pursued again, because there are certain complications related to financial sector that don't necessarily work well in a simple kind of insolvency and bankruptcy code. It would be important to have a more comprehensive framework specifically for financial sector," the IMF official said.
Observing that early in the term is the time to push for structural reform, he said the current government in its first term carried out majority of its reforms early in the term.
"It is also true globally that it is easier to pursue structural reforms in the first half of the term," Salgado said.
From the IMF perspective, these areas are labour, land, different product market reform, continuing to enhance competition and also pursuing some of the more medium to long term reforms such as in education and health, he said.
Noting that the IMF believes that India has fiscal base at-risk, Salgado said that as a result New Delhi's ability to use a fiscal policy for stimulus is very limited.
"India already has a relatively high general government deficits and general government debt," he added.
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SC to hear in July Karnataka's plea for financial assistance for drought management
New Delhi (PTI): The Supreme Court on Monday said it will hear in July a plea filed by the Karnataka government seeking a direction to the Centre to release financial assistance from the National Disaster Response Fund (NDRF) to the state for drought management.
The Centre had on April 29 told the apex court that around Rs 3,400 crore has been released to the Karnataka government for drought management in the state.
The matter came up for hearing on Monday before a bench of justices B R Gavai and Sandeep Mehta.
Senior advocate Kapil Sibal, appearing for the Karnataka government, said the state will file an affidavit in the matter.
The bench posted the matter for hearing in July.
During the hearing last week, Sibal had told the bench that Rs 3,450 crore has been released but the state's request was for assistance of Rs 18,000 crore.
The petition has sought to declare that the Centre's action in not releasing the financial assistance for drought arrangement according to the NDRF is "ex-facie violative" of the fundamental rights of the people of the state guaranteed under articles 14 and 21 of the Constitution.
It said the state is reeling under "severe drought", affecting the lives of its people and for the kharif 2023 season, which starts in June and ends in September, a total of 223 out of 236 taluks are declared as drought-affected.
The plea said 196 taluks are categorised as severely affected and the remaining 27 as moderately affected.
"Cumulatively for kharif 2023 season, the agriculture and horticulture crop loss have been reported in more than 48 lakh hectares with the estimated loss (cost of cultivation) of Rs 35,162 crore," the plea, filed through advocate D L Chidananda, said.
It said the assistance sought from the Centre under the NDRF is Rs 18,171.44 crore.
It said the state is constrained to move the apex court against the "arbitrary actions" of the Centre in denying the financial assistance for drought management to Karnataka under the Disaster Management Act, 2005 and the manual for drought management updated in 2020.
"Further, the impugned action of the Central Government is violative of statutory scheme of the Disaster Management Act, 2005, the manual for drought management and the guidelines on constitution and administration of the State Disaster Response Fund and National Disaster Response Fund," the plea said.
It said under the manual for drought management, the Centre is required to take a final decision on the assistance to the state from the NDRF within a month of the receipt of the inter-ministerial central team (IMCT).
"Despite the IMCT report, which visited various drought affected districts from October 4 to 9, 2023 and made a comprehensive assessment of drought situation in the state and consideration of the said report by the sub-committee of the National Executive Committee constituted under section 9 of the Disaster Management Act, 2005, Centre has not taken a final decision on the assistance to the state from the NDRF even after a lapse of almost six months from the date of the said report," the plea said.
