IMF may revise India's fiscal deficit upwards by 0.3% of GDP in WEO report

The International Monetary Fund’s (IMF’s) upcoming World Economic Outlook (WEO) report may paint a less rosy picture of the government’s fiscal consolidation plan, with the ambitious public sector banks’ (PSBs’) recapitalisation exercise. 

The Fund has written to the finance ministry that it might revise the fiscal deficit estimate upward by 0.3 percentage points of gross domestic product (GDP) in 2017-18, in the WEO report. The latter is due for issue next month.

“The India team is in touch with the authorities to gather all details of the recapitalisation bonds and still considering how to account for the operation in line with the IMF Government Finance Statistics Manual,” said Andreas Bauer, the Fund’s senior resident representative in India, in an emailed response. He added that dialogue with the government was an ongoing process and the latest lot may not necessarily be reflected in the coming report.

The Union government has maintained that the bank recapitalisation will be cash-neutral on its finances.

The IMF had projected the combined fiscal deficit of central and state governments at 6.4 per cent of GDP in 2017-18, in its WEO report issued last April. It is now looking to revise its estimate of this deficit to 6.7 per cent.

The Department of Economic Affairs (DEA) has written to the Department of Financial Services (DFS) for formulating a response to be given to the Fund before the WEO report is issued, show documents reviewed by Business Standard. 

“The IMF has followed a different methodology, due to which it might adjust the fiscal deficit numbers. The DFS has been asked to furnish a note, to explain how the government plans to go about bank recapitalisation, its mode of implementation, and methodology,” said a senior finance ministry official.

The DEA Secretary Subhash Chandra Garg declined to comment on the IMF’s communiqué. “I will not respond to them (queries),” he said.

The Fund is examining if the Rs 800 billion of recap bonds will be treated as an expense, in the form of subsidy or capital transfer, or as a transaction in financial assets or liabilities, “either as an addition to equity or an issuance of a loan or securities other than shares”.

“If you use the larger definition i.e., public sector borrowing requirement, it will be included. It also depends on the manner of financing,” said Pronab Sen, country director of the International Growth Centre’s programme and the government’s former chief statistician.

At a press conference in January, while announcing the contours of the Rs 800 billion in recap bonds to be issued in this financial year, Garg had said, “There is no fiscal impact of the bond issuance to banks…These will be swap deals and cash-neutral. There is not going to be a public issue.”

Chief Economic Advisor Arvind Subramanian had said last year that the bonds “do not increase the deficit” under standard international or the IMF accounting, as these were “below-the-line” financing. The bonds will be matched by additional receipts on issue of securities to the banks and “not entail any cash outgo”, the finance ministry had said while seeking a nod from Parliament earlier this year for additional expenditure. In simple terms, the government will get shares of PSBs in exchange for the bonds.

The recapitalisation plan of Rs 2.11 trillion, announced last year by the government, will be in phases. Apart from the Rs 800 billion in bonds during 2017-18, the other Rs 1.35 trillion will be mobilised through budgetary support and market borrowing.

During the Budget 2018-19 speech, Finance Minister Arun Jaitley had projected a higher fiscal deficit of 3.5 per cent of GDP for 2017-18, against the earlier target of 3.2 per cent. The deficit was 3.5 per cent of GDP in 2016-17 and 3.9 per cent in 2015-16.