The International Monetary Fund, or IMF, released the staff report prepared as part of mandatory consultations with the Indian government last week. Under normal circumstances, there is a routine element to the exercise; the IMF says what it has to, the government says "thanks, we'll take it from here" and both get on with their business. However, in times of stress, as right now, the report takes on greater significance. In particular, its identification of the causes of stress and the policy responses that it recommends will inevitably be used by global investors to assess the government's handling of the situation. The government would be well advised, therefore, to pay close attention to the report. If it agrees with the diagnosis and recommendations, it should say so and then lay out what it plans to do about them. If it doesn't, it should provide clear counter-arguments.
The IMF report differs from the government on virtually all major macroeconomic indicators. It believes growth in the current year will be slower. It thinks that the fiscal deficit will be higher than the estimates provided in the interim Budget, though this is largely because it does not treat disinvestment proceeds as equivalent to other revenue sources. It estimates that the current account deficit will be somewhat higher, though well within the comfort zone of three per cent of gross domestic product. And it suggests that persistent inflation should keep the monetary policy trajectory committed to reining it in.
In his interim Budget speech, the finance minister did lay out a set of 10 priorities, many of which directly address the concerns raised by the IMF. This is all to the good; a candid admission of the current state of the economy and the broad lines of response to it are the first two steps in getting to grips with the problem. However, some assertions during the speech and subsequent interactions are in direct contradiction to the IMF diagnosis. The continued insistence that India's macroeconomic problems are primarily due to global forces is challenged by the IMF's assessment that about two-thirds of the current slowdown is due to domestic factors. The minister also made a pointed reference to the need for monetary policy to give due consideration to growth, which goes against the proposals put forward by the Reserve Bank of India to transit to an inflation-targeting regime. The IMF evidently believes that inflation control will remain the dominant objective of monetary policy. The risks to deviating from this commitment are high, even as the costs of adhering to it cause so much concern. Somewhat surprising in the staff report are the suggestions that India issue a sovereign bond and extend the non-resident Indian (NRI) swap arrangement. The objective of shoring up reserves is unexceptionable, but increasing exposure to debt in the current situation seems a rather risky way to go about it. Ultimately, only capital inflows driven by a revival of confidence in India's growth prospects will provide enduring external stability. On that, there surely will be complete agreement between the IMF and the Indian government.
