By Laura Papi, Assistant Director, Asia and Pacific
Department, IMF and Rahul Anand, Economist, Asia Pacific
So far 2013 has been a breath of fresh air in terms of economic
news: financial markets have rallied and economic indicators have
started to surprise on the upside. In India, the rupee has
strengthened and the Bombay Stock Exchange index (Sensex) crossed
the 20,000 mark for the first time in two years. Industrial
production has started picking up.
So is India's growth about to go back to 8-9 percent? The
short answer is no
. But we need to look back to understand why India's growth has
decelerated to a decade low and why the slump, which has hit
investment particularly hard, has persisted for over a year. As
structural problems are at the root of the slowdown, so structural
reforms must be at the core of the solution.
In the IMF's annual check-up of India's
we attribute the slowdown mainly to structural
These include supply bottlenecks, but also uncertainty about
policies, and lengthy delays in investment project approvals and
implementation. Of course, subdued global growth and higher real
interest rates have also contributed, but were not the main
Our report also points out that India has one of the highest
fiscal deficits and inflation among emerging markets. Also, India's
external position has weakened, and banks' and corporates' balance
sheets have deteriorated.
This analysis implies that there is no quick fix. Getting
investment going again is not a matter of lowering interest rates
or raising government spending. Structural measures that help lift
obstacles to investments are vital.
At the same time, lowering the fiscal deficit and inflation are
necessary to ensure investment revives. Strengthening bank and
corporate balance sheets is also important, so that once conditions
are favorable to investment, firms will find adequate
Keenly aware of these challenges, the Indian authorities have
started to act in recent months. Addressing the nation on September
21, 2012, the Prime Minister said, "We need a revival in investor
confidence, domestically and globally… the time has come for hard
decisions." Speaking at the Economic Editors' Conference on October
9, 2012, the Finance Minister P. Chidambaram cautioned, "Without
reforms, we risk a sharp and continuing slowdown of the
, which we cannot afford…"
Indian officials have taken steps to restructure the debts
and reduce the losses of state power distribution companies, to
facilitate large investment projects with the Cabinet Committee on
Investment, to liberalize Foreign Direct Investment, and reduce
uncertainty in tax policy
. The Finance Minister presented a roadmap to reduce government
deficits. Buttressing this commitment, the government has started
to contain fuel subsidy spending and to roll out cash transfers,
which could improve spending efficiency considerably over time.
Are these measures enough? They have definitely boosted
financial markets and economic confidence, but the impact will
depend on successful implementation and follow-up. Negative growth
in mining and low electricity output growth suggest that
supply-side bottlenecks persist, and investment continues to be
Addressing long standing and complex structural issues
holds the key to reviving growth.
For example, resolving problems in the power sector-from fuel
linkages to pricing and the financial health of distribution
companies-is essential. We also see progress on inflation and the
reduction of government debt and deficits as required to boost
investment. The Planning Commission in the Draft 12th Plan has also
presented growth scenarios contingent on the progress on reforms:
they range from 8 percent growth with strong and wide-reaching
policy implementation to 5-5.5 percent growth with policy logjam.
Given the complexity of the issues, reviving investment in India is
going to be a marathon not a sprint.
That's the reason why we expect the recovery to be gradual and
inflation and the current account deficit to remain elevated for
some time. We project real GDP growth of 6 percent for the
2013-2014 fiscal year, gradually increasing to about 6.5-7 percent
over the next 5 years. And because elevated inflation and a sizable
current account deficit are also partly symptoms of supply
bottlenecks, combined with persistent high inflation and a gradual
reduction of government deficits, we expect modest progress on
these variables too.
However, more important than the exact numbers is progress on
addressing the current impediments to investment. This will create
a recovery that can be sustained and lay the foundations for faster
Stamina to carry out the reforms is required.
Gold: Fear And Panic Headed This Way