For the first time in decades, Centre's policies in tune with IMF advice

Year 2017 marks the first time ever that IMF has acknowledged this position without any caveats

For the first time in over several decades, the IMF notes this year that its advice and the Indian government’s policies have come to be “broadly aligned”.

“Past Fund advice and the authorities’ macroeconomic policies have been broadly aligned” the annual Article IV country report of the Fund notes for India. In no year before 2017, has the IMF’s annual surveillance report for India acknowledged this position without introducing any caveats. For instance, the staff report released in February 2014 notes: “Past Fund advice and the authorities’ macroeconomic policies have been broadly aligned, but progress on structural reforms has been slow”. Even in the country report for 2016, the line had not changed.

As per the terms of the IMF relationship with its 189 signatory countries, the Fund is supposed to make an annual appraisal of their macroeconomic position. The appraisal is mandated by Article IV of the IMF constitution and is therefore often referred to as such or as country report. It includes an assessment by an IMF team constituted for the purpose, a report on the discussions with the country’s government with their response and also a report by the Executive Director representing the country.

Over the decades the India reports have consistently lauded each government’s commitment to fiscal prudence and since liberalisation, has appreciated the efforts at reforms in several sectors. But for the past two decades the IMF position has been that despite the commitment to reforms, their pace of execution has been slow. This has been especially true for reforms in factors of production, land, labour and capital. Those in product markets has been executed faster though as late as 2014 it noted, “Progress on product and labor market reforms has, however, been limited”.

The IMF country report for India, 2017 is consequently quite a departure from this position. As the table shows, the Fund has used the term “big bang” to describe the set of reforms undertaken, quite unusual to describe them in a country analysis.

“Over the past year, big bang reforms, such as the legislation of a new bankruptcy code, formalization of inflation targeting framework, and a milestone constitutional amendment enabling implementation of the pan-India Goods and Services Tax (GST), have taken place”. While it still accepts that reforms in land and labour and in agriculture pricing are works in progress, it describes in detail the changes already brought in them. Incidentally it has introduced a new matrix in the Article IV reports, from this year, about gender issues.  

Its big area of concern is to “safeguard financial stability in the presence of rising corporate and banking sector strains”, in other words, the NPA problem. Not a surprise that while the annual reports mentioned former Prime Minister Manmohan Singh only twice in his ten year term, the IMF has identified policies with Modi’s name far more times in its last three reports.

Year	Outlook and risks	Key Policy issues	Past advice	Land & labour
2011	India’s growth outlook favorable. Risks stem mainly from weaker global growth	Elevated inflation. Large infra projects also raise opportunities for large rents to be sought by all players	India’s vigorous recovery required an earlier exit from the fiscal stimulus	No mention
2012	Growth remains relatively high, but various factors, including

unsettled global outlook and slow government decision-making, have weighed on investment Reconstituting fiscal space and reorienting expenditure toward capital and social areas are vital to make growth more inclusive, and also to reduce financial restrictions Fiscal consolidation will require subsidy reform, as well as tax reforms, which have been delayed Legislation to facilitate land acquisition and mining would keep growth going 2014             Growth expected to slow to the lowest level in a decade… domestic supply constraints. High and persistent inflation key macroeconomic challenge. Addressing supply bottlenecks and structural challenges—particularly in the pricing and allocation of natural resources India’s growth has underperformed in recent years, largely due to domestic factors (chief among them policy uncertainty and supply-side bottlenecks) Labour reforms on back burner 2015         India’s near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty Rising corporate and banking sector strains, regulation should be further enhanced, provisioning increased Further steps in relaxing longstanding supply bottlenecks, especially in energy, mining and power sectors, as well as labor market reforms are crucial work in progress at state levels—streamlining land acquisition 2016 Indian economy on a recovery path Potential further deterioration in exports & strains in bank and corporate balance sheets weigh on India’s growth. High fiscal deficits and upside risks to inflation Corporate leverage—particularly among large firms is one of the highest across EMs, reflecting increased reliance on bank funding to meet high capital investment requirements in the late 2000s. Land and Labour reforms needed 2017 Cash shortages arising from the currency exchange initiative have weakened the near-term outlook. Medium-term growth prospects have improved due to the implementation of key reforms Progress on important economic and structural reforms over the past year has been impressive. Over the past year, big bang reforms have taken place Past Fund advice and the authorities’ macroeconomic policies have been broadly

aligned Land and Labour reforms work in progress There was no appraisal in 2013, as it was a gap year. Source: IMF Staff papers