 "Harald Finger, International Monetary Fund's Mission chief for India")
The Indian economy has shown remarkable resilience amid global uncertainty and US tariffs, International Monetary Fund’s Mission Chief for India Harald Finger tells Ruchika Chitravanshi in a virtual interaction. Finger talks about the task ahead for the 16th Finance Commission, impact of artificial intelligence (AI), and more. Edited excerpts:
India’s gross domestic product (GDP) growth for the second quarter of 2025-26 (Q2FY26) was 8.2 per cent, and now the full-year growth is being estimated to cross 7 per cent in the financial year. How do you see this number against the IMF's own projection of 6.6 per cent growth?
India’s economy has shown remarkable resilience, thanks to strong domestic conditions. GDP growth in the September quarter was well above expectations. The 50 per cent US tariffs that have been placed since August are beginning to weigh on the economy to some extent. The recent trade has shown some initial signs of resilience, with the drop in exports to the US partially offset by increasing exports to other countries. When you take all this into account, there are significant upside risks to our projection of 6.6 per cent for FY26. We would be providing an update to our projection in the upcoming World Economic Outlook update in January.
So, will you upgrade India’s growth forecast?
It looks likely based on the strong trends of the September quarter that there would be an upward revision.
Do you think the IMF overestimated the impact of tariffs on the Indian economy?
The rise in tariffs is affecting India’s export sector, but the overall economic impact is manageable. Heightened uncertainty over bilateral trade policy with the US could dampen domestic investment and foreign direct investment (FDI) in India. Our baseline estimates, which we made when the 50 per cent tariffs were just announced, suggested moderate impact over the next financial year, assuming tariffs persist, but recent trade data shows signs of resilience. So, it is possible that the effect of the tariffs would be somewhat smaller than we projected, but it is too early to come to a full assessment. We will need at least a few more months of data to reassess this.
The IMF has recommended setting up of an independent fiscal body for strengthening the institutional architecture of public finances. A similar suggestion was made by 15th Finance Commission Chairperson N K Singh before. Do you think we should embrace this idea now?
Such a body would be a leap forward in strengthening India's fiscal institutions. As India strives to become an advanced economy, so overall, good reform (is needed) to strengthen institutions in a general sense.
The IMF report has also suggested that the 16th Finance Commission should create a devolution formula that balances equity with performance-based incentives. Can you elaborate how this can be done in a country where the development levels of states vary a lot?
Indeed, states are at very different stages of economic development, quality of institutions, and fiscal performance, which make it hard to come to a revenue distribution formula that all can agree on. Federalism in India means that states have the flexibility to act according to their own interests and abilities in many areas, but it also implies a need for solidarity and redistribution among states. The Finance Commission had the difficult task of finding the right balance between redistribution to the poorer states and allowing the more affluent states to retain adequate resources to pursue their own objectives and interests. We'll know the new formula at the time of the Budget early next year, and we look forward to learning how the Finance Commission decided this complicated task.
India’s FX (foreign exchange) classification has been brought to a crawl-like arrangement in the report. Given the current level of rupee against dollar, do you think it is advisable for the Reserve Bank of India (RBI) to target a particular rate?
The exchange rate classification that we undertake is something we do routinely across our membership on all Article IV consultations. This is a purely backward-looking mechanical assessment based on observed exchange-rate patterns over the last six to nine months, and as such, the assessment has no implications for exchange-rate policy intentions of central banks. In our Article IV consultation for India, we found that over the past six months, the exchange rate has de facto moved within a relatively narrow band around a depreciating trend, and that is consistent with a crawl-like arrangement, but that does not suggest any policy intentions for the RBI, which maintains that it does not target any specific level of exchange rate but aims to use interventions only to contain volatility if and when it considers such volatility to be excessive. Now, the rupee has already seen more fluctuation this year than in the previous two years. India has the necessary strength, economic fundamentals, and policy frameworks to let the exchange rate move even more.
Retail inflation has gone below 2 per cent for two consecutive months of September and October. Do you think the economy is facing a lack of demand?
So, the low inflation reading in September and October was mainly driven by accelerated food disinflation, reflecting supply-side factors such as favourable weather and base effects. Domestic demand has remained buoyant in recent quarters, supported by lower inflation, favourable monsoon, direct and indirect tax cuts, and monetary easing. We're expecting inflation to rise again in the coming quarters.
The report has said that AI will soon have the potential to disrupt labour markets at a fast pace. By when do you see it happening and what policy measures are required?
AI in India is an opportunity as well as a risk that needs to be taken seriously. It also provides important opportunities for companies to shine. It's important to make sure that education systems provide the right skills to the young people to embrace this and shine. There is also the need to provide strong social safety nets in case there is displacement of people. There should be adequate protection for them and ways to really re-educate them to pursue other careers and fields that are positively affected or less affected by AI.
The RBI’s Monetary Policy Committee (MPC) will announce the policy review later this week. Do you see any scope for reduction in repo rate?
The RBI has done a good job in managing inflation. I can't speculate for a single monetary policy meeting, but over the next few months or quarters, there could be room for additional monetary policy easing, particularly if the impact of the trade policy shock is stronger or there is a lack of demand. The central bank should definitely approach monetary policy with a bit of an easing bias in the current phase, but maintain it on the forward-looking assessment based on incoming data on inflation, and particularly domestic demand.
Do you think we should still have a fiscal road map, or debt-to-GDP is a good idea?
Many countries have a medium-term fiscal framework. A fiscal deficit path will be helpful to guide expectations. Consolidation should be revenue-based. India’s revenue-to-GDP ratio is solid, but if you compare it to well-performing emerging markets, there is still scope for additional revenue, because India has a lot of development needs. Having deficit-reduction anchored in revenue measures would also provide additional space for priorities, be it infrastructure or health and education, etc.
