IMF’s annual report on India’s Economy

Source: The post IMF’s annual report on India’s economy has been created on the article “IMF’s message” published in Indian Express on 22nd December 2023.

UPSC Syllabus Topic: GS paper 3 – Economy – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

News: The article discusses the IMF’s annual report on India’s economy, highlighting its currency stability and government debt. The IMF changed India’s currency regime classification and advised fiscal consolidation to manage debt risks, while India defends its economic policies and stability.

What is the IMF’s observation on India’s currency and government debt?

1. Observation on India’s currency

IMF Observation: The IMF observed the Indian rupee’s stability against the dollar, noting a narrow fluctuation range between 81.04 and 83.29 per US dollar (a 2.8% band), compared to the Euro-dollar rate band of 7.3%. Consequently, it reclassified India’s exchange rate from “floating” to a “stabilized arrangement” for the period between December 2022 and October 2023.

India’s Response: India, particularly the Reserve Bank of India, asserts the rupee is market-determined with interventions only for excessive volatility, contesting the IMF’s short-term view.

2. Observation on Government Debt

IMF’s Warning: The IMF warns that if past economic shocks recur, debt could exceed 100% of GDP in the medium term. It also warns that long-term risks are high because considerable investment is required to meet India’s climate change mitigation targets.

India’s Position: India counters, India argues that the sovereign debt risk is low since it’s predominantly in domestic currency, b) Despite various economic shocks, India maintains that its general government debt level has been relatively stable, barely increasing from 81% in 2005-06 to around 81% in 2022-23, c) India suggests that the IMF’s assessment might be overlooking the broader historical stability and resilience of India’s debt management.

For more information on IMF’s annual report on India’s economy read here.

Why did the Indian currency decline narrowly between December 2022 and October 2023?

Internal Factors:

Trade Deficit improved: India’s trade deficit averaged $20 billion a month during the period, a slight improvement from the previous year’s $22.1 billion.

Current Account Deficit: The current account deficit was $27.3 billion, nearly half of the previous year’s $53.5 billion.

Foreign Investment: Net foreign investment increased to $30.7 billion, despite a decrease in FDI (by almost $22 billion), offset by a surge in FPI.

Forex Reserves: Forex reserves modestly rose from $563 billion to $586 billion, indicating improved currency health.

External Factors:

Global Dollar Strength: The relentless increase in the US Federal Reserve’s policy funds rate strengthened the dollar, impacting other currencies including the Rupee.

Rupee Volatility vs. Dollar: Rupee’s movement was narrower (2.8%) compared to other major currencies like the Euro (7.3%), indicating active central bank management to stabilize it amidst global volatility.

Question for practice:

Examine the IMF’s observations regarding India’s currency and government debt, and provide an overview of India’s counterarguments in response to the IMF’s warning.