6 Feb 2013

IMF / INDIA

Since recovering rapidly from the global financial crisis, India's economy has slowed substantially, and its growth rate is expected to decline further in the coming year for a range of domestic reasons including lower infrastructure investment, say IMF economists in their annual health check of India's economy. IMF

Posted at: February 6, 2013 10:52 am

Duration: 02:19

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STORY: IMF / INDIA
TRT: 2.19
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS

DATELINE: 5 FEBRUARY 2013, WASHINGTON D.C. / FILE

SHOTLIST:

FILE – RECENT, HYDERABAD, INDIA

1. Wide shot, highway overpass under construction
2. Wide shot, workers inside building under construction
3. Wide shot, building under construction

5 FEBRUARY 2013, WASHINGTON D.C.

4. SOUNDBITE (English) Laura Papi, Mission Chief to India, International Monetary Fund (IMF):
"We are projecting six percent growth for this year, and even over the next three to four years, we do not see, at the moment, growth getting back to eight percent."

FILE – RECENT, HYDERABAD, INDIA

5. Zoom out, electrical lines
6. Wide shot, intersection

5 FEBRUARY 2013, WASHINGTON D.C.

7. SOUNDBITE (English) Laura Papi, Mission Chief to India, International Monetary Fund (IMF):
"Well, the government has taken action on several fronts over the last few months. Take, for example, the cabinet committee on investment, take the plans to restructure the debts of the power companies. These are all things that are meant to help provide investment. But these problems are complex and it takes time to put them in place and implement them. This is the reason why we see a subdued recovery."

FILE – RECENT, HYDERABAD, INDIA

8. Wide shot, traffic
5 FEBRUARY 2013, WASHINGTON D.C.

9. SOUNDBITE: (English) Laura Papi, Mission Chief to India, International Monetary Fund (IMF):
"There's no silver bullet because these problems are complex problems. Take power: you have to solve the problems that the distribution companies are having with their difficult financial situations. On the other hand, you have to make sure that the power plants get the fuel, often coal, which is a very thorny and complex issue."

FILE – RECENT, HYDERABAD, INDIA

10. Wide shot, gas station
11. Close up, fuel nozzle

5 FEBRUARY 2013, WASHINGTON D.C.

12. SOUNDBITE: (English) Laura Papi, Mission Chief to India, International Monetary Fund (IMF):
"The measures announced on fuel subsidies and in the pilot on cash transfers are really important steps. These are steps that can really buttress the Finance Ministry's commitment to cut the fiscal deficit. Cutting the fiscal deficit remains very important to reviving investment."

FILE – RECENT, HYDERABAD, INDIA

13. Wide shot, ATM
14. Wide shot, bank

5 FEBRUARY 2013, WASHINGTON D.C.

15. SOUNDBITE: (English) Laura Papi, Mission Chief to India, International Monetary Fund (IMF):
"What is concerning us so far is the increase that we're seeing in non-performing assets, especially in public banks, and also the increase in restructured assets which can turn into bad loans."

FILE – RECENT, HYDERABAD, INDIA

16. Wide shot, banks

STORYLINE:

Since recovering rapidly from the global financial crisis, India's economy has slowed substantially, and its growth rate is expected to decline further in the coming year for a range of domestic reasons including lower infrastructure investment, say IMF economists in their annual health check of India's economy.

In 2011/12, India's growth rate was 6.5 percent.  That figure is expected to drop to 5.4 percent in 2012/13.  Despite the poor outlook for the global economy, this is a far larger drop than might be expected.

"We are projecting six percent growth for this year, and even over the next three to four years, we do not see, at the moment, growth getting back to eight percent," said Laura Papi, IMF Mission Chief to India.

Between 2004 and 2011—a period that includes the global financial crisis—India's growth averaged 8.3 percent a year. High growth and higher incomes added to demand, especially for food, electricity, and transportation.

This growth outpaced new investment in power plants, roads and coal mining. As concern about corruption scandals slowed approvals for new projects, supply bottlenecks became evident, culminating in the July 2012 blackout across much of India, when a tenth of the world's population lost power for up to two days.

India's recently published 12th Plan calls for major investments in infrastructure, health and education, as well as for continued poverty reduction, but in their report, IMF economists say reforms to facilitate investment—especially in infrastructure—together with lowering the costs of doing business, are key to restoring high growth.

"Well, the government has taken action on several fronts over the last few months. Take, for example, the cabinet committee on investment, take the plans to restructure the debts of the power companies. These are all things that are meant to help provide investment. But these problems are complex and it takes time to put them in place and implement them. This is the reason why we see a subdued recovery," Papi said.

The government has already taken significant steps toward this, for example by laying out a plan to cut the losses of local power companies, creating the Cabinet Committee on Investment, and relaxing some restrictions on foreign direct investment.

But more needs to be done. Addressing India's long-term energy needs, for example, will require solving complicated problems related to coal (which powers most of India's electricity plants), while easing traffic jams will require facilitating the acquisition of land to widen roads or build new ones.

"There's no silver bullet because these problems are complex problems. Take power: you have to solve the problems that the distribution companies are having with their difficult financial situations. On the other hand, you have to make sure that the power plants get the fuel, often coal, which is a very thorny and complex issue," Papi said.

A common response to slow growth is the use of countercyclical fiscal or monetary policy, but this is inappropriate for India. High inflation rates means there is little room to cut interest rates, while the country's fiscal deficit (forecast to be 8.7 percent this year - the highest among major emerging markets) means that cutting, rather than raising, spending is a priority.

The government has already moved to lower fuel subsidies, which benefit disproportionately richer people.  It will need to do more to free sufficient resources for 12th Plan priorities.

In their report, the IMF economists warn about threats posed by the financial sector.  The numbers of nonperforming loans have risen recently, and the current slowdown raises the prospect that this trend will continue for some time.

"What is concerning us so far is the increase that we're seeing in non-performing assets, especially in public banks, and also the increase in restructured assets which can turn into bad loans," Papi said.

In the long run, ensuring India's financial system is able to underwrite strong growth will require pushing forward with financial reforms, such as developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt.

Filed under 02. - ECONOMIC DEVELOPMENT AND DEVELOPMENT FINANCE IMF INDIA.