India's Outlook 2018

• In India, growth slowed in recent quarters on account of disruptions from the currency exchange initiative (“demonetization”) in November 2016 and, more recently, the rollout of the goods and services tax, a landmark tax reform that is expected to unify the domestic market and encourage businesses to move from the informal to the formal sector. Inflation has been low compared with the mid-point target in recent months, driven by lower food prices, allowing the central bank to cut its policy rate in August.

• In India, growth was revised down to 6.7 percent in FY2017 and to 7.4 percent in FY2018, reflecting the recent slowdown in economic activity. Growth will be underpinned by private consumption, which has benefited from low food and energy prices, as well as civil service allowance increases. Headline inflation is projected to stay close to the midpoint of the target band (4 percent ±2 percent) in FY2017, while moving to the upper half of the target band in the medium term as food prices recover. The current account deficit should remain modest, financed by robust foreign direct investment inflows.  

Contribution to Projected Growth

Total factor Productive Growth

Fiscal Policy  

• In India, where large fiscal imbalances entail risks to macroeconomic stability, consolidation
  should continue, relying on high-quality measures to reduce the short-term drag  on economic activity and to contain any adverse distributional implications.
• Excise taxes on carbon and fuel could help raise revenue and lower pollution.Public spending should be reallocated from untargeted subsidies toward capital and social spending and should be supported by quality tax reforms.

Monetary and Exchange Rate Policy  

• In cases of inflation expectations that remain high compared with the inflation target, the monetary policy stance should have a tightening bias to achieve durable disinflation . 

Headline Inflation Change

Foreign Exchange  Reserve Accumulation Change science 2017

Equity Price Change During 2017

Exchange Rate

Financial Policies  

• In India, priorities should be strengthening public banks’ loss-absorbing buffers, implementing
  further public banking sector structural reforms, and enhancing public banks’ debt recovery  mechanisms.  

Structural Reforms  

• In India, reform efforts should aim at tackling supply bottlenecks, enhancing the efficiency of labor and product markets, and modernizing the agricultural sector. Labor market reforms such as rationalizing labor market regulations should be a priority to facilitate greater and higher-quality job creation.

Real Policy Allocation

Source: IMF, World Bank