Indians teach the IMF how Indians manage their economy. A fine lesson to others.

 

I saw an interesting article published in "mint" e-paper website, 22nd December (Article), on comments made by Indian authorities to the IMF 2023 Article IV Consultation Report which was issued on 20 November 2023 (IMF India Report).

The Report is seen giving A + ranking to Indian economy and its macroeconomic management as revealed from the IMF Executive Board Assessment. However, the IMF staff has made few adverse comments on corner items to create long-term issues unnecessarily.

However, it is admired that Indian authorities had the courage to discredit such IMF comments.

Therefore, this article provides highlights on IMF comments and Indian response so that other country authorities can learn how to deal with the IMF staff in the national interest in front of the day jobs of the IMF staff members.  

IMF Executive Board Assessment on Indian Economy

• Commended the Indian authorities for their prudent macroeconomic policies and reforms that resulted in the economy’s strong economic performance, resilience, and financial stability, while also facing continued global headwinds.

• Welcomed the authorities’ near-term fiscal policy, which focuses on accelerating capital spending while tightening the fiscal stance.

• Commended the Reserve Bank of India’s (RBI) proactive monetary policy actions and strong commitment to price stability. They agreed that the current neutral monetary policy stance, anchored on a data dependent approach, is appropriate and should gradually bring inflation back to target.

• Agreed that exchange rate flexibility should remain the first line of defense in absorbing external shocks, with foreign exchange interventions limited to addressing disorderly market conditions.

• Welcomed that the financial sector remains stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets, and adequate capital and liquidity buffers.

• Noted that continuing with comprehensive structural reforms can help further leverage India’s favorable demographics and encouraged the authorities to promote job-rich, inclusive, and greener growth.

According to the IMF,  India is expected to contribute over 16 percent of global growth as economic reforms in key sectors like infrastructure and digitalisation have made India a "star performer" among countries.

IMF's Concerns over Indian Economy

Despite the strength of the IMF Board assessment, the IMF staff has made several adverse observations with regard to debt, exchange rate stability management and non-banking sector risks. In this regard, the "mint" paper has reported following concerns of the IMF staff.

• Concerns about the long-term sustainability of India's debt and caution that general government debt is likely to exceed 100 percent of India's gross domestic product (GDP) in the near future.

• Reclassified India’s exchange rate regime, terming it a "stabilized arrangement" instead of "floating" for the period between December 2022 to October 2023. The IMF highlighted concerns over foreign exchange intervention (FXI) impacting the rupee-USD exchange rate. The IMF insisted on the continued importance of exchange rate flexibility in absorbing external shocks.

• Acknowledged India's effective inflation management amidst global commodity price hikes through extensive government interventions.

• Concerns about vulnerabilities in non-banking financial companies (NBFCs).

Indian response to IMF Concerns

It is admired that Indian authorities have carefully examined the IMF staff concerns and  refuted them outright as highlighted below. This will nib in the bud the malicious IMF staff intervention in Indian economy in the near future, especially fiscal, debt and exchange rate management which are often disrupted by the IMF staff.

• The risks from sovereign debt are very limited as it is predominantly denominated in domestic currency. Despite the multitude of shocks the global economy has faced in the past two decades, India’s public debt-to-GDP ratio at the general government level has barely increased from 81 percent in 2005-06 to 84 percent in 2021-22, and back to 81 percent in 2022-23.

• The USA, UK, and China are estimated to face significantly higher debt-to-GDP ratios of approximately 160, 140, and 200 percent, respectively, in their 'worst-case' scenarios.

• India's debt is largely rupee-denominated, with minimal contributions from external borrowings. Emphasizing the stability of domestically issued debt, mostly in government bonds with longer-term maturities, it underscored low rollover risks and limited exposure to currency volatility.

• Domestically issued debt, largely in the form of government bonds, is mostly medium or long-term with a weighted average maturity of roughly 12 years for central government debt. Therefore, the rollover risk is low for domestic debt, and the exposure to volatility in exchange rates tends to be on the lower end.

• India's resilience in facing events such as the global financial crisis, COVID-19, and geopolitical tensions like the Russia-Ukraine War, underscoring that these crises uniformly impacted the global economy. However, India's current debt level remains below 2002 in a cross-country comparison, illustrating the nation's relative stability.

• Strongly disagreed on exchange rate stabilized arrangement, asserting that interventions were necessary to curb excessive volatility. The IMF doesn't understand India's domestic compulsions. Since imported inflation is a crucial element of India’s overall inflation that impacts 1.4 billion people, the central bank has to actively manage the rupee volatility.

• Attributed India's lower inflation rate during the pandemic to a unique economic policy rather than extensive government intervention. It emphasized the careful mix of demand-side and supply-side measures implemented by India.

• Refuted outright that there are no lingering vulnerabilities in NBFCs.

Lesson to other country authorities

Indian response highlighted above shows that IMF staff concerns are silly and a lesson to other country authorities to protect national interests. 

• Indian debt managed around 80% of GDP mainly through domestic curency and exchange rate stabililized through a huge bed of foreign reserve around US$ 620 bn are really of no macroeconomic concern at all. The IMF staff does not understand the purpose of foreign reserve buffer in simple macroeconomics and, therefore, advises Indians to let exchange rate changes while sitting on the reserve buffer. In fact, the foreign reserve itself is a result of intervention to prevent harmful appreciation of the currency.

• Instead, the high debt position in the US is recognized by the US politicians as well and confronts political defaults every year. It is reported that the issuance of Treasuries in 2024 will be US$ 9 trillions, i.e., US$ 7 trillions for rollover (i.e., 30% of the existing debt stock) and US$ 2 trillions for deficit financing at sugar high interest rates unless the Fed cuts interest rates.

• The Fed undertakes dollar swaps with central banks in developed countries to provide dollar liquidity to stabilize respective exchange rates. The US has been confronting lingering trade deficits which create immense pressures on the value of US currency.

• However, the IMF never makes any comments on the US fiscal deficit, debt and trade deficit despite their uncertainties created to the global financial system stability.

• Instead, the IMF has nearly destroyed many developing countries including Sri Lanka on its views of numbers on fiscal deficit, debt and exchange rates without taking into considerations macroeconomic circumstances in these countries. These countries have been on IMF programmes in 15-17 times in the past without any long term macroeconomic benefits.

• It is reported that the IMF has turned down the request of Sri Lanka for financial support at the onset of the global Pandemic on concerns over Sri Lankan debt unsustainability while offering the support of nearly US$ 170 bn to nearly 90 countries (almost all emerging market economies including all countries with IMF debt unsustainability label) and debt relief to 30 countries. It is widely accepted that this non-receipt of the IMF facility was a root for the present economic crisis of Sri Lanka, However, the IMF recently offered nearly US$ 40 bn to the debt-ridden Argentina for two decades to rollover the debt. Further, IMF views on economic policies in these countries are in contrast to modern monetary and supply side economics.

• Overall, these countries often get into the IMF staff trap with their frequent travels to the IMF because they do not have fellow citizens like Indians while officials dealing with the IMF staff in fact are the IMF Agents who happily compromise the national interest to their personal interests.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)