April 17-18, 2015
1. I would like to congratulate the Managing Director for covering a wide canvass in the Global Policy agenda (GPA) and still retaining its cohesiveness.
2. While we agree with the broad thrust of the GPA, I would like to emphasize some issues.
3. State of the Global Economy
After more than six years of unprecedented monetary stimulus and fiscal stimulus in the initial stages of the crisis in the advanced economies, global growth remains weak. Even as global growth remains weak, financial stability risks have increased.
The focus in the advanced economies after the crisis has been on Unconventional Monetary Policies (UMPs). Such policies exacerbate financial stability risks by encouraging excessive financial risk taking and also cause spillovers to other economies. The exit from such policies will be challenging and needs to be predictable, and well communicated, so that disruptive effects on the other economies are minimized.
4.A major challenge for emerging markets and developing economies is to raise their potential growth by implementing structural reforms. The focus, in general, has to be on encouraging infrastructure investment, strengthening the investment climate and improving human resource skills through education and training. Many emerging market economies have benefitted from the sharp decline in oil prices. It, therefore, provides a window for implementing energy reforms, phasing out subsidies and build fiscal buffers. EMDCs also need to be prepared to deal with any shock that may arise on account of increased financial market volatility.
5. Let me now briefly touch upon the key macroeconomic developments in India. The Indian economy is now clearly on a recovery path and it is estimated to grow by 7.4 per cent in 2014-15. The Reserve Bank of India has projected the growth for 2015-16 at 7.8 per cent. In the recent period, we have taken several policy measures, including liberalization of foreign direct investment limits, increasing public investment in public infrastructure, especially railways, and ensuring predictability of the tax regime. Several stalled projects have been cleared. All these should help improve the investment climate and raise the medium-term growth prospects.
6. India has come a long way from the three main concerns which we had in 2013. Retail inflation has moderated significantly from 11.2 per cent in November 2013 to 5.2 per cent now. Short-term and medium-term inflation expectations have also moderated to single digits now. The Reserve Bank of India has recently adopted a flexible inflation targeting framework for conducting monetary policy. This should help contain inflation expectations and ensure better inflation management.
7. India has continued on the path of fiscal consolidation. In the last three years, the GFD of the central government has been reduced by more than 1.5 percentage points of GDP. According to the fiscal roadmap envisaged, the central government will reach the fiscal deficit target of 3.0 per cent in 2017-18.
8. India's current account deficit (CAD declined sharply by more than 3 percentage points of GDP in a single year in 2013-14. The CAD is expected to decline further to 1.3 per cent in 2014-15. Reflecting the improved domestic macroeconomic situation, as also the continued ultra accommodative global monetary conditions, India has received large capital flows in the recent period, far in excess of its absorptive capacity. Excess capital flows, therefore, have been absorbed into our foreign exchange reserves, which are now at an all-time high level of US$ 343 billion. As such, India is now better prepared to deal with global financial market volatility should that arise in the context of US monetary policy normalization.
9. The task before us is to maintain such overall conducive macroeconomic conditions that the Indian economy is able to achieve a high growth of 8 per cent and above on a sustained basis.
Quota and Governance Reforms
10. The third and the final issue which I briefly want to emphasize relates to the quota and governance reforms. The 2010 Quota and Governance Reforms have not become effective. We have not made any headway in the initiation of the discussions on the 15th Review, including the review of the quota formula. The reforms are key to ensuring the Fund's credibility, legitimacy and effectiveness.
11. Alternative options are being considered, in the interregnum. Of course, we have been of the view that the delinking option is the most desirable option.
12. However, we have noted, and are satisfied with US Treasury Secretary's assurance of getting the reforms done. We are pleased that Mr. Lew has promised the reform "sooner" rather than later. As such we feel there may indeed be no need for any interim options.