Following the International Monetary Fund's assessment of the country's excessive intervention in the foreign exchange market, India has choked with the IMF.
According to Bloomberg, on February 20, local time, the Reserve Bank of India (Reserve Bank of India) released a research article written by Michael Debaprata Patra, deputy governor of the bank, and others, which refuted the IMF's view that India's debt may exceed the size of the country's economy, saying that India's debt ratio (the ratio of debt to GDP) will decline faster than the IMF's.
In its annual report on India's economic conditions, released in December 2023, the IMF warned that in the event of a historic shock, India's total debt, including federal and local state debt, could exceed 100% of the country's GDP by fiscal year 2028. India** responded at the time, "This is the worst-case scenario, not a fait accompli." ”
The Reserve Bank of India (Reserve Bank of India)** has a combined assessment that India's ** debt ratio will fall to 73 by the 2030-2031 fiscal year4%, down from 782% (*excerpted from**).
The Reserve Bank of India's (RBI) monthly communiqué on February 20 was accompanied by an article written by the bank's deputy governor, Patra, and RBI researchers titled "The Shape of Fiscal Consolidation Compatible with Growth."
In the article, Patra et al. argue that by constructing a dynamic stochastic general equilibrium (DSGE) model, India's debt ratio will deviate from the path that the IMF described as India in its latest report.
Patra and RBI researchers argue that deficits can be cut sharply by adjusting spending, such as targeting sectors that create productive jobs, implementing energy-efficient transitions, and investing in digitalization.
The article also analyzes that the exchange rate risk of Indian borrowing is limited, as 95% of the ** debt is issued in local currency and held by domestic financial institutions and households.
The paper's research concludes that the debt ratio is expected to fall to 73 by FY 2030-2031 as India rebalances spending4%, compared to 78 of the IMF**2% is about 5 percentage points lower. Bloomberg mentions that the IMF estimates that India's ** debt ratio is currently around 82%.
In addition, the article said that in 2023-2028, the ** debt ratio of advanced economies is expected to increase from 1121% rose to 1163%, and the ** debt ratio of emerging market and middle-income countries will increase from 683% to 781%。
Against this backdrop, we do not accept the IMF's view that in the event of a historic shock, India's total debt would exceed 100% of GDP in the medium term, hence the need for further fiscal tightening. The article writes at the end.
According to Reuters, on December 22 last year, India's Ministry of Finance expressed its position on the IMF's view, saying that "this is the worst-case scenario, not a fait accompli", and "any interpretation that the IMF report implies that the total debt will exceed 100% of GDP in the medium term is wrong." ”
Much to the displeasure of the RBI is the IMF's annual report on India's economic conditions, released on December 18 last year, which covers the period from December 2022 to October 2023. In accordance with Article IV of the Constitutive Agreement, the IMF usually holds bilateral discussions with member countries each year and publishes judgments and assessments of member countries' economic performance and macroeconomic policies.
The IMF report mentions that based on India's past fiscal downturn and economic shocks**, India's debt ratio could reach 100% by fiscal 2028 under adverse scenarios. As a result, India needs bold fiscal consolidation to "support inclusive growth while replenishing capital buffers and sustainably reducing debt levels."
The IMF report also quoted India's finance ministry as saying that India's debt ratio, which is 81% in the 2022-2023 fiscal year, could fall below 70% in a favorable environment.
According to the IMF, India must reach a fiscal deficit of 4 percent of GDP in the 2025-2026 fiscal year5% target, and further shrink the deficit to build buffers, help withstand shocks, and create space for spending to support growth, such as infrastructure, health care, and climate change mitigation.
On October 27, 2023 local time, in Mumbai, India, several trains were canceled for the construction of Line 6 connecting Khar Road and Goregaon Station, and Andri Railway Station was crowded. (Source: Visual China).
It is worth mentioning that the RBI has previously refuted the IMF's decision to adjust India's real exchange rate regime from "floating" to "stabilization arrangement" in the same report.
According to the IMF, India has moved from a floating exchange rate system in which the rupee exchange rate is determined by the market to a managed exchange rate system, in which the exchange rate is controlled by the state. Moreover, India's intervention in the US dollar has exceeded what the IMF deems necessary.
But the RBI dismissed this view, saying that the IMF's change in the classification of India's exchange rate regime was "incorrect and unrealistic". India** said that the IMF does not understand India's domestic demand, and the central bank must actively manage rupee volatility because imported inflation is key to India's headline inflation.
Since the beginning of 2023, the USD/INR exchange rate has fluctuated slightly in the US dollar range of 81-84 rupees. For India, which positions itself as a "leader" in emerging countries in the Global South, how the country handles its future exchange rate will be key for foreign investors to decide whether to increase investment, according to Nikkei Asia.
At the moment, at a critical moment before India, according to Reuters, on February 21, because the negotiations with the guarantee of agricultural products failed to break the deadlock, Indian farmers stationed in the border area of Punjab and Haryana resumed the "advance to New Delhi" activity on the same day, and thousands of Indian farmers drove cranes and excavators along the highway.
On February 21, 2024 local time, near Ambala, India, peasant riots broke out in the border area of Punjab and Haryana, and the police took action.
This article is an exclusive manuscript of the Observer.com, and it is not allowed to be unauthorized and shall not be allowed.