EXTERNAL SECTOR REPORT 2022: IMF

The International Monetary Fund (IMF) has released its 2022 External Sector Report and advises India to roll back stimulus packages gradually.

Highlight of report

Fiscal and monetary policy stimulus

• The International Monetary Fund (IMF) advised India to progressively reduce monetary and fiscal policy support.
• Governmental intervention to promote private sector economic activity through the use of focused, expansionary monetary or fiscal policy is known as "economic stimulus."
• Central banks often implement monetary policy, which is largely concerned with managing interest rates and the total amount of money in circulation.
• The word "fiscal policy" refers to a government's overall taxing and spending decisions.

Infrastructure for export

• To maintain a favorable external sector balance over the longer term, India should expand its export infrastructure and increase shipments by signing free trade agreements with important trading partners.

Liberalization

• Additional investment regime liberalization and tariff reductions, particularly for intermediate goods, should proceed hand in hand with India.

Rupee appreciation vs the dollar

• Forex market interventions should only be used to deal with chaotic market situations.
• It is less necessary to accumulate more reserves because the Reserve Bank of India (RBI) currently has a healthy level of foreign exchange reserves notwithstanding recent declines (they are still sufficient to cover eight months of imports) accumulation of additional reserves is less warranted.

Structural alterations

• Structural improvements may increase FDI and deepen integration within global value networks.

The Current Account Deficit in India (CAD)

• According to the Fund, India's current account deficit (CAD) will increase from $38 billion (1.2 percent of GDP) in the previous fiscal year to $108 billion (3.1 percent of GDP) in FY23.
• The increase in the CAD this year mainly reflects how the conflict in Ukraine has affected oil prices.
• Import tariff while remaining far below the WTO-allowed level for the nation, India's average applicable import duty increased to 18.3% percent in 2021 from 15 percent the previous year.

The position of the nation's net foreign investment

• The factor that improved to -11.1 percent of GDP at the end of 2021 from -13.5 percent the year before is typically the difference between its external financial assets and liabilities.

Way forward

• IMF's recommendation for the removal of fiscal and monetary restrictions: The RBI has already hiked interest rates by 90 basis points since May, and another 35 to 50 bps increase is generally anticipated.
• Some of the liquidity measures should come to an end: Additionally, it has put an end to some of the liquidity restrictions put in place during the pandemic.
• The fiscal policies were primarily intended to increase supply rather than demand.
• The CAD of India is generally consistent with the country's level of per capita income, favorable growth prospects, demographic patterns, and development requirements.
• External vulnerabilities are caused by the erratic nature of the world economy and the sharp rise in commodity prices.
• In comparison to its counterparts, India's external debt obligations are "modest," and the danger of short-term rollover is minimal

IMF

• In the wake of the 1930s Great Depression, IMF was founded in 1944 at a summit in Bretton Woods, New York.
• The IMF and the World Bank are also known as the Bretton Woods twins, as both were the outcome of the summit.
• Its 190 member nations, which represent a nearly global membership, are in charge of it and are responsible to them.
• India joined the group in December 1945.
• Goal: To maintain the stability of the international monetary system, which facilitates trade between nations and their inhabitants through the use of exchange rates and international payments.
• All macroeconomic and financial sector issues that affect global stability were included in its 2012 mandate.
• Financing: The IMF's resources mainly come from the money that countries pay as their capital subscription (quotas) when they become members.
• Each member of the IMF is assigned a quota, based broadly on its relative position in the world economy.
• Countries can then borrow from this pool when they fall into financial difficulty.

Publications:

• World Economic Outlook
• Global Financial Stability Report
• Fiscal Monitor
• Global Policy Agenda