External Sector Report 2022: IMF

In News

• Recently, the IMF released its 2022 External Sector Report.

Major highlights/ recommendations of the report

• Fiscal and monetary policy stimulus
  • The International Monetary Fund (IMF) suggested India withdraw fiscal and monetary policy stimulus gradually.
    • Economic stimulus is action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or fiscal policy.
    • Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks.
    • Fiscal policy is a collective term for the taxing and spending actions of governments.
• Export infrastructure
  • India should develop export infrastructure and scale up shipments by getting into free trade agreements with key trading partners, in a bid to maintain a comfortable external sector balance over the medium term.
• Liberalisation
  • India should also be accompanied by further liberalisation of the investment regime and a reduction in tariffs, especially on intermediate goods.
• Depreciation of the rupee against the dollar
  • Interventions in the forex market should be limited to addressing disorderly market conditions. 
  • Given that the Reserve Bank of India (RBI) already has a comfortable level of foreign exchange reserves despite recent drops (these are still enough to cover eight months of imports), accumulation of additional reserves is less warranted. 
• Structural reforms
  • Structural reforms could deepen integration in global value chains and attract FDI.
• India’s current account deficit (CAD)
  • The Fund has forecast India’s current account deficit (CAD) to worsen to $108 billion (3.1% of its GDP) in FY23 from $38 billion (1.2% of GDP) in the last fiscal.
  • The spike in the CAD this year partly reflects the impact of the war in Ukraine on oil prices.
• Import tariff
  • India’s average applied import tariff rose to 18.3% in 2021 from 15% in the previous year, although it’s still way below the permissible limit set for the country by the World Trade Organization.
• The country’s net international investment position
  • It is typically the difference between its external financial assets and liabilities that improved to –11.1% of GDP at the end of 2021 from –13.5% a year before.

Way Forward

• IMF’s suggestion on withdrawal of fiscal and monetary measures: the RBI has already raised the interest rate by 90 basis points since May and is widely expected to hike the rate by another 35-50 bps.
• Ended some of the liquidity measures: It has also ended some of the liquidity measures initiated in the wake of the pandemic. 
  • The fiscal measures were mostly aimed at boosting the supply side, and not so much the demand side.
• India’s CAD is broadly consistent with its per capita income level, favourable growth prospects, demographic trends, and development needs.
• External vulnerabilities stem from volatile global financial conditions and significant increases in commodity prices.
• India’s external debt liabilities are “moderate” compared with its peers and short-term rollover risks are limited.
• India in international bond indices should increase portfolio investment inflows for financing the CA deficit over the medium term. 

Source: IE