White Paper Decoded: How IMF, World Bank perceptions about India changed after Modi govt took over

The Narendra Modi government has released a White Paper on the Indian economy, criticizing the previous Congress-led United Progressive Alliance (UPA) government's economic policies. The report detailed how the UPA government failed to promote economic activities and instead created obstacles that hindered economic progress.

It highlighted how the Manmohan Singh government capitalized on the reforms initiated by the Vajpayee-led NDA government and favourable global conditions. However, it exploited the resulting economic growth for short-term political gains, neglecting long-term consequences. This led to issues such as a significant accumulation of bad loans, a high fiscal deficit (much of which was concealed), a substantial current account deficit, and persistent double-digit inflation for five years. India also earned the dubious distinction of being part of the "Fragile Five" economies in 2013. The UPA government's policies not only failed to energize the economy but also deterred investment, prompting industrialists to prefer investing abroad over India.

The report, presented by Finance Minister Nirmala Sitharaman, also examined how the perception of India by international institutions like the International Monetary Fund (IMF) and World Bank changed before and after the Narendra Modi government came to power.

* Structural Reforms

Before 2014: 2012 India’s Article IV Consultations: Concerns were raised about the slow pace of reforms by the then government coalition, leading to disappointment among investors. There were expectations for an acceleration in implementation, but slower decision-making, exacerbated by governance scandals and civil activism, raised further concerns.

After 2014: Kristalina Georgieva, Managing Director of the IMF, speaking during the IMF/WB Annual Meetings in 2022, praised India's remarkable economic growth amid challenging global conditions. She described India as a bright spot amidst darkening horizons, attributing this growth to significant structural reforms. Notably, she highlighted India's success in digitalization, including initiatives like digital ID and the provision of services based on digital access, as key contributors to this growth.

* Current Account Deficit and Inflation

Before 2014: According to an IMF paper on "India: Selected Issues" from 2014, there was a notable widening of India's current account deficit concerning the sectoral savings-investment balance. The paper highlighted persistently high inflation, which led to reduced real returns, prompting an increase in gold imports and a significant decline in household financial savings. Additionally, the Global Economic Prospects report from June 2012 highlighted domestic tensions in countries like India, where inflation rates were high, and fiscal and current account deficits were elevated.

After 2014: The 2021 Article IV Consultations on India noted net inflows and improvements in the current account, contributing to an increase in foreign exchange reserves. Furthermore, the Global Economic Prospects report from January 2015 indicated a decline in both the current account deficit and elevated inflation, which were persistent vulnerabilities. The report suggested that over the medium term, steady growth up to 7 per cent was expected as reforms began to yield productivity gains.

* Business Confidence

Pre-2014: IMF paper on 'India: Selected Issues, 2014': Based on four commonly used indicators of financial strength, vulnerabilities of India’s corporate sector are found to be higher than at the trough of the GFC, and at their highest since the early 2000s. The sixth chapter examines the factors behind the recent investment slowdown in India. The results suggest that in addition to standard macro-financial variables, heightened uncertainty and deteriorating business confidence have played an important role.

Post-2014: 2022 Article IV Consultations, India: Corporate and financial sector balance sheets have improved. Financial sector policies provided important support to the corporate sector during the pandemic. Accommodative monetary policy and regulatory easing targeting lenders and borrowers played a key role in supporting the financial sector and avoiding a credit crunch…. The balance sheets of non-banking financial companies (NBFCs) have also improved. These developments largely reflect the corporate sector recovery.

* India’s Investment Slowdown

Before 2014: According to "The High Cost of Economic Policy Uncertainty" by Rahul Anand and Volodymyr Tulin (March 25, 2014), the decline in infrastructure and corporate investment significantly contributed to India’s recent growth deceleration. Despite investment growth averaging above 12 per cent over the last decade, it plummeted to less than one per cent in the last two years preceding 2014. Many investment projects were delayed or abandoned, and the pipeline of new projects dwindled. Rising policy uncertainty, delayed project approvals and implementation, and supply bottlenecks were identified as key factors behind this investment slowdown.

After 2014: The IMF's Article IV report for India in 2018 highlighted significant economic reforms that positively impacted investment. These reforms included the adoption of an inflation-targeting monetary policy framework, the implementation of the Goods and Services Tax (GST), the enactment of the Insolvency and Bankruptcy Code (IBC), and the liberalization of foreign investment inflow. These measures helped in attracting foreign investors and bolstering the economy. The report also acknowledged progress in strengthening the supply side of the economy through substantial infrastructure investments, which contributed to a more conducive environment for investment.

* Reduced Capital Flow

Before 2014, during India’s Article IV Consultations in 2012, it was noted that the Indian rupee experienced significant depreciation compared to other major Asian currencies in 2011, partly attributed to India’s current account deficit. Moreover, concerns about global economic growth adversely impacted investor sentiment, and deleveraging by banks in advanced economies increased the cost of external finance.

After 2014, in 2022 India’s Article IV Consultations, it was highlighted that the external position in FY2021/22 aligned well with medium-term fundamentals and desirable policies. The country experienced current account surpluses and significant capital inflows, which aided the Reserve Bank of India (RBI) in replenishing its international reserves during the pandemic. Additionally, these capital inflows contributed to the enhancement of India’s net international investment position.

* External sector

Before 2014, as per the India Development Update in April 2013, India faced challenges in its Balance of Payments (BOP) position, leading to a depreciation of the rupee throughout the fiscal year 2013. The rupee hit an all-time low in June and remained at that level until August, reflecting the country's economic vulnerabilities.

After 2014, according to the Global Economic Prospects report in June 2016, there was a notable increase in Foreign Direct Investment (FDI) inflows to India. Following the launch of the “Make in India” campaign in October 2014, FDI surged by 37 per cent until February 2016. The computer software and automotive sectors were particularly attractive to investors, receiving the majority of these investments.