External Sector Report 2022: IMF

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    In News

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

    Major highlights/ recommendations of the report

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    • 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. 

    International Monetary Fund

    • It was established in 1944 in the aftermath of the Great Depression of the 1930s.
    • IMF and the World Bank are also known as the Bretton Woods twins because both were agreed to be set up at a conference in Bretton Woods in the US.
    • It is governed by and accountable to the 190 countries that make up its near-global membership.
      • India became a member in December 1945.
    • Aim: To ensure the stability of the international monetary system (the system of exchange rates and international payments) which enables countries and their citizens) to transact with each other.
      • Its mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
    • 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 

    Source: IE