Fiscal reforms should follow stimulus package: IMF

The International Monetary Fund (IMF) has advised India that any further stimulus package should be accompanied by fiscal reforms as public debt is already at high level.

The IMF executive board, which released its views after consultations with India, said spending should focus on three categories: high-quality infrastructure, poverty reduction and bank recapitalisation. For instance, the board has urged the authorities to take advantage of falling fuel prices to reform administered price mechanism, with a targeted social safety net in place. The board did not specify what constitutes a high quality infrastructure or the safety net.

The IMF estimates India’s growth at 5.3 per cent in fiscal 2010, compared with 6.3 per cent for the current fiscal. It estimates the Centre’s fiscal deficit (the difference between total spending and receipts) at 7 per cent of GDP. Public debt is estimated at 80 per cent of GDP.

While advocating medium-term fiscal consolidation, the IMF says the key short-term policy objective should be to maintain liquidity and credit flows.

However, the board was divided in its view on what should be the Reserve Bank of India’s (RBI’s) future action. A segment of directors saw room for further reduction in interest rates as inflation has come down, while the rest were in favour of “wait-and-see” approach. But they were unanimous that monetary policy should carry the burden of adjustment because of high level of debt.

The IMF estimates average inflation to fall below 2 per cent in the next fiscal.