India must stick to fiscal consolidation in medium-term, says Gita Gopinath

India must stick to the fiscal consolidation roadmap in the medium term, International Monetary Fund (IMF) chief economist Gita Gopinath said on Friday. This comes amid the rising debate on whether the government should go for fiscal expansion to perk up the economy.

Speaking at the 92nd annual convention of Ficci, Gopinath also said the IMF will revise India’s growth projections downwards in January. This is because high frequency indicators are not showing an uptick in the second half.

“For India, macro stability is very important as it means stability on the fiscal front. A clear sense of keeping to the target of fiscal consolidation is very important,” said Gopinath, adding that would require increasing revenue mobilisation and rationalising expenditure.

Amid severe revenue shortfall under the goods and services tax (GST), several states had on Wednesday asked finance minister Nirmala Sitharaman to revise the fiscal deficit target to 4 per cent of the gross domestic product (GDP), up from 3.3 per cent. 

Gopinath added, “When we talk about fiscal consolidation, we think of it as a medium-term target which is something that has to be addressed over a period of time and not necessarily overnight.” 

India’s consolidated deficit (the Centre and states combined) is the highest among G20 nations, she added. “So, it’s not a free lunch and this has to be very carefully managed,” she said.

On GST, the IMF chief economist said that while reforms were important for formalising the Indian economy, certainty and clarity was needed as far as regulation and tax rates were concerned. “GST, which has been very important for formalising the Indian economy, but again there… certainly more needs to be done on what the rules are, what the rates are going to be.”

GST rates on over 400 goods and about 80 services had seen a revision since rollout on July 1, 2017. The government is planning an upward revision of certain slabs to compensate for the GST revenue slowdown.

On revision of India’s growth outlook, Gopinath said some high frequency indicators did not show an increase in India’s growth in the third and fourth quarters as was anticipated earlier.

“Our expectation was that the first two quarters of fiscal 2019-20 would be a slowing scenario and then there would be an uptick in the third and fourth quarter. Looking at some of the high frequency indicators, we are not seeing the kind of uptick we were projecting. So, this is why I mentioned that we will be revising the numbers again in January.”

She said it was important for India to take up reforms but with greater clarity and certainty. There are important reforms needed with respect to land acquisition and labour laws, she said.

“Now, we would like to think that with the government having strong political mandate, this would be the right time to undertake those kind of reforms. In the absence of it, India is missing out on what we assume globally in terms of shifting global supplies,” she added.

India’s economy growth fell to an over six-year low of 4.5 per cent in the second quarter of the current financial year.