More fiscal transparency will mean better economic policy in India: IMF

Financing new social initiatives and development projects will benefit India's younger generations but this will require prudent use of public funds, the International Monetary Fund (IMF) has said.

Economic development projects and enhanced social initiatives in the country will be vital in the coming years. But to generate the revenue needed to get them off the ground, India's debt -- among the highest in emerging markets -- must be reduced.

"Despite some improvement in reported fiscal deficits, debt as a share of GDP remains little changed over the past decade partly due to increases in off-budget financing," it said in a report released on Monday (local time).

This large public-sector footprint also ties up financial resources that could otherwise be drawn upon for private investment. Reforms to improve budgeting and enhance transparency in fiscal reporting have a vital role to play in putting debt on a durable downward trajectory.

Much of the discussion regarding fiscal policies in India focuses on its central and states' government deficits. However, a broader and more relevant measure of the government's fiscal position -- and its bearing on the economy -- is the public sector's borrowing requirement, which has risen to about 8.5 per cent of GDP, according to IMF estimates.

This estimate incorporates some information on central government expenditures which are financed off-budget through other mechanisms, but is missing information on activities of state public enterprises and lower tiers of government.

The high borrowing requirement of the public sector also holds India back as it strives to catch-up with more advanced countries by making private-sector investment more costly. Investment activity -- whether public or private -- relies on a finite pool of financial resources.

In India's case, households' net financial savings have been lower than the public sector borrowing requirement in recent years, implying that private investment projects face stiff competition for funding, making financing more costly and preventing potentially viable projects from being initiated.

Getting the word out on India's true fiscal stance could yield significant benefits for policymakers and the Indian economy. For example, a more accurate picture of the fiscal stance will better inform decisions regarding how much stimulus should be provided in a cyclical downturn.

The government can increase its credibility vis-a-vis financial markets and enjoy more favourable borrowing conditions as a result. And greater fiscal transparency will also boost the ability of investors and citizens to make informed and efficient financial and economic decisions.

In the coming years, said IMF, India should recommit to debt reduction by reducing its public sector borrowing requirement. Measures to enhance fiscal transparency and improve reporting will play a vital role in this process.

As part of the Group of 20, India has already committed to publishing general government fiscal information on a quarterly basis which should enable better monitoring and faster policy reactions.

As a complement, India will have to improve the collection and disclosure of information on public enterprises, especially at the state level, in order to better anticipate possible causes of financial distress and minimise their costs for taxpayers.

Yet, more information does not necessarily imply more transparency for citizens. Information is currently scattered across many documents and websites, making it difficult to obtain a comprehensive account of the use of public resources.

Going forward, the federal and state governments should look to provide the public with more user-friendly and forward-looking information and narratives and adopt common standards to ensure that citizens in all states have equal access to fiscal information, said IMF.

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