Reducing fiscal deficit to around 3% of GDP difficult: Govt to IMF

A fiscal deficit of around 3 per cent of the gross domestic product (GDP) for the central government, as advocated by the International Monetary Fund (IMF), is difficult since a significant amount of capital expenditure previously undertaken by state-owned enterprises (SOEs) has been brought onto the central government budget.

 

In its latest Article IV consultation report on India, the IMF said a combined fiscal deficit (Centre + states) of less than 6 per cent of GDP, as advocated by IMF staff for the medium term—coupled with the need to increase infrastructure spending by the Union and the states—“would imply eliminating the revenue deficit, which the authorities felt was not feasible in the near term and could compromise growth.”

 

“The authorities agreed on the need for greater revenue mobilisation, noting that their focus will remain on supporting voluntary compliance for taxpayers through simplification of the tax law (for example, review of the Income Tax Act) and continued efforts to improve the tax administration through digitalisation,” the IMF said in its report.

 

The report further noted that both the IMF and the government saw a need for medium-term fiscal consolidation but considered targeting a more gradual pace of adjustment to be appropriate, given global uncertainties.

 

“The government noted that, in any case, risks from public debt are mitigated as it is largely long-dated, contracted at fixed rates, denominated in domestic currency, and held by residents. They emphasised that the benefits of the favourable growth-interest rate differential are projected to continue in the foreseeable future,” the report noted.

 

In the recently announced Union Budget, finance minister Nirmala Sitharaman had introduced a new glide path with the debt-to-GDP ratio as the fiscal anchor, moving away from the current practice of targeting the fiscal deficit.

 

The six-year roadmap till 2030-31 (FY31) aims to bring down the debt-to-GDP ratio to 50 per cent, with a one-percentage-point deviation from either side, from 57.1 per cent in FY25. For FY26, the Budget pegs the debt-to-GDP ratio at 56.1 per cent—assuming nominal GDP growth of 10.1 per cent—effectively aiming to bring it down by 1 percentage point.

 

The Washington-based global lender also noted that the debt anchor should include state government debt and that a fiscal deficit path for the Union and states can be used as an operational guide for their respective annual budget processes.

 

“A revamped Fiscal Responsibility and Budget Management (FRBM) Act should include medium-term projections of key macroeconomic variables, the fiscal deficit, and its composition in the Budget to provide guidance and enhance transparency, while escape clauses can provide flexibility for fiscal policy to respond to large shocks,” it said.

 

The IMF also noted that a revenue-based consolidation strategy focused on growth-enhancing expenditure is appropriate, given India’s development needs and revenue potential. It further called for enhancing revenues, which can be raised through GST simplification, partially undoing the past decline in the effective GST rate, reversing fuel excise cuts, broadening the income tax base, and allowing domestic energy prices to move in line with global energy prices.

 

“Better targeting of subsidies and replacing them with cash transfers, where possible, would create fiscal savings while still supporting the vulnerable. Similarly, rationalising the volume of expenditure schemes introduced in past Budgets would generate cost savings,” the global lender noted.