Review medium-term debt target, make it more ambitious: IMF to Centre

In its Article 4 review, the Fund called for broader debt anchors, stronger state-level reforms and careful monitoring of tax cuts as India continues fiscal consolidation

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In its Article 4 consultation report on India released on Wednesday, the International Monetary Fund (IMF) asked the government to review its medium-term debt target, and make it more ambitious by broadening the debt anchor to include the state government debt as well. The IMF also said that the pace of fiscal consolidation in 2026-27 (FY27) should be conditional on the impact of tariffs on the output gap.

 

During the consultation, Indian authorities, however, said that it would be “premature” to consider a pause in fiscal consolidation in FY27, “especially in the context of the credible and transparent fiscal guidance path that the Government of India has been following”. The Indian government has also expressed confidence in the adequacy of the debt target of 50±1 per cent of gross domestic product (GDP) by FY31 as a medium-term fiscal anchor.

 

The IMF said states require further fiscal reforms to bring debt to sustainable levels while maintaining critical spending on infrastructure and social expenditure. It suggested that the 16th Finance Commission should create a devolution formula that balances equity with performance-based incentives, since with a heavy emphasis on equity, the current devolution formula provides little incentive for states with high deficits to consolidate or increase own revenue. 

 

The central government’s targeted debt ratio of 50±1 per cent of GDP by FY31 is achievable without further fiscal measures, the IMF said. It added that faster consolidation would ease the high debt service burden sooner, and help rebuild fiscal buffers for future shocks.

 

The IMF pointed out that fiscal sustainability of states is a critical component of macroeconomic stability, but compliance with fiscal frameworks is weak. It has advised more timely data reporting, and comprehensive disclosures such as contingent liabilities at the state level. The Fund has suggested operationalising the medium-term target with well-defined annual fiscal adjustment paths to clarify the government’s intentions and guide financial markets.

 

The Fund has recommended setting up of an independent fiscal body for providing advice and oversight for strengthening the institutional architecture of public finances.

 

The IMF also called for careful monitoring of fiscal impact of the reduction in goods and services tax (GST) and personal income tax rates. It said that the pace of fiscal consolidation planned for FY26 is well aligned with last year’s recommendations. “The continued focus on infrastructure is welcome, but the personal income tax reduction will erode the already-low income tax base in India,” the IMF said, adding that the decline in the effective GST rate can add mild fiscal pressure. 

 

 

Report flags impact of AI on job market

 

Artificial intelligence (AI) may soon have the potential to disrupt labour markets at a fast pace, IMF said emphasis should be placed on adequate social protection for those at risk of displacement in India. 

It highlighted that it was critical to ensure that AI diffusion is supported by complementary reforms, including investment in digital and physical infrastructure as well as improvements in human capital and innovation. 

The Fund noted that the adoption of AI in India has been uneven, with limited AI skills, expertise or knowledge, lack of tools and platforms and integration complexity being cited as the main barriers by firms. 

It said that AI adoption could raise total factor productivity in emerging markets Asia, including India, by 0.3 to 3 percentage points — depending on sectors and scenarios — over a decade. 

The report highlighted that while digital access in India has grown rapidly, there is potential for further development.