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IMF cautions India against fiscal stimulus, says govt should go for reforms

The Budget projected the Centre's fiscal deficit to come down to 3.3 per cent of the country's gross domestic product (GDP) in 2019-20 against 3.4 per cent a year ago

Indivjal Dhasmana  |  New Delhi 

Photo: Reuters
The IMF said with its strong mandate the Narendra Modi government had an opportunity to reinvigorate the reform agenda aimed at boosting inclusive and sustainable growth.

The (IMF) has cautioned India against giving a because the government has a wiggle-room to do so. It said the government was anyway likely to miss the fiscal deficit target given in the Budget for 2019-20 owing to ambitious revenue projections and the recent cuts in corporation tax rates.

It has estimated the Centre’s fiscal deficit to widen to 3.7 per cent of GDP in FY20 and 3.8 per cent next fiscal year, against the projection of 3.3 per cent and 3 per cent given in the Budget papers. It wanted the government to undertake reform measures and the (RBI) to give a monetary stimulus to spur the sagging economy.

“Addressing cyclical weakness should focus on monetary policy and broad-based macro-structural reforms. should be avoided given limited policy space,” the said in the country report on India, released on Tuesday under its Article IV. The IMF’s suggestion came amid industry lobbying with the government to provide it a The said the Union Budget for 2019-20 envisaged a small reduction in the fiscal deficit but the overly optimistic revenue targets and the recent reduction in corporation rates made achieving the Budget targets increasingly unlikely.

The Budget projected the Centre’s fiscal deficit to come down to 3.3 per cent of the country’s gross domestic product (GDP) in 2019-20 against 3.4 per cent a year ago. In absolute terms, the Budget targeted the deficit to come down to Rs 7.03 trillion in the current fiscal year from Rs 6.34 trillion a year ago. The deficit has crossed this target by over 2 per cent by October itself.

The said in the near term, given the cyclical weakness in the economy, monetary policy should maintain an easing bias at least until the projected recovery took hold.

The monetary policy committee of the has cut the repo rate by 1.60 percentage points in the current fiscal year, but refrained from doing so in its December policy review.

The IMF said with its strong mandate the Narendra Modi government had an opportunity to reinvigorate the reform agenda aimed at boosting inclusive and sustainable growth.

“A comprehensive reform package is needed to guide the economy on a path to the government’s goal of a $5-trillion economy in five years,” it said. It said a credible fiscal consolidation path is needed for the medium term to reduce debt, free up financial resources for private investment, and reduce the interest bill.

IMF cautions India against fiscal stimulus, says govt should go for reforms

To support the adoption of a necessary medium-term fiscal consolidation, driven by subsidy-spending rationalisation and tax-base enhancing measures, revenue projections should be more realistic and fiscal transparency and budget coverage should be enhanced, it said. The governance of public sector and the efficiency of their credit allocation needs strengthening, and the public sector’s role in the financial system needs to be reduced.

Labour, land, and product market reforms aimed at enhancing competition and governance, along with infrastructure investment, should be priorities to create more and better jobs for India’s rapidly-growing labour force and enhance female labour force participation, the IMF said. The Fund said fiscal consolidation needs to be anchored by a gradual reduction of subsidy spending on food, fuel, and fertilisers, the need for which is lessened by increased economically-less-distortionary direct-benefit-transfers to farmers, including through PM KISAN.

It also focused on increase in revenue collections through reforms on GST. It recommended increasing compliance by streamlining filing and refund mechanisms, broadening the base by including electricity and petroleum products, and simplifying the rate structure—adopting fewer rates.

First Published: Tue, December 24 2019. 20:51 IST
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