Fresh Imf Warning On Fiscal Deficit

The warning came during a board meeting early this week at the conclusion of Article IV discussions between the Fund and India. Article IV enjoins the IMF to maintain strict surveillance over the economic performance of its members.

The IMF board, striking a cautionary note, discussed a possible expansion of the tax base in India, and a reduction in the size of the government. India was also asked to ensure that its exchange rate police reflected its economic fundamentals.

Briefing reporters at an unusual meeting at the conclusion of the board discussion, Indias executive director to IMF, M R Sivaraman, said the country was expected to maintain a growth rate of above 6 per cent.

 

Explaining the factors contributing to the optimism, he said Indias foreign exchange reserves were close to $19.2 billion, while a good monsoon indicated that inflation will stay below 7 per cent. Sivaraman said the industrial sector was expected to grow at 10 per cent this year and the agricultural sector at 3-4 per cent.

The IMF board, although appreciative of Indias progress, observed that the country was still somewhat conservative on the macroeconomic front. Increased liberalisation, it noted, would lead to even higher rates of growth. The Fund has been particularly eager to emphasise that the fiscal deficit needs to be tackled. The IMF board noted that it was critical that there was no further deterioration in the fiscal deficit as it would lead to a greater burden on the monetary policy.

The observation is in tune with earlier IMF warnings. Recently, on the eve of the Fund-World Bank annual meetings, IMF managing director Michel Camdessus advised India to halve its public sector deficit in five years, warning that it jeopardised sustainable growth.

Sivaraman said India was targeting a central deficit of 5 per cent, state deficit of 2.8 per cent and public sector deficit of 1.2 per cent. The fiscal deficit, the Fund has also been calling on India to remove obstacles to private investment in infrastructure, step up privatisation of public enterprises, end quantitative restrictions on imports, reform the agricultural sector, open up the insurance sector and announce an exit policy.