IMF Urges India To Undertake Fiscal Reform

by Lorys Charalambous, Tax-News.com, Cyprus

19 January 2005

The International Monetary Fund has urged India to narrow its fiscal deficit by increasing its 'tax to gross domestic product' ratio, through broad-based fiscal reforms aimed at increasing tax collection.

"Fiscal deficit is an area of concern that the government needs to give more attention to," the IMF's First Deputy Managing Director Anne O. Krueger was quoted as observing after delivering a lecture on the subject of reforming economies in Delhi last week.

According to Krueger, India must reduce the number of exemptions in its personal income tax system, whilst the tax base must be broadened to increase the country’s “very low” tax to GDP ratio.

“The Indian government gives a large number of subsidies to the poor, which benefit non-poor groups as well. Such subsidies should be reworked as they merely increase the fiscal deficit,” she suggested.

Krueger recommended to the Indian government that measures aimed at rationalising the tax structure should be brought into force in the next budget, along with additional trade liberalisation and financial sector reforms, in order to maintain the pace of economic development.

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