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India Urged To Close Fiscal Gap

by Ulrika Lomas,, russe

07 January 2011

The International Monetary Fund has published its Article IV consultation with India urging further effort towards addressing the fiscal imbalance.

In its report, the IMF identified that monetary and fiscal policies remain accommodative, however the need for further fiscal consolidation was highlighted against the background of a high fiscal deficit.

India’s economy is projected to grow by 8.75% in real terms in 2010/11, moderating to about 8% the following year. The IMF foresees infrastructure as an area which will continue to drive economic growth, with the IMF stating that corporate investment is likely to accelerate, aided by conducive financing conditions and robust demand growth.

Presenting recommendations, the IMF said sustaining rapid growth over the medium-term will depend on reforms to facilitate infrastructure investment, such as deepening the corporate bond market and lowering the cost of doing business, and improving social indicators while carrying out fiscal consolidation.

The IMF Executive Board agreed that near-term challenges confronting the authorities arise from elevated inflation, fiscal consolidation needs, and buoyant capital inflows, warranting careful calibration of macroeconomic policies and the diligent pursuit of ongoing reforms.

The Board welcomed the authorities’ commitment to fiscal consolidation, including their plans to streamline spending. The Board said: “The envisaged Goods and Services Tax and the new Direct Tax Code should increase tax efficiency.” Most board members agreed: “Given buoyant economic growth, and since future deficit targets could be more difficult to reach, [there is merit] in a further strengthening of the consolidation effort.”

“Saving this year’s over performance in revenue and one-off receipts could help reconstitute fiscal space. More substantial current spending adjustment, mainly by further cutting subsidies and improving the targeting of spending, would help achieve social goals along with medium-term fiscal consolidation.”

TAGS: tax | economics | India | fiscal policy | goods and services tax (GST) | services

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