India needs to simplify GST, cut debts, says IMF : 09-08-2018

The $2.6-trillion Indian economy is like an “elephant starting to run” and will remain one of the world’s fastest-growing economies, aided by structural reforms, the International Monetary Fund (IMF) said on Wednesday. However, it needs to simplify the goods and services tax (GST) structure and take advantage of strong growth to trim debt more aggressively than planned. In its annual country report, the IMF said the government’s decision to ensure a 50% premium over cost of farm production “could skew farmers’ production decisions, add to inflation, and enlarge the fiscal burden”, so “their use (backed by assured procurement) should only be temporary and limited to correcting market failures”.

The IMF highlights the importance of reducing supply-side constraints in agriculture, building more integrated markets, boosting productivity and addressing market distortions. It cautioned that India’s debt (at 70.4% of the GDP in FY18) is “close to the thresholds that raise the likelihood of debt distress among emerging market economies”. So, a more ambitious medium-term fiscal consolidation path is required that is consistent with the FRBM review committee’s target of trimming the government debt to 60% of the GDP by FY23. The government wants to achieve this target by 2025.

The IMF hinted at the need for more prudent fiscal management by states that have resorted to a spending spree in recent years, including on farm loan waivers, when the Centre has been trying to consolidate. To fix the woes of massive stressed assets, the IMF has suggested greater privatisation of state-run banks over a medium term. Among other prescriptions, it recommends that RBI representatives be removed from banks’ boards and the terms of reference for board members, including those from the finance ministry, be defined better to ensure higher governance standards. The central bank should also be adequately empowered to make sure sure its regulatory and supervisory teeth remain ownership-neutral.

The government should gradually cut the statutory liquidity ratio to help deepen markets and encourage lending and re-examine its priority sector lending targets. “More aggressive PSB (public-sector bank) disinvestment and privatisation would address some of the structural issues in governance, such as incentives and efficiency of PSBs,” the IMF said. The fund also called for gradual tightening of the monetary policy to curb inflation that is expected to rise to 5.2% this fiscal, after hitting a 17-year low of 3.6% in FY18.

The IMF has identified higher oil prices, tightening global financial conditions, spillover risks from a global trade conflict and tax revenue shortfalls as challenges to the economy, but added that risks to its outlook are tilted to the downside. Ranil Salgado, IMF’s mission chief for India, described the $2.6-trillion economy as an elephant starting to run.

The fund has forecast economic growth of 7.3% for this fiscal and 7.5% for the next, against 6.7% in 2017-18, on strengthening investment and robust private consumption. India makes up for roughly 15% of global growth, it said. While asking the government to trim debt, the fund says immediate focus should be on achieving revenue targets, while standing ready to take corrective measures if risks to revenues, mainly from the GST, and expenditures materialise.

Describing the GST as a “milestone reform”, the fund appreciated its positive effect on growth but added a dual rate structure with a low standard slab and an additional higher rate on select items can be progressive and preserve revenue neutrality.

India currently belongs in a small group of five countries having four or more GST rates: 5%, 12%, 18% and 28%; special low rates of 3% on gems and jewellry and 0.25% on rough diamonds; and a GST ‘cess’ levied on demerit goods. In comparison, among 115 countries with value-added tax (VAT) regime, 49 have a single rate, and 28 have two rates, it noted. “The policy mix should be geared to supply-side measures to promote inclusive growth. With the economy recovering, the output gap closing, and inflation rising, policy space is limited, suggesting a premium on prudent macroeconomic policies,” the IMF said.

Source : PTI

error: Content is protected !!