IMF: India Needs to Recover from Disruptions of Demonetization, GST

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Washington, DC – The International Monetary Fund (IMF) said in its Fiscal Monitor report on Wednesday that Indian fiscal moves were “disruptions” and caused pause in the fiscal consolidation in the country “in fiscal year 2017/18 at the federal level.” Indian economy has to recover from “disruptions related to demonetization and the rollout of the new national goods and service tax,” said the report, which was titled “Capitalizing on Good Times.”

A more negative impact was felt by the federal actions in the fiscal sector to deal with the state actors to compensate for many disruptive moves. “Relatively buoyant revenues supported by base-broadening efforts and lower capital expenditures were offset by higher spending (including higher compensation to states for the rollout of the new goods and service tax) and lower profit transfers from the Reserve Bank of India due to costs incurred during the demonetization,” the IMF report said.

Future Consolidation

Striking a positive note on India for the current year and further, the IMF report stated, “Consolidation is expected to resume in fiscal year 2018/19 and after, but further measures—including to ensure smooth implementation of the new goods and services tax, reductions in fuel and food subsidies, and tax reforms—are needed to support it over the medium term.”

IMF Report TBLE 1.8

Under the title, “Saving for a Rainy Day,” the report recommended enhancing resilience in India, by “a return to a gradual path of growth-friendly fiscal consolidation is desirable to create fiscal space, but full and smooth implementation of the new goods and services tax (GST) is necessary to avoid tax revenue underperformance resulting in cuts to capital expenditures.”

The report suggested that India should focus on improving its labor force participation. Clubbing India with Saudi Arabia where women’s rights are very limited, the IMF said, “Encouraging female labor force participation in India and Saudi Arabia will go a long way in improving the quality of the labor force.”

Record Debt But Recovering Economy

Noting that the global economic recovery is on the rise, the IMF report advised that this would help bring down debt from current record levels, but policy makers must not become complacent. “Global debt is at historic highs, reaching the record peak of US$164 trillion in 2016, equivalent to 225 percent of global GDP,” the IMF said in the report.

The window of opportunity provided by a strong and broad-based growth globally, could be utilized to begin rebuilding fiscal buffers now, improve government balances, and anchor public debt. “Strengthening fiscal buffers in the upswing will create room to provide fiscal support in an eventual downturn and will prevent fiscal vulnerabilities from becoming a source of stress if financial conditions deteriorate,” the report suggested.

On the digital front, the report highlighted India and South Africa as showing, “how digitalization can help improve social protection and the delivery of public services.” The report stressed that digitalization could, “reduce the private and public costs of tax compliance and can improve spending efficiency.”

In the commodity export related sectors, the fiscal position was relaxed in major non–commodity exporters, including to provide stimulus to the economy in India along with China and Thailand but the headline fiscal balances improved in most commodity exporters, supported by a pickup in commodity prices and by expenditure cuts in Gulf Cooperation Council (GCC) members, Mexico, and Russia. The IMF predicted that several non–commodity exporters including India and Brazil would be expected to adjust over the medium term, while some countries like China and Thailand do not envisage adjustment.

Global Shadow of US Tax Reforms

The IMF noted that the latest tax reforms launched in the United States, coupled with a two-year budget agreement, provided “a procyclical stimulus and a less favorable debt outlook.” The IMF report recommended that fiscal policy should be “recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilizing higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment.”

The global body report predicted that the latest US tax reform would also affect the rest of the world. Noting “Macroeconomic spillovers resulting from the fiscal stimulus will affect global demand,” the IMF projected that the reform, “will affect the decisions of multinational companies and that, in turn, will prompt other countries to look closely again at their own tax systems.”

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