IMF calls on India to be more ambitious in fiscal consolidation

The Indian government should be more ambitious when it comes to improving its finances, according to the International Monetary Fund (IMF).

"We think that (fiscal deficit of) 4.5 percent by 2025-26 is achievable. We think it could go further," said Nada Choueiri, the IMF's mission chief for India, on December 23.

"Our scenario, that we have proposed to the authorities, is built on both spending efficiencies in terms of reforming subsidies and additional tax reforms of the GST, excise taxes, and income taxes. We foresee that the government could consolidate by 4 percentage points of GDP between today and our medium term, which is 2027-28," Choueiri added.

Choueiri was briefing the media on the Fund's Article IV Consultation Staff Report.

The Article IV consultations, as required by Article IV of the IMF's Articles of Agreement, is part of the Fund's country surveillance process.

The Indian government has set itself a fiscal deficit target of 6.4 percent of GDP for the current financial year. It plans to bring it below 4.5 percent by 2025-26.

In its report, the IMF staff also said India should clearly communicate its medium-term fiscal consolidation plans.

"While the additional support to vulnerable groups this year is warranted, policies should now focus on a credible and clearly communicated fiscal consolidation," the report, released today, said.

"The slightly contractionary fiscal stance this year, and further tightening in 2023-24 is welcome. However, baseline projections suggest only a gradual decline in the fiscal deficit over time, and while public debt is expected to stabilise over the medium-term, debt sustainability risks have increased," it added.

The comments by the IMF come just weeks before Finance Minister Nirmala Sitharaman presents the Budget for 2023-24 in Parliament, on February 1. Economists expect the fiscal deficit target for the next financial year to be around 6 percent of GDP, which would mean a 40-basis-point reduction if this year's target is met.

As per the latest data, the central government's fiscal deficit for April-October stood at 45.6 percent of the full-year target.

At the briefing, the IMF's Nada Choueiri said that India is a "relative bright spot" in the global economy.

The IMF sees India's GDP growing 6.8 percent in 2022-23 and 6.1 percent in 2023-24.

Choueiri added that the IMF does not see any risks to India's external sustainability, with the current account deficit seen falling in the medium term from an expected 3.5 percent of GDP this year.