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Sorting the mess

IMF calls for sound macroeconomic management to overcome India’s economic crisis

Sorting the mess

Getting the word out on India's true fiscal stance could yield significant benefits for policymakers and the Indian economy. A more accurate picture would better inform decisions regarding how much stimulus should be provided in a cyclical downturn. The government of India could increase its credibility vis-a-vis financial markets and enjoy more favourable borrowing conditions as a result. Greater fiscal transparency would also boost the ability of investors and citizens to make informed and efficient financial and economic decisions.

This suggestion of IMF given in a country-focus article released along with the country report is worth attention, especially when India's growth is at risk and all efforts of the government initiated in recent months have failed. The economy has touched a new low with a growth rate of only 4.5 per cent of the GDP in the last quarter despite government's claim of making everything possible to reverse the downturn, and the crisis is most likely to deepen further. The government has also failed to get its projects and initiatives to take off. Moreover, there are no funds, and the revenue required for this could not be generated. There seem to be only three options left with the government — selling national assets, resorting to large scale borrowing and squeezing the public and the business for more money.

India has huge debt requirement of 8.5 per cent of GDP for the public sector. That is why IMF has suggested that India should recommit to debt reduction by reducing its public sector borrowing requirement. This estimate by IMF incorporates some information on Central government expenditures, which are financed off-budget through other mechanisms, but is missing information on activities of state public enterprises and lower tiers of government.

The high borrowing requirement of the public sector also holds India back as it strives to catch-up with more advanced countries by making private-sector investment more costly. Investment activity — whether public or private — relies on a finite pool of financial resources. In India's case, households' net financial savings have been lower than the public sector borrowing requirement in recent years, implying that private investment projects face stiff competition for funding, making financing more costly and preventing potentially viable projects from being initiated.

Measures to enhance fiscal transparency and improve reporting will play a vital role in this process. As part of the Group of 20, India has already committed to publishing general government fiscal information on a quarterly basis, which should enable better monitoring and faster policy reactions. As a complement, India will have to improve the collection and disclosure of information on public enterprises, especially at the state level, in order to better anticipate possible cases of financial distress and minimise their costs for taxpayers.

Yet, more information does not necessarily imply more transparency for citizens. Information is currently scattered across many documents and websites, making it difficult to obtain a comprehensive account of the use of public resources. Going forward, the federal and state governments should look to provide the public with more user-friendly and forward-looking information and narratives and adopt common standards to ensure that citizens in all states have equal access to fiscal information.

Economic development projects and enhanced social initiative in India will be vital in the coming years, says the report. But to generate the revenue needed to get them off the ground, India's debt, which is among the highest in emerging markets, must be reduced. Despite some improvement in reported fiscal deficits, debt as a share of GDP remains little changed over the past decade partly due to increases in off-budget financing.

This large public-sector footprint also ties up financial resources that could otherwise be drawn upon for private investment. Reforms to improve budgeting and enhance transparency in fiscal reporting have a vital role to play in putting debt on a durable downward trajectory.

IMF's Executive board assessment, while noting a combination of factors for subdued economic growth in India, says that risks to the outlook for India is tilted to the downside. It, therefore, calls for continued sound macroeconomic management. Directors of the IMF noted that a credible medium-term fiscal consolidation path driven by subsidy spending rationalisation and tax base enhancing measures is needed to reduce debt, free up financial resources for private investment, and reduce the interest bill. Some Directors advocated that automatic stabilisers should be allowed to operate in the short run.

Directors called for more robust revenue projections and enhanced fiscal transparency and budget coverage. They welcomed the monetary policy easing undertaken so far this year and recommended that an easing bias be maintained at least until the projected recovery takes hold. As for inflation targeting, they recommended continued action to improve the monetary transmission mechanism to enhance the effectiveness of monetary policy and enable the Central bank to achieve medium-term inflation target on a sustained basis. They recommended that exchange rate flexibility should be maintained and foreign exchange intervention should continue to be two way and limited to disorderly market conditions.

They welcomed the steps taken to tackle the twin bank and corporate balance sheet problem but noted the continued challenges of the financial sector. They recommended deep operational restructuring and far-reaching governance reforms in banking sector in order to improve efficiency, risk management, and credit allocation. As for non-bank financial companies, they recommended enhancing the availability of timely and granular data to help restore confidence in the sector.

They recommend a better business climate complemented by continued labour, product market, land, and other reforms aimed at increasing labour market flexibility, enhancing competition, and reducing the scope for corruption. They noted that land reform remains essential to raise agriculture sector productivity and achieve ambitious infrastructure development targets. They also encouraged further trade and investment liberalisation.

Views expressed are strictly personal

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