Fiscal consolidation assumes centre stage in the list of medium-term targets proposed by the IMF for India after the recently concluded Article IV consultations. A comprehensive package of measures, comprising both tax and subsidy reforms, to ensure the quality and sustainability of consolidation has been prescribed by the multilateral agency, which include rationalising fuel and fertiliser subsidies and introducing the goods and services tax to create necessary fiscal space.
Most of this runs counter to the broad policy direction offered by the UPA government in its vote-on-account early this week, which was widely critisised for having put off a slew of committed expenditures to the next year, while simultaneously assuming high growth in tax revenue next year even as nominal GDP growth was projected to be static and the increase in total spending assumed way below the rate of growth in the nominal GDP.
The issues flagged by the IMF, which could come up for discussion at the upcoming Group of 20 meetings of finance ministers and central bankers to be attended by finance minister P Chidambaram and RBI Governor Raghuram Rajan in Sydney this weekend, include a recommendation that the (Indian) authorities “maintain the monetary policy stance appropriately tight, and stand ready to raise the policy rate further” so as to bring down inflation to more sustainable levels. This too runs contrary to the direction of monetary policy easing signals that the government wants the RBI to move towards.
Apart from the predictable stress on the need for reviving growth by undertaking broader structural reforms to improve infrastructure, the business climate, and the pricing and allocation of natural resources, the Fund has also drawn some red lines on the Indian financial system. Advocating caution on the deteriorating corporate financial positions and weakening bank balance sheets, especially among public banks, the government and the regulator have been advised to exercise close monitoring and further strengthen prudential regulation of banks’ asset quality classification and concentration risks.
Under this, the report clearly points to the strident need to pay “due regard to the inter-linkages between corporate vulnerabilities and banking system health”, along with steps to modernise the insolvency framework. The task seems cut out for the next government.
Anil is a senior editor based in New Delhi.