India needs more reforms; fewer GST rates will raise revenue: IMF’s Gopinath

Gopinath said money from international institutions or multilateral development banks are going to be a fraction of the spending that is needed and so countries would need to rely on domestic resource mobilisation.

“In the case of India, given its stage of development, increasing fiscal space is not going to come about through reducing overall spending. So overall expenditures are going to go up… so the creation of fiscal space and any fiscal consolidation should happen through the channel of raising revenues-to-GDP,” she said.

India, for example, can increase revenues-to-GDP through Goods and Services Tax (GST). “Now, GST has begun to deliver good results. As we see it, if there is a way to simplify further, so you have fewer of these different tax rates and broaden in the base, which is, you have fewer exceptions. Then you can end up with raising about 1 percentage point of GDP in additional revenue through this,” she said.

Broader tax base for personal income tax is also going to be helpful and making sure that there are no loopholes or too many leakages that happen in terms of tax exemptions, she said, adding that more work is needed on the property tax front. “It is very important to have sufficient progressivity in the taxation system and to make sure that it is actually delivering. In the case of India and other countries in the world, the more focus should be in making sure you are getting enough from your capital gains tax, it is going to be critical. Also, in many countries, more can be done on the property tax front. There is now much better technology to be able to implement this better. That’s another area where work is needed,” she said.

Gopinath further said that it is a tremendous aspiration to get to a developed country status and India needs structural reforms on an ongoing basis. “It doesn’t happen automatically and requires ongoing, consistent efforts on a pretty broad scale across many areas to deliver on that. India has grown well, in terms of, its overall growth rate and at 7 per cent it is the fastest growing major economy in the world. The question is how does one keep up the momentum, in fact raise it further so that you can increase per capita incomes in India to get to being an advanced economy,” she said.

Enlisting the areas where India needs to step up to be a high-income country, Gopinath said the country needs a workforce that is much more skilled and has much higher levels of education. “If you look at the years of formal education, for example, for the workforce in India, compared to its other G20 peers it’s on the lower end. So increasing the quality of education, the depth of that education, the amount of skills that people, students pick up, it’s going to be absolutely critical,” she said.

Investment in infrastructure is also going to be crucial, with the government already having done a lot in the public infrastructure space and digital infrastructure, but there is still a “big gap between what is needed and where the country is”, she said.

Ease of doing business, regulatory environment, the efficiency of the judicial system are also going to be critical, she said. Land and labour reforms will also play a crucial role in the elevation of India to high-income country. “Land reforms, absolutely critical. In the case of labour markets much greater flexibility in the labor markets. In 2019, the Parliament passed a new set of labour codes. Those code provide a nice blend between getting labour market Flexibility but also protecting workers. Implementing that is going to be absolutely critical, she said.

India also needs to be more open to trade and lower tariffs, she said. “We are certainly in an environment where trade integration is being questioned but I think it is very important for India to open up to trading even more. On an average, tariff rates in India are higher than in its other peer economies. If it wants to be an important player on the world stage and an important part of global supply chains, it’s going to require a reduction of those tariffs,” she said.

It is “super important that women’s labour force participation goes up from where it is”, she said. “Now at 35 per cent, (there) is no way, no path to get to a high-income status without being able to bring more women into the workforce, for which safety is absolutely critical.

On the question of how India can create more fiscal space, Gopinath said governments around the world are grappling with very high spending needs, which include both the spending need from the day-to-day job of running the country and additional spending that’s needed to deal with the climate transition, digital transition, including AI, along with ageing populations in many countries that require countries to provide for them in terms of health and pensions.

Apart from raising revenue-to-GDP ratio, India can also look at saving money through targetted transfer of benefits and subsidies, she said. Giving the example of fertiliser subsidies, she said those remain non-targeted at this point, with unlimited amounts being given to farmers. She cited the example of Karnataka, where a pilot is being conducted to look at tailoring it to the farm size, which is also an environment-friendly measure, she said. “Doing more on that front to make sure the list of beneficiaries that you have are indeed the right group that you are trying to target. Saving on that front can also play an important role on the revenue side,” she said.