IMF asks India to deepen reforms

IMF said there was need to dereserve small scale industries, increase labour market flexibility, bankruptcy reform and improved effectiveness of debt recovery tribunals besides considerable improvement in tax administration including at the state level.

Apart from widening the tax base, the IMF said that services sector had to be fully brought into the tax net besides reducing innumerable exemptions. The periodic consultation with India under article IV of IMF was held on June 19 and release of its recommendations and comments within a couple of weeks of the executive board meeting was unprecedented.

This reflects the new policy of openness and transparency of the IMF after the new Managing Director Horst Kohler took over. The fund also called for considerable improvment in tax administration both at central and state levels, broadening of the tax base in particular by reducing exemptions and bringing more sectors like services into the tax net.

There was need to improve the effectiveness of debt recovery tribunals and reforms to boost agricultural efficiency and incomes. India should continue the process of tariff reduction along with improvements in customs administration and withdrawal of exemptions to avoid any adverse effects on the fiscal position, it said.

The fund called for steps to link the transfers by the centre to states to the latter8217;s fiscal performance and said expenditure reforms should be taken to up support deficit reduction. Budgetary allocations for infrastructure and priority social expenditure should be facilitated.

Though calling for faster progress in liberalisation of foreign investment flows, the fund said a cautious approach should be adopted in the case of Capital Account Convertibility. Noting that the fiscal position had deteriorated significantly in recent years, IMF said much of the consolidation that had been achieved following the 1991 balance of payment crisis was erased.

While the centre8217;s deficit during 1999-2000 had reached 7 per cent as against the budgeted 5.75 per cent, the states deficit was also high at 4.5 per cent, the fund noted adding this was mainly on account of pressures of fifth pay commission and growing debt service payments. In addition delays in raising energy prices also eroded the surplus on oil pool account, it said.

The central government8217;s 2000/01 budget suggested that deficit reduction in the coming year would be marginal at best, leaving the central deficit close to 7 per cent of GDP in 2000/01. However, important reforms of the tax system were introduced.

Executive directors agreed that the new government8217;s strong commitment to delivering a higher rate of economic growth so as to reduce poverty more rapidly was achievable provided that determined efforts were undertaken to strengthen the fiscal position and to accelerate the implementation of structural reforms.

IMF considered that the presently favourable economic environment presented the authorities with a unique opportunity to press ahead with reforms in key areas. Though important structural initiatives have been included in the government8217;s budget for 2000/2001, the centre8217;s deficit will be broadly unchanged as a share of GDP and the prospects of consolidation by the states remain unclear. As a result, the consolidated public sector deficit is likely to remain over 10 per cent of GDP.

The IMF directors supported the authorities8217; goal to introduce fiscal responsibility legislation, but stressed that this should include strict requirements for fiscal transparency and credible enforcement mechanisms, and be extended to te states.

The authorities were encouraged to treat privatisation receipts as below-the-line financing in their fiscal accounts. Directors emphasized the importance of strengthening fiscal discipline among the states. It welcomed the Reserve Bank of India8217;s RBI focus on inflation risks in its recent monetary and credit policy statement.

They agreed that the scope for further easing appeared to have been exhausted, and they suggested that the authorities should be prepared to act to avoid an intensification of price pressures. Directors generally acknowledged that the conditions for establishing a formal inflation target were not yet in place. Against this background, most directors considered that the current RBI multiple indicator approach to monetary policy was appropriate, although some directors cautioned that this approach left monetary policy without a well-defined nominal anchor. They also underscored that clearer statements by the RBI of its inflation objective would help buttress the credibility of its commitment to price stability.