(Bloomberg) -- India’s government should avoid a fiscal stimulus to spur the economy, and focus instead on cutting public debt so that financial resources can be freed up for investment, the International Monetary Fund said.
While the national government has a budget deficit target of 3.3% of gross domestic product in the year through March, a better reflection of the fiscal position is the public sector borrowing requirement, which the IMF estimates has increased to about 8.5% of GDP.
“Economic development projects and enhanced social initiatives in India will be vital in the coming years,” the IMF said in a statement accompanying its annual Article IV report on the economy. “But to generate the revenue needed to get them off the ground, India’s debt -- among the highest in emerging markets -- must be reduced.”
The government needs a credible consolidation path to rein in debt, including reducing subsidies and boosting the tax base, the IMF said. Additional monetary policy easing may be warranted to support the economy in its downturn, it said.
IMF Chief Economist Gita Gopinath said last week the lender will likely cut India’s growth forecast of 6.1% for the fiscal year through March. The central bank is projecting growth of 5% in the period.
Last month, Moody’s Investors Service reduced the nation’s credit-assessment outlook to negative, citing issues ranging from a worsening shadow banking crunch and a prolonged slowdown in the economy to rising public debt. The ratings company is projecting a budget deficit of 3.7% of GDP in the year through March.
Other Highlights
- The IMF estimates that general government debt rose to a three-year high of 68.1% of GDP in fiscal 2019. Its directors recommend India adopts measures to reduce this to the officially adopted target of 60% of GDP
- Consumption-boosting steps -- such as personal tax cuts -- are likely to feature in the budget in February, Abhishek Gupta, an economist at Bloomberg Economics, wrote in a note Monday. The IMF, however, sees no scope for India to provide fiscal stimulus, given that it expects revenue from both income and general-sales taxes to decline this fiscal year
- Monetary policy should maintain an easing bias until an economic recovery takes hold, the IMF said. India’s central bank reduced its benchmark rate five times this year and introduced measures to bolster rate transmission after lenders failed to fully pass on its 135 basis points of policy easing since February
