FISCAL CONSOLIDATION : IMF to INDIA

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Raj Ranjan, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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In its WEO report, IMF has asked India to follow the path of fiscal consolidation, although severall demand and supply factors have resulted in sharp fall in inflation, thereby giving RBI space to cut interest rates. With Mr. Rajan hinting at more favourable rate cuts in occurrence of a favourable monsoon, WEO in its report projected that India’s CAD [current account deficit] would widely sharpen to $94.7 billion by 2021, up from $26.2 billion.

Hence should it be a worrying sign for India, especially with growth forecasts being one of the best in the world. Here is some economic numbers for Indian economy. India taxes and spends less as shares of its GDP than its peers as well as developed nations, the Economic Survey says.

The country’s tax receipts constituted 16.6 per cent of its gross domestic product (GDP) in 2013-14, the lowest among ten countries studied. It was also the least in terms of the average tax-GDP ratio of OECD countries and emerging market economies that stood at 34.2 per cent and 21.4 per cent, respectively. India’s expenditure on health and education was 5.1 per cent of its GDP in 2013-14, the lowest among the ten countries. Overall public expenditure constituted 26.6 per cent of the GDP in 2013-14.

India’s spending and tax ratios are also the lowest among economies with comparable purchasing power parity adjusted GDP per capita like Vietnam, Bolivia and Uzbekistan. The ratios, respectively, stood at 28 per cent and 22.2 per cent, 43.3 per cent 25.5 per cent, and 33.4 per cent and 25.6 per cent for Vietnam, Bolivia and Uzbekistan for the latest year available.India’s shares of income and property tax in GDP, 5.6 per cent and 0.8 per cent, respectively, were also comparatively low, with the exception of China in the case of direct tax.The government has made limited progress in increasing its taxing and spending capacity. India’s tax-GDP ratio has increased by about 10 percentage points over the past six decades from 6 per cent in 1950-51 to 16.6 per cent in 2013-14.

Seeing the above numbers and behaviour of different economies world over, it seems for India to take the IMF consideration seriously. The government so far has shown no such signs of straying from the path of fiscal consolidation, but 2018 and 2019 shall be crucial for government. Its in these years where government has to be far-sighted, so as to achieve a sustainable growth period of more than a decade.

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