The International Monetary Fund (IMF) has delivered a few timely punches in its latest assessment of the Indian economy, released on Tuesday. And in the weeks leading to the new Union Budget, its comments on the state of government finances are particularly pointed and relevant.
The finance ministry has been in a self-congratulatory mood of late. An economic boom has worked wonders for tax collections. The official budgetary numbers suggest the government is well on its way to meeting its fiscal deficit for the year. No wonder the mood in the ministry is so cheerful.
IMF pours some cold water on this exuberance. It says India has made no progress in fiscal consolidation in recent years. The general government deficit “has hovered at just over 7% of GDP (gross domestic product) since 2004-05.”
That’s a far cry from the official story of a steep drop in deficits. The gap between the government and the IMF numbers is explained by the definitions the two agencies use. IMF—quite rightly, in our view—adds two items to the official deficit number. One, the oil and fertilizer bonds that the government has sold instead of hiking prices of these two commodities. And two, the deficits of state governments.
There is little doubt that both Union and state governments have got their books in better order of late. But that’s because of strong tax revenues rather than tighter controls on expenditure. This could change. A slowdown in the economy this year could affect tax revenues and, hence, fiscal balance. No wonder IMF says, “Fiscal consolidation is subject to downside risks.” And, though this doesn’t get a mention in the IMF report, the overdue pay hike for government employees could lead to budget pressures a few years down the line.
The news on India’s fiscal situation is far more sanguine than what is warranted by the hard facts. India needs a far tighter fiscal policy right now. The Reserve Bank of India (RBI) is trying to deal with record inflows of foreign capital that are likely to feed inflation. The central bank will have to run a tight monetary policy to cool demand, even though there is growing pressure on it to cut interest rates to fight an incipient industrial slowdown. But RBI cannot loosen its policy unless the government tightens its fiscal policy.
And that’s why the IMF warnings are timely.
(Should India run a far tighter fiscal policy? Write to us at firstname.lastname@example.org)