The best route to fiscal rectitude lies in reducing subsidies, improving tax collection and increasing investment
Everyone knows the fiscal deficit needs to be cut. The problem lies in how to do it. Won’t a reduction in the deficit lead to lower growth in the short run? Won’t lower growth lead to a higher deficit because tax collections will fall? And while everyone wants a reduction in subsidies, won’t the impact on the poor at a time of low growth be devastating? The International Monetary Fund, or IMF, in an annexure to its recent country report on India, looks at these knotty issues and comes up with three alternative paths to fiscal piety. Each of these routes will reduce the deficit by 5% of the gross domestic product (GDP) in five years, but they take different approaches to reach that goal.