The Indian government should not rest on the laurels bestowed on it by the IMF executive board during the course of this year?s Article IV consultations, an annual exercise. Maybe it can allow itself an exultant ?ahem? or two, having been commended for its sound macroeconomic policies and the economy?s strong performance, but no more. The tough part comes now: seeing the gains of fiscal consolidation translate into wider appreciation. This, even as the fiscal tightening is actually speeded up, which could once and for all seal its acceptance as a policy that works. Faster consolidation, according to the IMF, is warranted not only to meet targets but also to help address the liquidity problem that has made inflation a trickier variable to deal with. By helping neutralise the liquidity impact of capital inflows, a smaller Budget deficit could also ease pressure on the rupee, a burden which, it points out, has been disproportionately borne by monetary policy. As the IMF report notes, though the central fiscal deficit is officially projected to be only about 3.3% of GDP in the current fiscal, the real figure would be 4.5% of GDP if one includes the various off-Budget bond issues and the like. Fixing this would not be easy. On current trends, it would take more than half a decade to meet the FRBM targets fair and square. Going by its targets, the Centre must achieve a revenue balance next year, but if the actuals are taken into account, it would take a 2.75%-of-GDP tightening to get anywhere close.
If that?s too daunting, the finance ministry can perhaps take comfort in the IMF view that a 30% increase in government salaries over two years, to meet recommendations of the Pay Commission, would not injure the fisc much, since government spending on this count has been falling in real terms. Whittling down exemptions would be better, given that about 5.7% of GDP is forgone as revenue this way?roughly half the total tax collections. So far, tax collections have soared year on year, but a cyclical downturn could spoil the story in 2008-09. Equally valid is the IMF argument in favour of targeting subsidies better and supplanting the FRBMA with an explicit framework to reduce the debt burden by around one-fourth to 62% of GDP by 2012. This would free up funds for social and infrastructure projects.
