Widen tax base to improve fisc, IMF tells India

WASHINGTON: Warning that India’s high fiscal deficit was “not sustainable�, the International Monetary Fund (IMF) has said that a more efficient revenue collection and tax administration, a wider tax base and reduction in subsidies will help improve the fiscal position of the country.
However, it lauded India’s economic growth in excess of 7% achieved last year and said a growth of 10% a year was both necessary and feasible.
“Tackling the fiscal deficit has to be an important priority. The biggest single obstacle to tackling this problem in India’s case has been complacency,� IMF’s first deputy MD Anne O Krueger has said. “Because so far, the large deficit, now in excess of 10% of the gross domestic product (central and state deficits and losses in state-owned enterprises), has not inflicted as such short-term damage to the economy as might have been expected�, she said.
But deficits of this order of magnitude are simply “not sustainable�, Krueger said addressing the Stanford India Conference during the weekend.
A large part of the fiscal reform in India would involve making the public sector more efficient, which would bring direct benefits to the poor, she said. More efficient revenue collection and tax administration; a wider tax base; a more streamlined civil service; more carefully targeted transfer payments and the reduction of subsidies: these can all help improve the fiscal position while at the same time creating opportunities for growth elsewhere in the economy, Krueger added.

Krueger, however, said “the growth in excess of seven per cent achieved last year was, of course, impressive. But I believe India can do better than that and needs to over a long period.�
The target needs to be sufficiently ambitious, she said, adding, “In my judgement, with appropriate commitment, growth of 10% a year is both necessary and feasible�. The Government of India’s growth target of 7-8% is not only attainable but it is necessary to raise the target to 10%, Krueger said.
Other countries, such as South Korea, have achieved a 10% growth rate, she pointed out. “There is no point in being timid, given the scale of the economic challenges that Indian policymakers must now confront,� said Krueger. “But, nor is there any point being unrealistic. Looking at what other countries have achieved quickly puts the target I am suggesting into context.
It can be done — because others have done it.� If Indian policymakers are to realise their legitimate ambitions for sustained rapid growth and poverty reduction, she added, continuing trade liberalisation will have a crucial role to play.
If the new government in India continues to pursue reforms, she said, the Indian economy could be close to moving to a path of sustained and rapid growth rates. Indian exporters still face bureaucratic hurdles that have to be overcome... More efficient government, and a reduction in costly and market-distorting subsidies, would increase productivity, Krueger said.