India needs to continue its fiscal consolidation: IMF

The Dollar Business Bureau

In order to enhance prospects for investment and to cut external vulnerabilities, the Indian government should have to continue with its activities of fiscal consolidation including clearing of the GST Bill, further reforms related to subsidy and removing local supply bottlenecks, said a report by the IMF.

As per the report, external sector position of India in the fiscal of 2015-16 is largely constant with medium-term fundamentals and required policy settings.

“To reduce external vulnerabilities and reach the authorities' fiscal deficit goal of 3 percent of GDP by 2017-18, continued fiscal consolidation is needed, including by passage of goods and services tax (Bill) and further subsidy reforms,” IMF said in a research note.

In addition, facilitating local supply bottlenecks would encourage exports and enhance investment prospects for the country, it added.

Other possible policy responses for the country’s economy include, making new monetary framework stronger, with a robust institutional design of the Reserve Bank of India’s Monetary Policy Committee and cutting further barriers to monetary transmission.

In the meantime, a constant focus on lowering the inflation will be crucial to control the imports of gold, IMF said.

The report further noted that easing the limits on external commercial borrowing (ECB) should be implemented ‘cautiously’, in the wake of potential challenges to the balance sheets of the corporates, including those of considerable unhedged foreign exchange exposures.

On the other hand, in spite of a cut in external susceptibilities, there is a need for "vigilance given commodity price volatility and the recent REER appreciation".

The report noted that present reserve levels are sufficient, the RBI’s flexible exchange rate approach is sound, and the current policy easing the exchange rate volatility is suitable.