The International Monetary Fund has suggested India to consider setting up an independent fiscal council, saying this institution has contributed to better outcomes in the countries where it has been introduced.
“India is engaging in very gradual fiscal consolidation which we regard as a welcome move,” Vitor Gaspar, Director of IMF’s Fiscal Affairs Department, told PTI in an interview.
“India has accepted a public debt anchor at 60 per cent of GDP. We think that is appropriate. And that’s something that will help India establish its public debt as a safe asset,” he said.
Of the view that further progress can be made, Gaspar said India could further strengthen its fiscal institutions both at the level of the union and at the level of states.
“In the context of strengthening the fiscal responsibility frameworks, perhaps India could consider setting up an independent fiscal council,” he suggested.
This is because the IMF has seen from the experience in other nations that this helps both in terms of transparency and accountability towards the general public, and also in terms of the quality of the policy debate in the country itself, he added.
“By and large, when it comes to fiscal discipline, we regard the recent steps as steps in the right direction,” Gaspar said, adding that the issue of an independent fiscal council has been raised with India in the context of Article IV consultations.
“I would assume that the main point that was made from our side is that some countries have introduced independent fiscal councils and in these countries, there is tentative evidence that this has contributed to better outcomes,” he said in the interview last week.
Describing introduction of Goods and Services Tax (GST) as of macroeconomic significance, Gaspar said this is a major change.
GST promises to create a single market in India, to integrate India much further and therefore, from a medium to long term perspective, it is something which is growth friendly, he said.
“The only qualification that we would have is that we would have preferred to see a simpler system in place and perhaps over time the structure of rates could be simplified further and the tax base could be widened,” he said.
Since the GST has been introduced on July 1 there will be a steep learning curve concerning how it is functioning and it’s from that learning experience that the solutions will emerge, he noted.
There is no way of giving detailed advice without looking at the hard data and the experience that is being accumulated in India, the IMF official said.
From a medium to long term perspective the prospects for the Indian economy are very good, Gaspar said, noting that there have been some issues that have affected negatively the economic growth in the short run.
Observing that growth and development are long run processes, he said that it is definitely worthwhile to promote structural reforms that will make growth stronger, more inclusive, more robust and resilient.
Optimistic about the prospects of the Indian economy, Gaspar in response to a question on demonetisation said that there were some episodes of cash shortage, implying headwinds associated with the cash operation.
“But if you think about it from the viewpoint of the overall process of digitisation of the Indian economy, if you think about it as a strategy to fight the underground economy and to combat tax evasion and illicit transactions of various types, you can regard it as an investment worth making,” Gaspar said.
Initiatives like GST, demonetisation, digitisation of public administration, proper targeting of income support and work support programs, are very positive for inclusion and growth, he said.
Noting that India has been growing fast, he said that the growth has likely benefited all percentiles of the population.
“The fact that you have very strong growth is enhancing the instruments that the Indian government can use to promote inclusiveness. Clearly, as time goes by, the outcomes will be commensurate to the results on the growth front as well,” he said.
If India can continue to make progress in the future as it has made in the past it will be doing very well, he said.
When it comes to subsidy reform, despite the fact that India has made progress between 2011 and 2017, there is still food fuel and fertiliser subsidies worth about 1.5 per cent of GDP, he said.
It does seem that there is further room for rationalisation, he added.
Responding to a question on Indian growth story, Gaspar said that India is making progress in terms of inclusion, stability and sustainability.
“Clearly the future of India is very promising. In order to be successful, you will have to continue to upgrade policies,” he said, adding that these includes strengthening fiscal frameworks.
He said the process of using technology to improve the administration functioning in India has successfully started.
“India is engaging in a fascinating process of economic development, based more on services than on manufacturing. So, it’s a country that is following a completely regional route to development, a route that may be followed by many other countries. It is all about sustainable and inclusive growth. India is falling that path in a very successful way,” he said.
“If you look at it from the view point of the potential use of digital technologies in public administration and the economy in general, India is an important source of inspiration,” he said.
One of the reasons why inequality among citizens in the world is falling is because of the very strong growth in countries like China and India, he said.
“So India is one of the countries shaping the world,” Gaspar said.
When it comes to global inequality, the growth of India is one of the reasons why inequality worldwide is coming down. It’s one of the reasons why poverty in the world is falling so rapidly, he added.