Is India's Fiscal Strategy Aligning Globally?

In a recent report by the International Monetary Fund (IMF) following their Article IV consultations, India's economic growth trajectory received commendation. The IMF expressed optimism about the country's robust economic performance, highlighting its potential for accelerated growth through the implementation of comprehensive structural reforms.

The IMF endorsed India's fiscal policies, noting the appropriateness of a tightened fiscal stance in the near term and the necessity for a comprehensive medium-term consolidation plan. The government aims to lower its fiscal deficit to 5.9 percent of GDP for the current financial year and targets a further reduction to 4.5 percent by 2025-26, a commitment echoed and supported by the IMF.

Structural Reforms and Debt Sustainability

Acknowledging India's high public debt, the IMF stressed the importance of additional revenue and expenditure measures. This includes further reforms in Goods and Services Tax (GST) and subsidies, emphasizing the need for continued focus on public investment and targeted support for vulnerable sectors.

While the IMF expects India's economy to grow by 6.3 percent in the current and next year, slightly lower than the government's forecast, recent GDP data for July-September suggests potential for an upward revision in the growth forecast. The Reserve Bank of India (RBI) has already adjusted its projection to 7.0 percent following this positive economic performance.

Inflation and Monetary Policy

Regarding inflation, the IMF acknowledged its volatility but recognized a reduction, attributing this to the effective policy tightening by the RBI. Commending the RBI's proactive measures and commitment to price stability, the IMF deemed the current neutral monetary policy stance appropriate, expecting it to gradually bring inflation back to the target range.

However, challenges persist, particularly with food prices affected by multiple supply-side shocks. Economists anticipate inflation possibly breaching the upper limit of the RBI's tolerance range in the latest data set to be released in January. This information is crucial as it precedes the government's Interim Budget for 2024-25 and the RBI's Monetary Policy Committee meeting in early February.

The IMF is set to release its updated World Economic Outlook in late January, shedding more light on global economic trends and their implications for India.

The IMF's appraisal reflects confidence in India's economic trajectory while emphasizing the need for continued reforms to sustain growth and address fiscal concerns.