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IMF urges Centre to refrain from more tax sops
By TII News Service
Dec 27, 2019 , Washington DC

    

The Indian Budget for FY 2020-21 might well offer notional tax lollipops if Finance Ministers pays heed to International Monetary Fund (IMF’s) latest recommendations. The IMF Staff Report on India dated December 23, 2019 stated that fiscal stimulus should be avoided given fiscal space at risk and revenue losses from the recent corporate income tax rate cut should be offset. Another key recommendation for the near-term is that Reserve Bank of India should maintain an easing bias in monetary policy at least until the projected recovery took hold.

It adds that in the event of external pressures, India should continue to rely on exchange rate flexibility. Foreign exchange intervention should be two-way and limited to disorderly market conditions. As for medium-term recommendations, the report states that credible fiscal consolidation path is needed to reduce debt, free up financial resources for private investment, and reduce the interest bill. To support the adoption of a necessary medium-term fiscal consolidation, driven by subsidy-spending rationalization and tax-base enhancing measures, revenue projections should be more realistic and fiscal transparency and budget coverage should be enhanced.

The report also stated that Governance of public sector banks and the efficiency of their credit allocation needs strengthening, and the public sector’s role in the financial system needs to be reduced. Labor, land, and product market reforms aimed at enhancing competition and governance, along with infrastructure investment, should be priorities to create more and better jobs for India’s rapidly-growing labor force and enhance female labor force participation.

As for risk assessment, SR notes that Risks to India’s economic outlook are tilted to the downside. The two major domestic risks are tax revenue shortfalls and delays in structural reforms. It believes that credit growth could also remain subdued, as there is a perception of increased risk aversion among banks and implementation of the recently announced Public Sector Banks’ consolidation could divert focus and weigh on near-term credit growth. The main external risks identified by SR are: higher oil prices, a sharp rise in risk premia in global financial markets, and rising protectionism globally.

 
 
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