IMF emphasises need to raise tax revenues

Asks India to tighten monetary policy to keep inflation under check

The International Monetary Fund (IMF) on Friday said India should improve its revenue mobilisation over the medium term for fiscal consolidation and tighten its monetary policy in order to contain inflation.

“There is great room for improvement in India’s tax structure. There is a need to raise tax revenues efficiently,” said Thomas Richardson, senior resident representative - India, IMF. He was explaining IMF’s annual assessment of India under Article IV at an event by Icrier here on Friday.

Compared to other emerging economies, India’s tax-to-GDP (gross domestic product) ratio is considered very low at 10.2 per cent. Recently, Finance Minister P Chidambaram had also expressed concern over it.

Richardson also said though the Cabinet Committee on Investment (CCI) had cleared many infrastructure projects, one of the key concerns for the country was the lack of infrastructure projects in the pipeline.

“Even if the CCI is hugely successful in getting stalled projects up and running, the pipeline of new investment after the stalled projects is really thin. That is the worse effect of the slowdown,” he said.

In its report released on Thursday, the IMF had suggested India go for tax and subsidy reforms to durably lower fiscal imbalances. It also observed the Reserve Bank of India (RBI) needed to raise the policy rate to control inflation.

According to Richardson, the overall inflation — not just food inflation — is also very high, undermining India’s competitiveness. This should be addressed by a tight monetary policy, he said, adding India should not try to curb capital outflows.

In its report, IMF had said India’s growth had slowed markedly, largely due to domestic supply constraints, while inflation remained stubbornly high. Led by falling infrastructure and corporate investment, the slowdown has extended to other sectors of the economy.

The financial positions of banks and corporates have deteriorated. The combination of persistently-high inflation, sizeable current account and fiscal deficits intensified the global liquidity tightening-induced balance of payment pressures experienced during the summer. This resulted in significant portfolio debt outflows, and pressures on currency, equity and bond markets.

IMF also said along with improving external conditions, positive policy steps taken by the authorities had improved market sentiment. The current account deficit, after reaching a record high in 2012-13, is narrowing fast, and capital inflows have picked up.