International investors are optimistic about new government at the Centre
Noting that international investors are very optimistic about India's new government at the Centre, International Monetary Fund (IMF) sees India's economic growth rising to about 7 per cent in the next fiscal from its current growth forecast of 5.4 per cent for this fiscal, a top IMF official said at an ASSOCHAM event.The growth is picking up and the external environment is positive and in that context we can foresee India recovering to some potential growth rate in the neighbourhood of 6.25-7 per cent and it could go up as investments continue, Mr Thomas Richardson, senior resident representative, IMF said.
There are risks to that forecast as we are worried about factors like the potential conflict in Europe between Russia and Ukraine, deflation in the Euro Zone, possible instability on emerging markets as a result of tapering by the Federal Reserve, said Mr Richardson.
There is optimism by investors and hopefully the whole investment climate can gradually be improved as a way of boosting growth overtime as the external environment that India faces has started to pick up though a bit slowly with global growth expected to be at about 3.6 per cent this year rising to about 3.9 per cent next year, he added. We've to be realistic and need to give sometime to the Government of India to get growth going.
He also said that certain structural bottlenecks that had led to slowdown in investments are still there as the pipeline of new infrastructure and investment projects is pretty thin and it will take sometime to turnaround.
Highlighting that inflation is one of the key challenges being faced by India, Mr Richardson said that bringing inflation down is really an important way to set the stage for long-run growth. Inflation undermines India's competitiveness of trade-able goods as it's a risk factor and is one of those things that drove fiscal deficit to rise so high as the relative price of trade-able goods became less competitive and we support the prudent monetary policy that the RBI is undertaking and the focus on CPI is the right thing to look at.
Stressing upon the need for fiscal consolidation, the IMF's senior resident representative in India said, At 7.5-8 per cent of GDP the combined deficit of Union and state governments is quite high by international standards and it needs to be addressed.
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One of the key ways by which authorities should bring the fiscal deficit down is through subsidy reforms as fuel/energy subsidies are not only expensive but actually regressive, added Mr Richardson. There is a need to address the subsidy reforms' issue and using that money for something more productive like water and sanitation, health and education.
He added that the current account deficit has begun to adjust owing to administrative measures to control gold imports. It is now much lower and looks more stable now than about a year ago.
Stressing on the need for revenue enhancement, Mr Richardson said, The revenue to GDP ratio particularly for the union government i.e. 9% of GDP is on a low side from international standards and for a country like India with global aspirations it needs to be boosted without raising tax rates.
He also said that there is a lot of scope for improving tax administration, for broadening tax bases, for bringing people into the tax net and that way we could actually improve the revenue performance without unduly damaging the business climate.
On the issues of goods and services tax, Mr Richardson said, Passing a nation-wide value added tax, a GST as a way of reducing tax distortions across states would be a really important way to boost growth overtime.
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