WASHINGTON: India, which has recovered from disruptions caused by demonetisation and the rollout of the GST, must fully implement the new nationwide indirect tax to avoid tax revenue underperformance resulting in cuts to capital expenditures, the IMF said today.
In its Fiscal Monitor report titled 'Capitalising on Good times', the International Monetary Fund (IMF) said that relatively buoyant revenues supported by base-broadening efforts and lower capital expenditures were offset by higher spending (including higher compensation to states for the rollout of the GST) and lower profit transfers from the Reserve Bank of India due to costs incurred during the demonetisation.
In India, fiscal consolidation was paused in fiscal year 2017/18 at the federal level as the economy recovered from disruptions related to demonetisation and the rollout of the GST, it said.
"In India, a return to a gradual path of growth-friendly fiscal consolidation is desirable to create fiscal space, but full and smooth implementation of the new goods and services tax is necessary to avoid tax revenue underperformance resulting in cuts to capital expenditures," the IMF said.
According to the IMF, overall fiscal deficits in emerging markets and middle-income economies fell marginally in 2017 for the first time after four years of steady increase, explained mainly by fiscal adjustment among commodity exporters.
On average, the overall deficit declined from 4.8 per cent of GDP in 2016 to 4.4 per cent of GDP in 2017, with diverging fiscal developments across countries.
Commodity exporters have continued to push through reform to adjust to "lower for longer" oil prices.
The headline fiscal balances improved in most commodity exporters, supported by a pickup in commodity prices and by expenditure cuts (Gulf Cooperation Council members, Mexico, and Russia).
In contrast, the fiscal position was relaxed in major non-commodity exporters, including to provide stimulus to the economy (China, India, Thailand), the IMF said.
The average trend among emerging market and middle-income economies is largely driven by rising fiscal deficits in China, which are higher when off-budget spending is also taken into account. In contrast, fiscal consolidation in Brazil continued in 2017, it added.
According to the report, in emerging market and developing economies, fiscal policy is appropriately focused on consolidation, especially in those countries that are still adjusting to lower commodity prices.
However, the speed of adjustment could be fine-tuned and, in some cases, it can be more ambitious, it said.
"Several countries could step up the speed of their fiscal adjustment," the IMF said, adding that given the strength of the recovery, Brazil should quicken the pace of consolidation and front-load the fiscal effort.