Economic Highlights

New Delhi,13 August 2018

IMF’s Good Chit

  YET GOVT CAUTIOUS

By Shivaji Sarkar

The International Monetary Fund has lauded India for recovering from disruptions caused by teething troubles of GST and some other activities. It projected a growth rate of 7.3 per cent in 2018 and 7.5 per cent in 2019 making it among the fastest growing major economies. The latest projection is slightly less – 0.1 per cent in the current fiscal and 0.3 per cent in 2019 – than its April projections. But this is way ahead of the projections of 6.7 per cent made in 2017.

As one of the world’s fastest growing economies, accounting for about 15 per cent of global growth, India’s economy has helped millions out of poverty and given a boost to global growth. Fortunately, a major benefit for India is its young population which would continue to lead its growth for the next three decades, till 2050, when working age population is projected to decline.

However, the Union Finance Ministry has reservations on some of its prescriptions. A critical suggestion is to cut subsidies at 0.5 per cent for the next four years with a 0.3 per cent cut in fertilizer subsidies, elimination of fuel subsidies, some more cut in food subsidies. It has called for further “reforms” and continued measures to raise tax collections to help fiscal consolidations.

Such fiscal consolidation is possible only if there is substantial rise in tax-to-GDP ratio. The IMF prescription certainly does not suit a country, which has one of the highest tax rates despite GST. The Central government wants to include petrol, diesel and other fuels under it. Being a politically sensitive issue, with the States not wanting any further cut in their revenue realisations, this does not seem feasible as of now.

The Centre itself has increased fuel cess to eight per cent from two per cent to negate the impact of subsuming excise in GST. Various kinds of other taxes, including tolls on highways, cities and village panchayats and continuing State excise under different names, is adding to the tax burden.

The IMF suggestions are not taking the issue of rural distress, agrarian crisis and various social unrests, such as the farmers’ or protests by groups which were considered well-off and influential like the Marathas, Jats, Patidars and others into account.

Additionally, the Finance Ministry apparently differs with the IMF on reduction of debt level to 60 per cent of GDP by 2022-23, an essential for increasing government-funded development. In the Budget 2018-19, the government has said it would achieve the target with a two-year delay in 2024-25. It wants to delay such fiscal consolidation.

Notwithstanding India’s fast-paced growth, there are groups within, such as the Swadeshi Jagaran Manch, which is vocal, along with others which are professing balanced inclusive growth for the benefit to the marginalised. Such groups also still have a conservative approach on FDI and are not happy at creations of monopolies like the recent merger of Walmart and Flipkart.

On the other side, the Income Tax department is happy at such developments as it is to accrue substantial capital gains tax. The department is not bothered about its impact in the retail market, which the Parliamentary Standing Committee on commerce has noted.

Various subsidy cuts have made fuels expensive, rise in railway and transport fares and many other services. This has led to an inflation rising to 5 per cent beyond the tolerable limit of the Reserve Bank. Undoubtedly, these are politically sensitive issues.

Further, the ongoing global trade war is hitting current account deficit -- higher import bill. On July 26, the Parliament Standing Committee noted that anti-dumping problem against China “runs deep and the industries affected are not able to reach the Directorate General of anti-dumping & allied duties (DGAD) on account of high cost involved in moving the applications”.

Besides, anti-dumping measures also suffer from lax implementation, under-invoicing, misclassification and routing goods through least developed countries (LDCs). It also notes that delays in quality control orders (QCO) helps China monopolise dumping of its low quality goods. Even the ease-of-doing business is helping China and hitting the Indian manufacturing sector. The committee has called for changes in Customs Act and other prudent steps to help Indian manufacturers. Something the IMF does not want.

If India adheres to its internal assessments it would be contrary to IMF prescriptions. The task is complex. The government has increased Minimum Support Price (MSP) for many crops. The World Bank and WTO, unfortunately consider it subsidy. Despite anti-dumping duties on Chinese goods, these continue to flood the market.

Rising global fuel prices and weakening currency is making it difficult for the government to keep the discontent under check. The US sanctions on Iran is also causing a problem. It is being viewed as a measure to boost the sales of US shale oil and weakening of Asian economies. The unipolar world has its problems, which countries like India are finding difficult to match with.

India is concerned at such actions as ultimately it hits the employment figures, an issue that is socially and politically sensitive. If IMF suggestions are implemented it would not be comfortable, yet a straight rejection is also not prudent.

The government it must be admitted is virtually facing a critical situation. It has to boost economic activities and take anti-dumping and restrictive measures without letting it look like that. It has to strengthen the rupee and cut on its fuel import bill and is also under pressure to increase the threshold limit for taxing income in tune with rising inflation.

At the same time, the country has a problem that rising inflation and high taxes are constricting purchasing power of the people. The IMF has no suggestion to tackle these issues. The economy cannot be only about fiscal consolidation and higher taxes – a sure prescription for social unrest.

The IMF projection about India accounting for 15 per cent of global growth is good news and it has the capability to attain it. However, it cannot ignore other issues such as growth for all of its people and its reflection in the happiness index.

India is for a balanced growth and has taken the right step in not following IMF prescriptions blindly. It must reduce tax burden on its people, ease investment climate, increase exports and lead access to the world market, an effort being helped by whirlwind tours of Prime Minister Narendra Modi, External Affairs Minister Sushma Swaraj and now President Ram Nath Kovind.---INFA

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