IMF Calls for GST Overhaul, Structural Reforms to Boost India’s Economy

The International Monetary Fund (IMF) on Thursday called for deeper structural reforms, emphasising fiscal consolidation, labour market improvements and trade policy adjustments to bolster India's long-term growth and fiscal stability. It also flagged increasing risk to India's economic outlook citing geopolitical tensions, inflation volatility, and weak private consumption.

"Executive directors commended the authorities’ prudent macroeconomic policies and reforms, which have contributed to making India’s economy resilient and once again the fastest-growing major economy," IMF said in its Article IV Consultation report for 2024.

Fiscal Prudence and Debt Management

The global lender lauded India's fiscal prudence and debt-reduction target and recommended continued, well-calibrated fiscal consolidation over the medium term to rebuild buffers, ease debt service, and reduce debt.

The report noted that both the IMF and the Indian government agreed on the need for medium-term fiscal consolidation but advocate for a gradual adjustment pace, given global uncertainties.

“A revamped Fiscal Responsibility and Budget Management (FRBM) Act should include medium-term projections of key macroeconomic variables, the fiscal deficit, and its composition in the Budget to provide guidance and enhance transparency, while escape clauses can provide flexibility for fiscal policy to respond to large shocks,” it said.

It further said that a revenue-based consolidation strategy focused on growth-enhancing expenditure is appropriate, given India’s development needs and revenue potential. The report emphasised the need to boost revenues by simplifying GST, partially reversing past reductions in the effective GST rate, rolling back fuel excise cuts, expanding the income tax base, and aligning domestic energy prices with global trends.

IMF directors also commended the Reserve Bank of India's (RBI) calibrated monetary policy that has kept inflation within its target range. It also noted that there was scope for gradual rate cuts and emphasising a data-driven, well-communicated approach.

India's New Fiscal Framework

The government in its recent union budget for FY25, introduced a new glide path with the debt-to-GDP ratio as the fiscal anchor, stepping back from the current target of fiscal deficit. The aim is to bring down the debt-to-GDP ratio to 50% by FY31 with a one-percentage-point deviation from either side, from 57.1% in FY25.