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July 01, 2000
IMF deplores fiscal deficit; asks India to deepen reforms
International Monetary Fund (IMF) has asked India to carry out drastic economic reforms including rapid deregulation of industrial and agriculture sectors and cut in non-plan expenditure saying the Fiscal deficit of centre and states at 11 per cent of the GDP was deplorable.
In a report issued after consultations between its executive board and India, The fund listed out reforms that New Delhi should pursue in the face of combined deficit skyrocketing to an estimated 11 per cent from 8.5 of GDP in a matter of five years.
IMF said there was need to dereserve small scale industries, increase labour market flexibility, bankruptcy reform and improved effectiveness of debt recovery tribunals besides considerable improvement in tax administration including at the state level.
Apart from widening the tax base, the IMF said that services sector had to be fully brought into the tax net besides reducing innumerable exemptions.
The periodic consultation with India under article IV of IMF was held on June 19 and release of its recommendations and comments within a couple of weeks of the executive board meeting was unprecedented.
This reflects the new policy of openness and transparency of the IMF after the new Managing Director Horst Kohler took over.
The fund also called for considerable improvement in tax administration both at central and state levels, broadening of the tax base in particular by reducing exemptions and bringing more sectors like services into the tax net.
There was need to improve the effectiveness of debt recovery tribunals and reforms to boost agricultural efficiency and incomes.
India should continue the process of tariff reduction along with improvements in customs administration and withdrawal of exemptions to avoid any adverse effects on the fiscal position, it said.
The fund called for steps to link the transfers by the centre to states to the latter's fiscal performance and said expenditure reforms should be taken to up support deficit reduction.
Budegtary allocations for infrastructure and priority social expenditure should be facilitated.
Though calling for faster progress in liberalisation of foreign investment flows, the fund said a cautious approach should be adopted in the case of Capital Account Convertibility.
Noting that the fiscal position had deteriorated significantly in recent years, IMF said much of the consolidation that had been achieved following the 1991 balance of payment crisis was erased.
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