IMF urges India to cut deficit, debt

The International Monetary Fund has suggested that India should begin fiscal consolidation with the next budget as the deficit has entered into the double digits due to the stimulus measures taken to revive the economy.

"Although we believe that the stimulus measures that were put in place were instrumental in supporting activity during the crisis, it has pushed the deficit into double digits again, and the debt back to nearly 80 per cent," IMF deputy director, Asia and Pacific Department, Kalpana Kochhar told reporters in a conference call on Thursday.

"We, therefore, recommend that the fiscal adjustment strategy begin with this next budget, which the Finance Minister (Pranab Mukherjee) has already announced will happen, and we believe it should be anchored on a debt target along with some nominal expenditure rules," she said.

India last year announced tax cuts and increased expenditure to prop up the economy hit by the global economic slowdown. The Reserve Bank had also cut its key policy rates to pump more money into the system.

The government in its budget for 2009-10 had proposed to raise Rs 450,000 crore (Rs 4,500 billion) from the market, up from Rs 310,000 crore (Rs 3,100 billion) in the previous year and pegged the fiscal deficit at 6.8 per cent of the GDP as against 6.2 per cent in 2008-09.

India, Kochhar said, was one of the first countries to recover from the crisis.

The IMF has project growth to reach 6.75 per cent for the year ending March, 2010, and then rising to 8 per cent for the year ending March 2011.

"We believe there are a lot of indications already in the pipeline that suggest that this recovery will in fact occur and will broaden. Along with the recovery, we've seen an upward rise in prices. Some of it is due to food, but some of it is also due to demand pressures," Kochhar said.

The IMF, she said, is of the view that it is right time to withdraw the monetary stimulus, which means that they see growth picking up and becoming more broad-based, and all the leading indicators -- things like the purchasing managers index for industry and services -- suggesting that the recovery will continue.

"We do believe it's time to withdraw the stimulus also on the fiscal side," Kochhar said.

"But, more importantly, with the debt burden being so high, it actually constrains the space for very essential fiscal spending that the government needs to do, including on poverty and its goals of inclusiveness.

"So it does need to reduce the deficit in order to make space for essential spending. And, yes, we do believe it's time to unwind the stimulus measures that were put in place last year," she said.