Gita Gopinath on why India needs to keep fiscal deficit target

Stating that India's consolidated deficit is the highest among the G20 nations, Gopinath added it is important for India to undertake reforms.

IMF Chief Economist Gita Gopinath on Friday said India needs to keep its fiscal deficit target, which would require expenditure rationalisation and increased revenue mobilisation.

Speaking at the 92nd Annual Convention of Ficci, she said that in the past few quarters, there has been a steep slowdown in private sector demand and there is now weakness in investment.

And, if there is a prolonged weakness in investment, it will affect potential growth, she stressed at the special plenary moderated by Harsh Pati Singhania, former president of Ficci.

"For India, macro stability is very important, which means stability on the fiscal front.

“A clear sense of keeping to the target of fiscal consolidation is very important.

“That would require increasing revenue mobilisation and also rationalising expenditure," Gopinath said.

With tax revenue slowing in a sputtering economy, some states had on Wednesday suggested Finance Minister Nirmala Sitharaman to go for fiscal expansion and relax the deficit target to 4 per cent of the gross domestic product (GDP).

The finance minister in full Budget 2019 reduced the fiscal deficit target to 3.3 per cent, from earlier 3.4 per cent for 2019-20.

Keeping in mind its fiscal deficit target, the government has stayed with the borrowing plan for the financial year as announced in the Budget despite a sharp cut in corporate tax rate that is expected to cost Rs 1.45 lakh crore.

Gopinath further said that "when we talk about fiscal consolidation, we think of it as a medium-term target which is something that has to be addressed over a period of time and not necessarily overnight".

India's consolidated deficit (the Centre and states combined) is the highest among the G20 nations, she added.

"So, it's not a free lunch and this has be very carefully managed," she said.

The IMF's chief economist also said it is also important for India to undertake reforms.

But, to be able to do this, some clarity, greater clarity and greater certainty would help, she said adding that "this is also applied to big reforms like the GST (goods and services tax)".

On increasing share of the manufacturing sector, Gopinath said another set of big reforms are required to get manufacturing on the ground and for India to have bigger presence on the export front.

There are important reforms needed with respect to land acquisition and labour laws.

"Now, we would like to think that with the government having strong political mandate, this would be right time to undertake those kind of reforms.

“In the absence of it, India is missing out on what we assume globally in terms of shifting global supplies," she added.

India's economic growth slowed to an over six-year-low of 4.5 per cent in the second quarter of the current financial year.

Fitch Ratings on Friday cut India's GDP growth forecast for 2019-20 to 4.6 per cent on deterioration in business and consumer confidence.