New Delhi: The International Monetary Fund (IMF) cautioned on Wednesday that in a scenario of rising protectionism in developed countries, the greatest deterioration in corporate balance sheets would occur in China, India and South Africa. “If protectionist pressures increase, the combination of declining global trade and growth would increase corporate vulnerability and borrowing costs, that may lead to financial stability risks in these economies," it said in its Global Financial Stability Report.

“Commodity sectors especially would come under pressure because metal and oil prices would fall as a result of the sharp decline in global growth," it added.

A sudden repricing of risk or a rise in protectionism could trigger capital outflows and hurt demand. This would worsen existing vulnerabilities in corporate sectors and raise risks in the weakest banking systems. “To ensure resilience against an uncertain global policy mix, policymakers should continue to address corporate and bank vulnerabilities," it advised.

In countries such as India with limited fiscal space to boost growth, growth-friendly fiscal consolidation should continue by reorienting public expenditure away from untargeted subsidies, especially on food and fertilizers, towards capital and social spending, the IMF said in its report.

ALSO READ : IMF raises global growth forecast, warns against protectionism

IMF said countries such as India should opt for other measures to compensate for growth-friendly revenue and spending measures in a budget-neutral way, or along the country’s envisaged fiscal consolidation path. “In India, the authorities should continue to raise taxes on petroleum products while oil prices remain low. India’s food and fertilizer subsidy regime through better targeting and efficiency could generate substantial fiscal gains," it added.

IMF noted that India returned to fiscal consolidation in the year 2016-17—by bringing the deficit down to 3.5% of GDP from 3.9% the previous year—supported by the near-elimination of fuel subsidies and enhanced targeting of social benefits, notwithstanding the deceleration in growth on account of the country’s recent currency exchange initiative.

“In India, the headline deficit is projected to decline modestly in fiscal year 2017-18, with continued delay in reaching the medium-term deficit target. The budget envisages a growth-friendly fiscal adjustment underpinned by expenditure cuts that protect infrastructure investment, as well as more progressive income taxes for individuals combined with lower taxes on small and medium-sized enterprises," IMF said.

But IMF recognized that India is also making progress towards strengthening its fiscal responsibility framework, including through anchoring fiscal adjustment by means of a debt-to-GDP ratio of 60%, to be achieved by 2022-23.

ALSO READ : IMF retains its India GDP growth forecast at 7.2% for 2017-18

IMF said the rollout of the nationwide goods and services tax (GST) this year will enhance the efficiency of the internal movement of goods and services and create a common national market.

In emerging markets and developing economies, improving access to health and education through well-designed social transfers and better-targeted spending will create a larger and more productive labour force, IMF said.

“In India, this will require continued progress in reducing gender inequality in education and health and additional spending on gender-targeted skills training," it added.

A challenge facing policymakers today is how to raise productivity, the key driver of living standards, in the long term. For the manufacturing sector, IMF said that if dispersion of firm revenue productivities in China and India were reduced to the levels observed in the US, total factor productivity would increase by 30% to 50% in China and by 40% to 60% in India.

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