New Delhi: India should use improved economic conditions to accelerate the pace of fiscal consolidation, according to the International Monetary Fund (IMF).

“A faster pace of consolidation would help cap the rise in long-term bond yields, reduce external and banking vulnerabilities, and improve market confidence," IMF said in its report, prepared after consultations with the government, on Wednesday.

To achieve accelerated fiscal consolidation, IMF suggested India cut subsidies gradually by 0.5% of GDP over four years, with a 0.3% of GDP cut in fertilizer subsidies, elimination of fuel subsidies and a modest cut to food subsidies. Further reforms and continued measures to raise tax collections will also help fiscal consolidation, it added.

Front-loading of fiscal consolidation is possible only if tax-to-GDP ratio accelerates substantially, said D.K. Srivastava, chief policy adviser at EY India. “This fiscal, the government finances will be under pressure because of the upcoming general elections. Next fiscal, the pressure will be due to higher demand for capital expenditure to meet the government’s promise of higher infra spending. In such a scenario, chances of achieving faster fiscal consolidation are rather low," he added.

IMF retained its growth projection for India at 7.3% for 2018-19 and 7.5% for the following year.

The Fund stressed the need to take advantage of the projected acceleration in economic growth to achieve a public debt level of 60% of GDP by 2022-23, as recommended by the Fiscal Responsibility and Budget Management Review Committee. The government in its 2018-19 budget had said it would achieve the target with a two-year delay in 2024-25.

However, the finance ministry seemed to have differed with IMF. “While underscoring the importance of medium-term fiscal consolidation, they (Indian authorities) felt that a gradual pace was called for because of the need to support growth and development," the report said.

Finance ministry officials were hopeful that taxing fuels such as aviation fuel and natural gas under GST would be relatively easy, but including petrol, diesel and immovable property would be more challenging, since they were key revenue earners for states. “Pruning exemptions would also be difficult," the authorities maintained.

IMF said risks for India are tilted to the downside. “On the external side, risks include increase in oil prices, tighter global financial conditions, a retreat from cross-border integration including spillover risks from a global trade conflict, and rising regional geopolitical tensions. Domestic risks pertain to tax revenue shortfalls related to GST issues and delays in addressing the twin balance sheet problems and other structural reforms," it said.

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