The International Monetary Fund staff urged India to make “tough choices” on its tax and subsidies system, calling for measures to improve the business climate as the country battles a slowing expansion and faster inflation.
“India is saddled with large fiscal and external deficits,” the IMF staff said in a report released on the Group of 20 economies. “With slower growth and persistent twin deficits, investor sentiment has weakened and risks have risen alongside recent market turbulence.”
The IMF’s assessment on India was part of a broader study of imbalances in the world’s economy, which was released just as several emerging markets see their currencies tumble in anticipation of the Federal Reserve’s plans to reduce monetary stimulus.
Overseas funds have cut holdings of Indian debt by $10.5 billion since May 22, when Fed Chairman Ben S. Bernanke first flagged a potential cut in monthly purchases of U.S. assets that had fueled demand for emerging markets in a search for profit.
Faced with revenues that are too low and spending that’s too high, India needs to overhaul its tax system to create a single sales tax, according to the report.
“Removing supply bottlenecks and improving the business climate would help reduce medium-term external imbalances, lift growth and improve fiscal dynamics,” the IMF staff also said.
Besides India, the report identified seven countries and the euro region as having “relatively large imbalances” in 2013. While overall imbalances in the global economy have decreased, only part of the improvement is permanent, according to the IMF staff assessment.
While some of the adjustment has been healthy, some of it stems from weaker demand in advanced nations, according to the report. “Exchange rates have also broadly moved in the right direction to help rebalancing, though with some exceptions,” the staff said in the report.
China’s growth has been too reliant on investment and an “unsustainable surge in credit,” according to the IMF staff report, which identified reform in the financial sector as an “urgent priority” for the world’s second-largest economy.
The U.S. fiscal outlook remains a “major” concern despite improvement and more remains to be done to safeguard stability of its financial system, according to the report.
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