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Indian economy beginning to recover

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The Indian economy is beginning to shake off its torpor, with the International Monetary Fund (IMF) noting in its annual country report released on Wednesday that the country is likely to lead global growth over the next financial year. Ranil Salgado, IMF’s mission chief for India, likens it to an elephant starting to run, reported New Indian Express (India).

“Following transitory disruptions, growth is projected to recover in FY2018/19 and strengthen in FY2019/20 as stability-oriented macroeconomic policies and progress on structural reforms continue to bear fruit,” the report stated.

However, while the IMF’s projections for Indian GDP growth remains one of the highest in the global arena at 7.3 per cent for 2018-19 and 7.5 per cent the next year, the report flags risks including increases in international 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 continued GST implementation issues and delays in addressing the twin balance sheet problems and other structural reforms,” it said.

The IMF has also observed that the GST, a “milestone reform” unifying and harmonising numerous indirect taxes across all states and the Central government.

“Yet, it has a complex structure with a relatively high number of rates (and exemptions), which could be simplified without sacrificing progressivity of the current GST and with potentially significant gains from lower compliance and administrative costs,” it said.

The IMF said that with the consumption basket of the rich taxed at higher rates than that of the poor, the GST is designed as an effective tax rate rising with household consumption.

However, a revenue-neutral reduction in the number of rates would raise the effective rates for poorer households while reducing those for richer households. This is the key cost of moving to a simpler system, it argued.

‘RBI needs to gradually tighten monetary policy’

The RBI needs to gradually tighten monetary policy in view of inflationary pressure due to higher oil prices, increase in Kharif MSP and possible fiscal slippages, the International Monetary Fund said, adding that the repo rate hike in early June was appropriate and further gradual tightening will be needed.

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