By TIOL News Service

NEW DELHI, FEB 09, 2013: ACCORDING to IMF Study, fiscal consolidation remains a big challenge for India. It notes the challenge is more serious in view of weak revenue collections and ongoing spending pressures, which have kept deficits high. The decline in public debt has slowed down, and its continued downward trajectory is vulnerable to slower growth.

The Study states that high debt and deficits constrain space for counter-cyclical policy and absorption of contingent liabilities. While borrowing costs are contained via the Statutory Liquidity Ratio and other measures, high deficits can crowd out investment. Recently, the government has endorsed a medium-term roadmap for deficit reduction, but with the forthcoming 12th Plan aiming to raise spending for health, infrastructure and education, expenditure will have to be reoriented within this shrinking envelope.

A three region setup is used, namely India, the euro area and the rest of the world and the results are gauged relative to the steady state, calibrated on India’s medium-term outlook. The Study underlines that the Govt consumption is the largest component of spending, and consumption taxes are the principal source of revenue. Three consolidation scenarios are assessed. Each scenario reduces the deficit to the steady state level in 5 years, the timeframe of the 13th Finance Commission and the period the current consolidation roadmap is expected to take to reach its target.

The scenarios studied assume containment of government spending, comprehensive subsidy reform, and GST implementation modeled as a reduction in untargeted transfers and GST implementation as stronger consumption tax collection. The three scenarios achieve the same deficit objective with different combinations of the three instruments, it adds.