"The reversal of the budgetary initiatives runs the risk of undermining the credibility of the fiscal policy stance," an IMF executive board assessment report prepared after consultations with senior government officials said.

The report has also suggested a plethora of initiatives to be undertaken by the government which include removal of the 4 per cent additional import duty, further freeing of consumer goods imports, taxing of agriculture and exports, speeding up of insurance reforms, curtailment of subsidies, phased movement towards capital account convertibility, early implementation of Narasimham panel report and continuance of tighter monetary policy.

Stating that the public sector deficit could not be sustained at its current high level without heavy costs to the country's long-term economic prospects, the IMF report has expressed "doubts whether the modest reduction in the fiscal deficit targeted for this year will be achieved, pointing to possible slippages in both the revenue and expenditure estimates."

The IMF has also cautioned the government against orienting the fiscal and monetary policies toward supporting domestic demand which run the risk of straining macroeconomic stability. It suggested that a strong macroeconomic stance would help restore low inflation and improve market sentiment. The emphasises was also on reinvigorating the momentum of investment. It said that the growth would require bold policy steps to convince markets of the comprehensive character and consistency of reforms.

The IMF wanted the Indian government to launch an ambitious and front-loaded medium-term fiscal adjustment programme involving actions not only by the centre but also by states. It also noted with concern that reductions in tax rates were not matched by an expansion of the tax base. In this regard it suggested exemption of tax base through elimination of "costly tax exemptions mainly in agriculture and export sectors." The report also underlined the importance of reducing unproductive expenditure by curtailing subsidies and reducing public sector employment.

The IMF further pointed out that with the fiscal deficit still too high, the monetary policy would continue to bear a heavy burden in ensuring macroeconomic stability. It stressed that the monetary policy, (RBI likely to announce the busy season policy sometime in October) should be firmly focused on a low inflation objective. It cautioned against a premature easing of the recently tightened monetary stance and further monetisation of deficit.

On the trade front, the IMF said that protection in India was at a high level and suggested that considerable efficiency gains could be reaped by accelerating trade liberalisation, including through further tariff cuts and a more rapid elimination of remaining quantitative restrictions on consumer goods. It also strongly urged the government to remove additional 4 per cent import duty imposed in the recent budget.

The IMF urged the government to develop a consensus to allow the elimination of the policy of reserving items for production by the small scale sector which acted as a drag on accelerating exports. The other suggestions include revision of the existing labour laws and setting in place an effective exit policy to facilitate not only redeployment of resources across sectors and encouragement to the employment generating activities.

While welcoming the government's intention to push the reform agenda, the IMF made a case for quick implementing of initiatives in the field of privatisation, infrastructure, insurance and foreign direct investment.

With regard to the banking sector, the IMF welcomed the strategy outlined in the Narasimhamam committee report. The report urged the "authorities to accelerate implementation of these reforms, noting that the experience of other Asian countries had shown that the costs of delaying such reforms could be extremely high." The IMF also pleaded for a fully independent Reserve bank and urged the government to persevere with the phased opening of capital account, particularly the further liberalisation of foreign direct investment and portfolio equity flows.

On the foreign exchange front, the IMF wanted the authorities to contain overshooting of the exchange rate through interest rate policy. It also cautioned against relying on administrative measures to limit foreign exchange demand and curb speculation.

insight

a convergence of views

IMF's scepticism about containing the fisc to the targeted 5.6 per cent of GDP echoes the Planning Commission's reservations in the wake of rollbacks of various revenue measures. While the IMF talks of a strong macroeconomic stance to restore low inflation, the Planning Commission has warned that a larger-than-usual expansion of the money supply (a consequence of deficit financing) "is bound to put pressure on the general price index"--that is, stoke inflation.

Expectedly, the IMF wants the special additional duty on imports to go, because the 4 per cent levy is viewed as protectionist. India's large manufacturer-importers, who had asked for the levy as a countervailing duty against local taxes payable by them, now want its removal. This is because trader-importers are exempt from SAD. This enables them to mark up prices of imports required by manufacturing within the ceiling set by SAD.