The executive board of International Monetary Fund (IMF) on Wednesday called for a closer look on possible fiscal implication created by GST rate rationalisation and personal income tax rates in India. Meanwhile, it said that despite external headwinds, growth is expected to remain robust, supported by favorable domestic conditions.
These remarks are part of Article IV Consultation for India, completed by the Executive Board of the multilateral agency.
Taking note of GST rate cut, made effective from September 22, directors of the board said that resulting reduction in the effective rate are expected to help cushion the adverse impact of tariffs. Headline inflation is projected to remain well contained, reflecting the one-off effect of the GST reform and continued benign food prices. However, “they called for careful monitoring of the fiscal impact of the reduction in GST and personal income tax rates,” a statement by the IMF said.
Tariff relief measures
Directors also recommended that tariff relief measures should be targeted, transparent and timebound, and that the pace of fiscal consolidation in FY2026-27 should be conditional on the impact of tariffs on the output gap. For the medium term, Directors stressed that fiscal buffers should be replenished by focusing on domestic revenue mobilization, while also raising efficiency of expenditure including through a more targeted social safety net.
Directors generally encouraged the authorities to review their medium-term debt target in light of the GDP rebasing next year, with a view to making it more ambitious. “Enhancing fiscal sustainability at the state level as well as carefully monitoring contingent liabilities would also be important,” it said.
Directors supported the RBI’s data dependent approach to monetary policy. They generally felt that, if tariffs persist at current levels, there would likely be scope for further monetary easing amid benign inflation dynamics. Directors broadly recommended continued efforts to enhance monetary transmission, as well as greater exchange rate flexibility to help the Indian economy absorb external shocks, with interventions aimed at addressing disorderly market conditions consistent with the Integrated Policy Framework.
Talking about overall growth scenario, the board said that India’s economy has continued to perform well. Headline inflation has declined markedly, driven by subdued food prices. The financial and corporate sectors have remained resilient, supported by adequate capital buffers and multi-year low non-performing assets. Fiscal consolidation has advanced, and the current account deficit has been contained, supported by resilient service exports.
Despite external headwinds, “growth is expected to remain robust, supported by favorable domestic conditions. Under the baseline assumption of prolonged 50 per cent US tariffs, real GDP is projected to grow at 6.6 per cent in FY2025-26 before moderating to 6.2 per cent in FY2026-27,” it said.
However, there are significant near-term risks to the economic outlook. On the upside, the conclusion of new trade agreements and faster implementation of structural reform domestically could boost exports, private investment, and employment. On the downside, further deepening of geoeconomic fragmentation could lead to tighter financial conditions, higher input costs, and lower trade, FDI, and economic growth. Unpredictable weather shocks could affect crop yields, adversely impact rural consumption and reignite inflationary pressures.
Looking ahead, India’s ambition to become an advanced economy can be supported by advancing comprehensive structural reforms that enable higher potential growth, the board said.
