IMF Urges Deeper Structural Reforms to Strengthen India's Growth Outlook As per the report, continued fiscal discipline will be crucial in rebuilding financial buffers, easing debt service, and ensuring macroeconomic stability.

The International Monetary Fund (IMF) has called for deeper structural reforms in India, stressing the need for fiscal consolidation, labor market improvements, and trade policy adjustments to bolster long-term economic growth and financial stability. In its latest Article IV Consultation report for 2024, while commending India's economic resilience and its position as the fastest-growing major economy, the IMF flagged potential risks stemming from geopolitical tensions, inflation volatility, and weak private consumption.

The global lender praised India's commitment to fiscal prudence and debt reduction while advocating for well-calibrated fiscal consolidation over the medium term. As per the report, continued fiscal discipline will be crucial in rebuilding financial buffers, easing debt service, and ensuring macroeconomic stability. The IMF also recommended a revamped Fiscal Responsibility and Budget Management (FRBM) Act, incorporating medium-term projections of key macroeconomic indicators, fiscal deficit targets, and their composition to enhance policy transparency.

"A revenue-based consolidation strategy focused on growth-enhancing expenditure is appropriate, given India's development needs and revenue potential," the report stated. It highlighted key areas for boosting revenues, including simplifying the Goods and Services Tax (GST), partially reversing past reductions in the effective GST rate, rolling back fuel excise cuts, broadening the income tax base, and aligning domestic energy prices with global trends.

The IMF directors also commended the Reserve Bank of India's (RBI) cautious monetary policy stance, which has helped maintain inflation within its target range. While supporting gradual interest rate cuts, the report emphasized a data-driven and well-communicated approach to ensure stability in the financial markets.

The report comes at a time when the Indian government, through its Union Budget for FY25, has introduced a new fiscal framework centered on a debt-to-GDP ratio as the fiscal anchor. Moving away from the existing fiscal deficit target, the government aims to bring down the debt-to-GDP ratio to 50 per cent by FY31, from 57.1 per cent in FY25, allowing for a one-percentage-point deviation on either side.

Beyond fiscal reforms, the IMF emphasized the need for crucial structural adjustments, including simplifying GST—potentially moving to a single rate of 14 per cent—cutting excise duties on fuel, and broadening the income tax base. The report also underscored the significance of India's strong financial sector, improved corporate balance sheets, and a robust digital public infrastructure in supporting sustained medium-term growth.

In addition to fiscal and monetary measures, the IMF highlighted the urgency of reforms in agriculture, land, governance, and the judiciary. It also called for investments in education, skill development, public health, and social safety nets. The report urged the reduction of the public sector's footprint in credit markets and the implementation of comprehensive climate policies to ensure sustainable growth.

"Looking ahead, India's financial sector health, strengthened corporate balance sheets, and strong foundation in digital public infrastructure underscore India's potential for sustained medium-term growth and continued social welfare gains. Risks to the economic outlook are tilted to the downside," the IMF warned.