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RBI need to tighten monetary policy to counter inflation: IMF

Average inflation is likely to rise to 5.2% in 2018/19 from a 17-year low of 3.6% in the previous fiscal year, the IMF said

New Delhi: The Reserve Bank of India (RBI) will need to gradually tighten monetary policy further due to rising inflation, driven mainly by higher oil prices and a falling rupee, the International Monetary Fund said on Wednesday.

India’s central bank raised the repo rate for the second straight meeting last week by 25 basis points to 6.5%, while warning about the inflationary pressures. The average inflation is likely to rise to 5.2% in 2018/19 from a 17-year low of 3.6% in the previous fiscal year, the IMF said.

It said inflationary pressures were also exerted by a pick up in domestic demand and recent hike in procurement prices of major crops by the government, as it seeks to win support from farmers ahead of national elections next year. India’s annual consumer inflation hit 5% in June, staying above the RBI’s medium-term 4% target for an eighth consecutive month.

“The RBI will need to gradually tighten policy further, in response to inflationary pressures, which will help to build monetary credibility,” the IMF said in its annual report. The current account deficit is forecast to widen to 2.6% of gross domestic product in 2018/19, from 1.9% in the previous year, due to higher oil prices and strong demand for imports.

The IMF projected global crude oil prices to average $72 a barrel in 2018/19, up from $62 in its earlier forecast.The report welcomed economic reforms undertaken by prime Minister Narendra Modi’s government, such as the introduction of a nationwide Goods and Services Tax (GST) and moves to allow more foreign investment in new sectors.

The report, prepared after consultations with government officials, also warned that India was at risk of a shortfall in tax revenue this year due to continued problems with implementation of GST and a delay in financial sector reforms.

It also forecast India’s economy could grow at 7.3% in the current fiscal year and 7.5% in 2019/20. As one of the of world’s fastest-growing economies – accounting for about 15 percent of global growth – Indian economy has helped lift millions out of poverty, the report said.

“The economy was gaining momentum and the government should reinvigorate reform efforts to accelerate growth and create more jobs. This is critical in a country, where per capita income is about $2,000, still well below that of other large emerging economies” -Ranil Salgado, IMF mission chief for India

IMF asks India to consider simpler GST rate structure

  • The IMF described the Goods and Services Tax (GST) as a ‘milestone reform’ in Indiaalt39s tax policy, but pushed for a simplified structure, saying the multiple rate structure and other features could give rise to high compliance and administrative costs.
  • In its annual country report, the International Monetary Fund also said that a dual rate structure with a low standard rate and an additional higher rate on select items can be progressive and preserve revenue neutrality.
  • The IMF said that GST is a milestone reform in India’s tax policy, taking the important step of unifying and harmonising numerous indirect taxes across all states of the federation and the central government.
  • “Yet, the GST 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.
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