An IMF country focus on 12 November 2021 indicates that India’s economy is preparing to rebound following the setbacks inflicted by the second wave of Covid-19 infections. India’s substantial policy responses to the pandemic, with economic reform and fiscal support, have prepared the way for a return to growth that will be one of the fastest among the major economies.

The report issued on 15 October 2021 following consultations under Article IV of the IMF’s articles of agreement noted that India was one of the fastest-growing economies in the decade before the pandemic. The economy was moderating before the pandemic, and then two waves of Covid-19 brought on a health and economic crisis from which the economy is gradually recovering. Economic growth is projected to be 9.5% in FY2021/22 and 8.5% in FY2022/23.

During the pandemic relief measures have helped to mitigate the impact of the health and economic crisis, especially in rural areas through use of the rural employment program. Social protection coverage is however incomplete for the informal sector and urban poor. The pandemic has therefore reversed some of the progress made in reducing poverty, because individuals who rely on daily wage labour and are outside the formal safety net have lost income.

Reform priorities include continuing labour and land reforms; investment in infrastructure; measures to improve governance; further trade and investment liberalization; and efforts to improve education. These reforms could alleviate inequality and improve India’s integration into global value chains. The IMF notes that fiscal policy can be an important factor in promoting an inclusive, green economic recovery and reduce the lasting impact of the pandemic.

Medium-term fiscal consolidation, with greater revenue mobilization and expenditure efficiency, can increase fiscal space and support a private sector led recovery. The tax gaps are estimated to be around 5 percent of GDP, and these gaps can be reduced by expanding the tax base, increasing tax rates and improving the efficiency of tax collection.

Recently efforts have been made to increase tax efficiency by phasing in mandatory e-invoicing in GST, the introduction of measures to reduce the compliance burden and improved enforcement. Fuel excise taxes have also been increased. Expenditure can be made more efficient by the reform of subsidies and other measures.

Measures to improve the revenue efficiency of the GST could include improved compliance, rate rationalization and the rationalization of non-food exemptions. Loopholes could be eliminated in corporate and personal income tax and the tax base could be broadened.

Reductions in tariffs, in particular tariffs on intermediate goods, and further investment liberalization, can promote further integration into global value chains and can increase the potential for economic growth.