File picture of the Indian rupee note. The IMF raises concerns that fiscal stimulus could further imperil India's economy. Image Credit: Reuters

Washington (Bloomberg): India’s government should avoid a fiscal stimulus to spur the economy, and focus instead on cutting public debt so that financial resources can be freed up for investment, the International Monetary Fund said.

While the national government has a budget deficit target of 3.3 per cent of gross domestic product in the year through March, a better reflection of the fiscal position is the public sector borrowing requirement, which the IMF estimates has increased to about 8.5 per cent of GDP.

“Economic development projects and enhanced social initiatives in India will be vital in the coming years,” the IMF said in a statement accompanying its annual Article IV report on the economy. “But to generate the revenue needed to get them off the ground, India’s debt - among the highest in emerging markets - must be reduced.”

Need a gameplan

The government needs a credible consolidation path to rein in debt, including reducing subsidies and boosting the tax base, the IMF said. Additional monetary policy easing may be warranted to support the economy in its downturn, it said.

IMF Chief Economist Gita Gopinath said last week the lender will likely cut India’s growth forecast of 6.1 per cent for the fiscal year through March. The central bank is projecting growth of 5 per cent in the period.

Last month, Moody’s Investors Service reduced the nation’s credit-assessment outlook to negative, citing issues ranging from a worsening shadow banking crunch and a prolonged slowdown in the economy to rising public debt. The ratings company is projecting a budget deficit of 3.7 per cent of GDP in the year through March.