India needs more reforms and should be open to trade and lower tariffs: Top IMF official

India's economic development is evident in its improved global rankings and robust foreign exchange reserves, reflecting financial stability and competitiveness

India's economic trajectory during the last decade has been remarkable, consistently surpassing global averages. In 2022/23, India's GDP total was $3.7 trillion and per capita was $2,612, marking an 11.67 per cent rise from the previous year's $2,238.

Today India is at the fifth position globally on the nominal GDP rank (2023) while on a per capita income basis it has ranked 139 on nominal basis giving a GDP growth of 7.2 per cent for the period 2022-23. Nearly 70 per cent of India's GDP is driven by domestic and private consumption and its GDP is fueled by government spending, investments and exports.

This economic activity has been achieved due to various structural reforms like the implementation of the Goods and Services Tax (GST) regime and initiatives such as ‘Make in India’ have been pivotal in driving growth. The GST streamlined the indirect tax system, fostering business ease and tax compliance.

The fiscal deficit for 2024-25 is currently estimated at 5.1 per cent of GDP, aiming for 4.5 per cent by 2026. Major fiscal policy shifts from 2014-2024 include GST introduction, changes in expenditure allocation, and off-budget borrowings. As of March 31, 2023, the central government's debt was Rs 155.621 trillion, ($1.8 trillion) 57.1 per cent of GDP, while debts of state governments was 28 per cent of GDP. Despite plans for increased spending, the Centre aims to reduce its fiscal deficit to 5.1 per cent of GDP in 2024-25.

India's economic development is evident in its improved global rankings and robust foreign exchange reserves, reflecting financial stability and competitiveness. Indices such as the Ease of Doing Business and the Global Innovation Index highlight India's growing stature on the world stage.

Nearly 60 per cent of Indian population is rural, and the country does face high unemployment, rising income inequality coupled with a slight drop in aggregate demand. However India made significant strides in poverty reduction, with multidimensional poverty declining from 29.17 per cent in 2013-14 to 11.28 per cent in 2022-23, lifting millions out of poverty. Nevertheless, even now over 230 million families remain in poverty (IMF data) pointing to the need for more government intervention for their uplift.

To achieve the status of a developed country and an advanced economy, India needs a more skilled workforce, an increase in women’s labour force participation with critical focus on safety, investment in infrastructure along with more structural changes, especially land and labour reforms, first deputy Managing Director of the International Monetary Fund (IMF) Gita Gopinath has said.

Broader tax base for personal income tax is also going to be helpful and making sure that there are no loopholes or too many leakages that happen in terms of tax exemptions, she said, adding that more work is needed on the property tax front.

It is a tremendous aspiration to get to a developed country status and India needs structural reforms on an ongoing basis.

“It doesn't happen automatically and requires ongoing, consistent efforts on a pretty broad scale across many areas to deliver on that. India has grown well, in terms of, its overall growth rate and at seven per cent it is the fastest growing major economy in the world. The question on how one can sustain the momentum, in fact raise it further so that you can increase per capita incomes in India to get to being an advanced economy”, she said.

Investment in infrastructure is also going to be crucial, with the government already having done a lot in the public infrastructure space and digital infrastructure, but there is still a “big gap between what is needed and where the country is”, she said.

Ease of doing business, regulatory environment and the efficiency of the judicial system will be critical, she said.

Land and labour reforms will also play a crucial role in the elevation of India to high-income country. In the case of labour markets much greater flexibility in the labor markets. In 2019, the Parliament passed a new set of labour codes. These provide a nice blend between getting labour market flexibility and protecting the workers. Implementing that is going to be absolutely critical, said Gopinath.

India also needs to be more open to trade and lower tariffs, she said.

Going further Gita Gopinath said, “We are certainly in an environment where trade integration is being questioned but I think it is very important for India to open up to trading even more. On an average, tariff rates in India are higher than in its other peer economies. If it wants to be an important player on the world stage and an important part of global supply chains, it's going to require a reduction of those tariffs”.