Fiscal policy is supporting consumption demand. While revenue from the corporate income tax is buoyant, thanks to measures to improve compliance, revenue from the GST and the personal income tax is below target. Adding to temporary spending pressures ahead of the elections, various welfare schemes targeting the poor are being implemented. These include a new hospital insurance scheme, the creation of primary health care centres, retirement pensions for workers of the unorganised/informal sector, and an income support scheme for small land-holding farmers. These measures will contribute to reducing poverty and improving access to quality public services. Fiscal space for most states is limited. Given the relatively high public debt and to avoid crowding-out private investment, additional spending should be partly financed by winding down ineffective spending programmes, such as fertiliser subsidies which benefit more large farms and contribute to soil and water degradation. Additional tax revenue could also be raised by limiting the use of exemptions and reduced rates for the GST and by removing tax rebates in the personal income tax system that mostly benefit the rich.
With inflation well below the mid-band point target, inflation expectations adjusting down, and existing slack, there is room for a cut in policy rates. With banks’ health gradually improving, as evidenced by the recent decline in stressed assets, lending rates should adjust more swiftly, and support the revival of business investment. To avoid a new build-up of non-performing loans, public banks’ governance should be improved to ensure sound portfolio decisions. Implementing strict norms for defaulting borrowers and time‑bound resolution of insolvency procedures are also key to promoting sound debtors’ behaviour.
Removing structural bottlenecks to the manufacturing sector is key to promoting job creation in more productive and better-paid activities. Infrastructure has improved, in particular in energy supply and roads. Replacing the plethora of state and cascading sales taxes by the GST has made India a single market and exports more competitive on foreign markets, as taxes on inputs can be deducted. To help firms grow and become more productive, product and labour market regulations, together with administrative processes, should be streamlined and modernised further. Experiences in some states look promising. However, the lack of comprehensive and timely data, including on employment, makes it difficult to assess the benefits of reforms. Manufacturing output, exports and jobs would also benefit from a reduction in tariff and non‑tariff barriers to trade. The process of land acquisition and administrative clearances should be made easier and predictable to facilitate greenfield investment.
