India's fiscal response to the first wave of COVID-19 infections last year has found a taker in the International Monetary Fund (IMF).
Speaking at a high-level roundtable organised by the IMF in association with the Centre for Social and Economic Progress (CSEP) on "Securing Sustainable Finances and Medium-term Fiscal Frameworks: International Experience and Relevance for India", Vitor Gaspar, Director of IMF's Fiscal Affairs Department, supported India's fiscal response in the face of COVID-19, stating that "fiscal support in India has prevented severe contractions". The online event was organised on April 23.
The other speakers at the event were N.K. Singh, Chairman of the 15th Finance Commission of India, Niels Thygesen, Chairman of the European Fiscal Board, and Montek Singh Ahluwalia, Distinguished Fellow at CSEP.
Gaspar stressed the importance of being ready to provide agile and flexible policy support as appropriate to respond to COVID-19 related developments. Looking ahead, he said it is equally important to avoid premature withdrawal until the recovery is entrenched. Given the unprecedented rise in deficit and debt across countries, he also noted the importance for countries to manage heightened risks and rebuild sustainability in their medium-term fiscal frameworks.
In his address, N.K. Singh said India is in the third phase of building its fiscal rules. "Finance Minister in her recent budget speech did mention her intention to appoint another group to revisit the medium-term fiscal framework in light of the pandemic and the continuing need for greater fiscal forbearance and support," he said.
According to Singh "at least 4 per cent of GDP is a lost potential in terms of India's revenue and if some part of it could be realised, it would help greatly in aligning not only inevitable expenditure needs, pandemic needs, and health needs, but also help find convergence between sustainable development and the medium-term fiscal policy statement".
Due to the ongoing pandemic, talks on medium-term fiscal policy will occupy a backseat, he said. "Looking ahead, the challenge is to closely align India's medium-term fiscal policy with the imperatives faced by the political leadership", Singh said.
Bringing the European perspective to the discussion, Thygesen said that the evolution of European Union's fiscal policy, deficits and debts could offer important lessons for India.
"The most important innovation is the role of independent national fiscal councils...One major motive was to protect macro-economic forecasts, on which budgets are based, from political influence. There was an optimism bias, in particular in the years prior to the financial crisis, which made countries slip into deficits too easily. One role of the national fiscal councils is to monitor the quality of the macro-economic forecasts...they have improved significantly in recent years," Thygesen said.
Ahluwalia touched on various issues, including the implications of a slower recovery due to the second surge of the pandemic, especially for the informal sector, the need now to tolerate a larger fiscal deficit, and to avoid any premature withdrawal of fiscal support.
"We have to assume that the pandemic will be brought under control, and then we will get down to the business of how India will recover and the kind of growth rate it should expect, and then we can relook at fiscal rules and institutions", he said.
Moderated by Anoop Singh, Distinguished Fellow at CSEP, the roundtable featured Anne-Marie Gulde-Wolf, Deputy Director of IMF's Asia and Pacific Department, Alfred Schipke, IMF's Mission Chief for India, and Rakesh Mohan, President and Distinguished Fellow, CSEP.