India should gradually reduce fiscal deficit: IMF official

To bolster economic growth, India should continue to gradually bring down the fiscal deficit and usher in fuel subsidy reforms, a senior International Monetary Fund official said.

Inflation, which has been at high levels, is also a key challenge for the country, Thomas J Richardson, the IMF's Senior Resident Representative in India and Nepal, said in New Delhi on Wednesday.

"It is important to continue the gradual process of bringing the fiscal deficit from relatively high levels to lower levels.

"It should not be done overnight and should be done gradually. . . it will help reduce vulnerability to external shocks and make India more durable for international investors as well as for domestic investors," Richardson said.

The country's fiscal deficit stood at 4.5 per cent of gross domestic product in the previous financial year.

Pitching for reforms in fuel subsidies, he said they are ‘not only extensive but actually regressive’.

"Some (fuel) subsidy reform can be done in a way that it does not aggressively affect growth and also broadening the tax base is a way to bring down the fiscal deficit without adversely affecting business climate," Richardson noted while speaking at an event organised by industry body Assocham.

The International Monetary Fund has projected the Indian economy will expand 5.4 per cent in the current financial year and pick up to 6.3 per cent in the next fiscal.

India has grown below 5 per cent in each of the two previous financial years mainly on account of a global slowdown and domestic economic sluggishness.

In the current financial year ending March 2015, the Reserve Bank of India expects the economy to grow at over 5.5 per cent.

Image: Bogdan Cristel/Reuters