International Monetary Fund headquarters, Washington, DC. Photo: Reuters

The International Monetary Fund (IMF) is bullish on India’s proposed Goods and Services Tax (GST), which will be implemented from July 1, predicting it will boost the country’s medium and long term growth.

“The government has made significant progress on important economic reforms that will support strong and sustainable growth going forward,” Tao Zhang, Deputy Managing Director of the International Monetary Fund, told PTI. “We expect that the GST will help raise India’s medium-term growth to above 8%, as it will enhance production and the movement of goods and services across Indian states.”

Observing that India is the “fastest growing emerging market economy” in a region that remains the strongest-growing in the world, Zhang said the IMF believes that the country will continue to grow at a fast pace, with a projected 6.8% rate for 2016-17 and 7.2% in 2017-18.

The GST is an indirect tax on the manufacture, sale and consumption of goods and services throughout India (except for the state of Jammu and Kashmir) and will merge most of the existing taxes into single system of taxation. It is administered by a GST Council chaired by Union Finance Minister Arun Jaitley.

The new tax will impact on every sphere of business activity, from procurement and supply chains to IT, logistics, pricing, margins and working capital.

Bad loans a worry

Zhang said that the IMF’s key concern for India was the health of its banking system, which is still dealing with a large amount of “bad loans”, and with “heightened corporate vulnerabilities” in several key sectors of the economy.

In India, public banks’ bad loans rose by over Rs1 trillion (US$15 billion) to Rs6.06 trillion (US$90 billion) during April-December of 2016-17. The bulk of these are loans to the power, steel, road infrastructure and textiles sectors.

In its recently released bi-annual Global Financial Stability Report the IMF said the Indian banking industry’s loss-absorbing buffer has deteriorated in the recent years and currently stands at just 7.9% of risk-weighted assets, as against 11.3% in China.

It warned that deterioration in loan quality in India could destabilize the country’s banking system.