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IMF pegs India's GDP at 5.5%; warns of high deficit

August 25, 2003 15:21 IST

International Monetary Fund has warned that large fiscal deficit and public debt was hampering India's economic growth, which is slated to go up by 1.0 per cent to 5.5 per cent this fiscal in the face of good monsoon.

"India's large fiscal deficits and public debt are exacting an economic cost in term of foregone growth," IMF said, but projected GDP growth of 5.5 per cent for 2003-04 in the face of recovery in agriculture.

"The projection for 2003-04, which was broadly in line with the consensus forecast, incorporates a recovery in agriculture. But there is a potential for even a stronger rebound in this sector," the fund said in its latest country report after consultation with the Indian government.

IMF said inflation was expected to be "moderate" at around 4.5 per cent by end of this fiscal.

"The external current account situation is expected to remain in surplus," it said.

IMF acknowledged the "resilience" of the Indian economy in warding off recessionary trends worldwide, which was a testimony to the benefits of reforms.

But the apparent ease with which the fiscal deficit has been financed, IMF said, "There would be detrimental effects on growth through crowding-out of critically needed spending on fiscal and social capital and through the pre-emption of resources for private investments."

"Large fiscal imbalances leave little room for manoeuvre in the face of shocks and have tended to result in ad hoc policy changes, which increase investment uncertainties," IMF cautioned.

Giving policy prescription, IMF asked India to use the favourable external and interest rate environment to build the necessary political consensus for accelerating the needed fiscal and structural adjustments.

"The strategy of postponing (fiscal) consolidation while attempting to stimulate growth is risky," it said, adding few countries were successful in "growing out" of fiscal problems without implementing a comprehensive reforms programme.

IMF, however, said the Fiscal Responsibility and Budget Management Act would bring important discipline and transparency in the Central government's budget process and enable authorities to draw up a clear-cut and time-bound programme for restoring fiscal sustainability.

The financial positions of the states have improved only moderately, it said while strongly prescribing tax reforms, divestment of state PSUs, reducing subsidies and losses in power utilities.

In this context, IMF regretted the delay in introduction of value-added tax saying, "Top priority should be given in developing the necessary consensus to implement VAT within the current fiscal year, with the Centre launching a consorted campaign jointly with the states about VAT's benefits."

With inflation under control, IMF viewed the easy monetary conditions as "appropriate" and welcomed the cuts in administered savings rates as these allowed banks to lower lending rates as well.

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