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IMF warns India on high fiscal deficit
T V Parasuram in Washington | June 10, 2004 11:36 IST
Last Updated: June 10, 2004 13:45 IST
Warning that India's high fiscal deficit was "not sustainable", the International Monetary Fund has said that a more efficient revenue collection and tax administration, a wider tax base and reduction in subsidies would help improve the fiscal position of the country.
However, it lauded India's economic growth in excess of seven per cent achieved last year and said a growth of 10 per cent a year was both necessary and feasible.
"Tackling the fiscal deficit has to be an important priority. The biggest single obstacle to tackling this problem, in India's case, has been complacency," IMF's First Deputy Managing Director Anne O Krueger said.
"So far, the large deficit, now in excess of 10 per cent of the gross domestic product (central and state deficits and losses in state-owned enterprises), has not inflicted short-term damage to the economy as might have been expected," she added.
But deficits of this magnitude are simply "not sustainable", Krueger said addressing the Stanford India Conference during the weekend.
A large part of the fiscal reform in India would involve making the public sector more efficient, which would bring direct benefits to the poor, she said.
More efficient revenue collection and tax administration; a wider tax base; a more streamlined civil service; more carefully targeted transfer payments and the reduction of subsidies: these can all help improve the fiscal position while at the same time creating opportunities for growth elsewhere in the economy, Krueger added.
Krueger, however, said, "The growth in excess of 7 per cent achieved last year was, of course, impressive. But I believe India can do better than that and needs to over a long period."
The target needs to be sufficiently ambitious, she said, adding, "in my judgment, with appropriate commitment, growth of 10 per cent a year is both necessary and feasible".
Other countries, such as South Korea, have achieved a 10 per cent growth rate, she pointed out.
"There is no point in being timid, given the scale of the economic challenges that Indian policymakers must now confront," said Krueger. "But nor is there any point being unrealistic. Looking at what other countries have achieved quickly puts the target I am suggesting into context. It can be done -- because others have done it."
If Indian policymakers are to realise their legitimate ambitions for sustained rapid growth and poverty reduction, she added, continuing trade liberalisation will have a crucial role to play.
If the new government in India continues to pursue reforms, she said, the Indian economy could be tantalisingly close to moving to a path of sustained and rapid growth rates.
Indian exporters still face bureucratic hurdles that have to be overcome... more efficient government, and a reduction in costly and market-distorting subsidies, would increase productivity, and streamlined government would also improve the delivery of public services, Krueger said.
Reducing the government's reliance on borrowing will also free up resources for the private sector, and contribute to more rapid growth and poverty reduction, Krueger said.
She said the foreign direct investment was still less than three quarters of one per cent of GDP in India -- an amazingly low figure given both its geographical size and its natural resources.
On the infrastructure sector, she said rapid improvements were vital, and better infrastructure will greatly benefit the poor, who have suffered most from inadequate transport, power and communications networks.
Krueger said further reforms were needed in the private sector too. A more buoyant and productive private sector would create more jobs -- though it is currently prevented from doing so on a large-scale because of labour market regulation.The success of the software industry and the popularity of India as a base for back-office operations like call centres illustrate what a dynamic private sector can do, she added.