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Budget deficit to narrow only slightly

The government admitted on Tuesday its central fiscal deficit for the year ending in March would only shrink marginally to 5.1 per cent of gross domestic product from 5.5 per cent the previous year as slower-than-forecast economic growth failed to deliver expected tax revenues.

The annual Economic Survey, prepared by the finance ministry, is seen as a preview to the central Budget due to be presented on Thursday. The target for the current year was for the deficit to decline to 4.7 per cent of GDP.

The survey urged more economic liberalisation to lift growth and cut the deficit, which it said was choking the economy.

Its recommendations suggested Finance Minister Yashwant Sinha will continue to follow an orthodox and now familiar line of his economic policies, which aim to free up the economy from state controls, lift growth and cut the deficit.

The report also confirmed that growth would be just 5.4 per cent in the year to March, up from four per cent in the previous year but well short of the eight per cent target the government says is required to reduce poverty.

Rising interest payments, an increase in subsidies and a surge in pension payments in recent years had driven up the deficit to unsustainable levels, limiting India's ability to invest in the infrastructure and social sectors, the survey said.

The government's heavy borrowings to fund its expenditure was crowding out the more efficient private sector and holding up real interest rates in the economy, it added.

It also said if the deficits of state governments were taken into account, the total fiscal deficit would reach 9.6 per cent of GDP in 2000-01, taking the combined public debt to 85 per cent of GDP.

State fiscal deficits are harder to control as state governments tend to be more susceptible to populist pressures, with several, for example, giving free power to farmers.

And despite being almost sovereign in nature, state bonds are generally rated well below the AAA rank given to central debt.

UPHILL TASK

The survey said despite a decade of reforms, central deficits had consistently stuck around five per cent of GDP or above.

"Inadequate fiscal adjustment continues to be the most intractable problem confronting the Indian economy," it said.

"The restoration of high economic growth would be difficult to achieve without a significant and sustained reduction in the fiscal deficit."

Its comments highlighted the size of the task faced by the Bharatiya Janata Party, which heads the coalition government, in lifting growth before elections due in 2004.

The BJP was routed in state polls this weekend, losing control of Uttar Pradesh, its traditional power base.

Analysts are divided on whether the setback will make it harder for the BJP to push through reforms, such as privatisation and relaxation of rigid labour laws, or act as a wake-up call. Many voters had cited economic issues as their prime concern.

The survey said global economic recovery would have a knock-on effect on India and help economic activity, while also pushing up prices of Indian commodities and manufactured goods.

It said the economy had responded well to economic reforms in the 1990s by shifting to a higher growth trajectory when compared to earlier decades. Higher growth rates could be achieved by extending the reforms process, it said.

It also said real, or inflation-adjusted, interest rates were too high. The year-on-year inflation rate, measured by wholesale prices, is hovering slightly over one per cent and is at 20-year lows. The annual inflation rate is, however, above four per cent.

In particular interest rates on popular state-run small savings schemes, which currently pay tax-free interest of 9.5 per cent, needed to be brought down in line with inflation.

Reuters

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