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India’s deficit makes IMF feel bad

Wednesday 21 April 2004

WASHINGTON: International Monetary Fund on Wednesday warned that fiscal deficit needed to be reined in for India to sustain the present high growth as it would put upward pressure on interest rates.

"Further progress in addressing India’s fiscal imbalances is urgent because recovery will increase the private sector demand for financing, putting upward pressure on interest rates," IMF said in its semi-annual World Economic Outlook.

Observing that the way forward to correct the imbalance was spelt out in Fiscal Responsibility and Budget Management Act, it said there was a need to balance the current budget by one per cent of GDP.

"Given India’s low revenue to GDP ratio, the bulk of the adjustment will need to come from revenue-enhancing measures, including improving tax administration, broadening the tax base and simplifying the tax regime." However, the report also highlighted the plus points of the Indian economy, which had accelerated, reflecting both cyclical and structural factors.

The structural factors included the lagged impact of the economic liberalisation during 1990s on manufacturing, the recent further opening up of the external sector, the effect of investment in infrastructure (especially road and telecom), the recent corporate restructuring and the impact of global outsourcing of customer support services on exports.

The cyclical factors comprised the effect of good monsoon on agriculture production, the impact of low interest rates on consumer and real estate credit, it said.

Though appreciative of the initiative to strengthen the financial system, IMF said, "Vigilance over credit quality will continue to be necessary to limit risks from rapid credit growth." On rupee appreciation against the greenback, it said the "management float" was welcome and "even greater flexibility would be desirable".

On Asia, whose growth accelerated to 7.0 per cent during 2003, it said for expanding its contribution to world growth, the region would need to "nurture" domestic demand and the "growth is expected to remain high in 2004."

In particular, IMF said, structural reform will be required to strenghten and deepen financial markets, improve public and private sector governance, increase competition and "raise the labour productivity of the large rural population in India and China".

These measures, it said, would not only help balance the emerging Asia’s economic growth and make it more resilient, but would also help "turn the region into a major engine of the global economy."

Noting the intra-regional trade in emerging Asia, it said the region was a whole was becoming less dependent on the rest of the world and was becoming more of "autonomous engine" of growth.

"Increased trade integration has clearly resulted in closer links between economies in the region and greater business cycle correlation across countries," IMF said.

The rise in intra-regional exports accounted for over 50 per cent of export growth in emerging Asia during 1998-2002, it said.

See online : The Times of India

P.S.

in The Times of India, Wednesday, April 21, 2004.

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