The Telegraph
Since 1st March, 1999
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IMF optimism peppered with fiscal concern

New Delhi, Aug. 25: The International Monetary Fund today pegged India’s growth at 5.5 per cent on the back of good monsoons, but added that it could have been better if the fiscal deficit had not been ballooning so much.

Last April, the World Bank had lowered India’s GDP growth potential ranking and said it would grow at about 5.3 per cent. The current GDP growth forecast by the sister body is an improvement.

However, the Fund cautioned in a country report formulated after consultations with the finance ministry and the Reserve Bank that “India’s large fiscal deficits and public debt are exacting an economic cost in term of foregone growth.”

The IMF report also praised India for its softer interest rate regime. RBI governor Bimal Jalan, who was in town, told reporters here that the softer rate bias would continue.

The bank rate, at which RBI lends to banks, was cut by a quarter per cent last April to just 6 per cent, while the repo rate was reduced by half-per-cent last week from an earlier 5 per cent.

IMF also asked India to use its 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.”

The IMF instead prescribes a regime of lower subsidies, disinvestment and further tax reforms, including introduction of value-added tax (VAT).

“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 report stated. Last year saw a severe drought lowering GDP growth to 4.3 per cent for the year ended March 2003.

The Fund, however, praised India’s resilience and said its foreign exchange and trade surplus management were exemplary. Inflation too was forecast as remaining within a manageable 4.5 per cent. Inflation is currently ranging at a little below 4 per cent.

Criticising the manner in which the fiscal deficit was being bridged by huge market borrowings, the Fund 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.”

The report, however, did acknowledge that a new fiscal responsibility and budget management act could exert discipline on central and state governments and help reign in the huge combined fiscal deficit which was near 10 per cent of the GDP.

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