The Telegraph
Since 1st March, 1999
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IMF warns of debt trap, sees 5.5% growth

Washington, Aug. 30 (PTI): The International Monetary Fund (IMF) has projected a modest Indian economic recovery forecasting 5.5 per cent growth this financial year but warned weak fiscal situation could push the country into a debt trap.

“The economy is projected to grow at 5.5 per cent in 2002-03, assuming a modest recovery in the industrial sector to 4.5 per cent, IMF said yesterday after its annual review of India’s economic performance.

The projection is based on a deceleration in agriculture to its historical trend growth rate of 3 per cent, and a levelling-off of service sector growth at about 7.25 per cent, IMF directors said in a statement after concluding the Article lV consultations with India.

The directors, however, expressed concern about the sustainability of India’s fiscal situation observing that the government deficit was among the highest in the world and that the government debt, even excluding sizeable contingent liabilities now stood at 80 per cent of GDP.

They were particularly concerned that the recent trends—large primary deficits, growing debt, and the sharp narrowing of the growth rate-interest rate differential—were creating conditions for potentially unsustainable debt dynamics.

The weak fiscal situation left little room for manouevre in macroeconomic policies and could entrench the cycle of decelerating growth and deteriorating fiscal balances, the statement said.

The IMF executive directors regretted the compression of priority spending on social and economic infrastructure, with adverse effects on private investment.

They also noted the risks to the financial sector, which dominated by public sector owned institutions with a large amount of non-performing assets.

The directors, however, highlighted the great potential of the indian economy, as demonstrated by the growth momentum achieved in the wake of the ambitious reform programme of the early 1990s.

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