India's deficit, debt impeding rapid growth: IMF
Pakistan Times Business & Commerce Desk

WASHINGTON (US): The IMF warned Thursday that India's huge fiscal deficits and public debt were impeding the country's rapid economic growth, which it forecast to be around 6.5 percent in the year to March.

The predicted growth rate for the world's second most populous nation was at the lower end of the government Central Statistical Organisation's (CSO) latest forecast of 6.5 to 7.0 percent.

The Indian economy expanded at 8.5 percent in the last fiscal year to March 2004, the best in over a decade, thanks to bumper agricultural growth.

The Washington-based International Monetary Fund (IMF) said in an annual review of the Indian economy Thursday that its large fiscal deficits and public debt "remain a key constraint on sustained rapid growth."

Without enhancing tax revenues and reducing lower-priority spending, it will be very difficult to adequately address Indias large infrastructure needs, the IMF report said.

Reforms taken to strengthen state finances had so far not led to a decisive turnaround, the IMF report said, emphasizing "more needs to be done."

It also expressed "serious concerns" with an Indian proposal to use rising foreign exchange reserves to finance infrastructure spending.

Using reserves in this manner has the potential to "compromise perceptions of central bank independence and increase inflation," the IMF said.

Foreign exchange reserves have risen 25 billion dollars in the past year and stood at 129.4 billion dollars on January 21.

The Fund also urged India to ease regulations, and liberalize what it termed restrictive labor laws. Agricultural reform, for example, was critical to India's economic growth and poverty reduction, the IMF said.

Swift reduction of tariffs coupled with lowering of administrative barriers to trade "will help unleash a potentially powerful engine of growth," it said.

On India's financial sector, the IMF said more remains to be done over the medium term to make it strong and globally competitive.

In this context, the IMF encouraged the authorities to open further the banking system to private and foreign investors, including by raising the foreign direct investment cap for private banks and eliminating the 10 percent limit on voting rights for foreign investors.

Indian Prime Minister Manmohan Singh , a former economist and father of economic reforms, promised this month that his government would remove barriers to economic growth.

"Our motto and our goal should be to do as well as a country like China does whether it is in the area of growth of GDP, growth of manufacturers, growth of trade or growth of infrastructure," he said.

China's gross domestic product (GDP) is forecast at around 8.5 percent for the current financial year. The IMF said India's 6.5 percent growth forecast for this year would be on the back of expanding industry and services sectors.

The growth rate would be around the same in 2005/06 on the back of a recovery in agriculture on normal monsoons, it said.●