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IMF concerned about India's fiscal deficit, debt

The International Monetary Fund on Thursday expressed concern about India's large fiscal deficit and debt, and urged the government to implement reforms to achieve economic goals.

In its annual review of the Indian economy, the Washington-based lender said India's fiscal deficit -- among the largest in the world -- left little room for economic stimulus and could jeopardise economic growth.

The Indian economy is expected to grow 5.4 per cent this year, up from 4.0 per cent last year, the fund said. Prices are expected to rise, with inflation growing 4.3 per cent in 2002, up from 3.8 per cent last year.

Despite major economic improvements in the 1990s, which led to one of the highest rates of economic growth in the world over the past 10 years, low inflation and reduced poverty, growth in India could suffer if the fiscal situation is not addressed, the fund said.

It said major policy challenges lay ahead for the world's largest democracy.

The fund said fiscal consolidation and structural reforms were essential to ensure that India reaches its 8.0 per cent growth target.

The lender supported goals laid down in the Fiscal Responsibility and Budget Management Bill, which included reducing the government's deficit -- which currently stands at over 6.0 per cent of GDP -- to 2 per cent by 2006.

The Bill also contains measures aimed at cutting the government's massive debt to half of GDP. It now stands at over 80 per cent of gross domestic product, and was a source of concern for the IMF.

To cope with the deficit and debt, the fund urged Indian authorities to strengthen their tax revenues, and said that introducing a state level value-added tax would be a "watershed reform of the tax regime."

India's tax-to-GDP ratio is low by international standards, so broadening the tax base and boosting revenues were regarded as a priority by the IMF.

The Indian economy slowed in 2001, partly because of weak agricultural growth and a slowdown in the service sector. Industrial production also lost steam last year and still remains low.

While the fund said India's external position remained comfortable, in spite of the slowdown, market sentiment wobbled as it did across the globe, as the main Indian index fell 10 per cent due to economic and political factors.

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