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Duff and Phelps report supports second generation reforms

Duff and Phelps India, an affiliate of Duff and Phelps Credit Rating Company of the USA, in its monthly research report on the Indian economy, today said containment of fiscal deficit was the key area of concern for the government in the reform process.

It, however, noted that the Indian government has accelerated the implementation of the second phase of reforms.

The report Economy Update said the decision to sell off 74 per cent of its equity stake in Modern Foods and 51 per cent in Indian Airlines was an indication of the Indian government's commitment to privatisation.

It noted that the high combined fiscal deficit at the Centre and state levels threatens the potential of economic growth and advocated tough measures like reducing non-merit subsidies, following an aggressive privatisation strategy, widening the tax base in the coming Union Budget.

Although the cumulative growth for the first nine months of the fiscal 1999-2000 was robust, indicating that the Indian economy was on the recovery path, the report said the performance during December 1999 suggested a slowdown, as the low base effect was tapering off.

The agricultural sector, which was an important growth driver last year, was likely to show only a marginal growth of 0.8 per cent this fiscal, which would pull down the overall gross domestic product growth rate, the report said.

The most encouraging sign on the external front, the report said, has been the momentum in export growth in current financial year. In the first nine months, cumulative exports in dollar terms had registered a 13.2 per cent increase over the corresponding period last year, it added.

The growth was much higher than the targeted growth rate of 11 per cent set by the commerce ministry and total foreign exchange reserves were also comfortable at $ 35 billion as on February 4, 2000, it said.

With the recently announced reduction in interest rates on small savings, the report said the general investment scenario was likely to receive a boost and expected to herald a lower real interest rate regime.

It, however, suggested that to materialise this there should be a concomitant downward revision of the bank rate and Cash Reserve Ratio requirement.

The report also praised measures for automatic approval for foreign direct investment and relaxation in external commercial borrowing norms and commented that these measures were seen as a conscious effort on the part of the government to gradually and selectively relax the control on capital account convertibility.

UNI

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