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IMF sees Indian deficit as big short-term risk

The International Monetary Fund says India's yawning fiscal deficit is a big short-term risk and New Delhi needs to aggressively pursue reforms to overcome the problem.

Anne Krueger, the IMF's first deputy managing director, told reporters late on Sunday that India could not afford to allow the deficit problem to drag on.

"For the health of the Indian economy we would see (the fiscal deficit) as a big short-term risk," said Krueger who was in New Delhi to attend a meeting of the Group of 20 countries.

She hoped the Indian government would resume its stalled privatisation programme to give momentum to economic reforms. India has set a fiscal deficit target of 5.3 per cent of GDP for this financial year, down from 5.7 per cent last year. But it has consistently overshot its target in previous years.

Rating agencies have cited India's fiscal deficit, one of the largest in the world, as a major obstacle to its economy achieving its full potential.

Krueger said, "I think the combined fiscal deficit in India is now at 10 per cent of GDP. It is not sustainable as it could stunt growth pushing up inflation, harden interest rates crowding out private investment and choking government borrowing in the short term."

Asked if the Vajpayee Government had the political will to grapple with the situation in the face of the ensuing elections, Krueger said she did not know as she had not met Indian leaders because her vist was primarily for G-20.

But the issue of high fiscal deficit had the potential to stunt growth if immediate steps were not taken to contain it. "It is not possible to say how long something like that can go on before there is trouble. So clearly that has to be addressed. We would see that as a big short-term risk," she cationed.

"I know of no country that has succeeded in running a fiscal deficit that is 10 per cent of GDP for very long," Krueger said asserting the adverse effect of fiscal deficit would be felt when the economy started to look up.

When pointed out that India's economic fundamentals were strong like low inflation and comfortable foreign exchange reserves of $65 billion, Krueger said "when the investment demand picks up, interest rates have to start rising. As and when that happens, there will be a crowding out of the private sector, choking growth."

The hardening of interest rates would also hit the government directly as it would have to pay more to service its debt burden.

The government has, however, taken a decision to cut the fiscal deficit by half a per cent every year, Krueger said apparently referring to the Fiscal Responsibility legislation pending in Parliament for over two years.

Asked what would her prescription be for reducing fiscal deficit, Krueger said "that's a political choice, how it is addressed, whether it is by reduction in expenditure or increase in taxes."

Noting that economic reforms since 1991 has pushed up growth, Krueger said there was need to hasten it further to achieve 8 per cent growth proposed in the tenth plan.

"We recognise that India has a higher rate of economic growth since it started reforms in 1991 and that is the way to go," she said.

To a question if there was political will on the part of the government after the recent controversy over the divestment, Krueger said "We hope it (divestment) will be revived in three months as indicated."

Asked what would be an ideal level for foreign exchange reserves considering that India had a whopping $65 billion reserves, which was growing by $500 million a week, she said the leval must depend on the vulnerability of the economy to internal and external environment.

But "there is no ideal level and there is no rule that covers everything.That's a judgement that has to be made by the competent authorities within the country," she said.

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