India needs more reforms to reduce poverty, deficit -- IMF

India needs more reforms to reduce poverty, deficit -- IMF
T V PARASURAM

WASHINGTON, APR 12: Despite being one of the fastest growing economies, India needs far-reaching reforms to grow faster for bringing down poverty and reducing fiscal deficit, International Monetary Fund (IMF) said today.

"India's economy has one of the highest growth rates in the world but it needs to grow faster still to reduce poverty, and that requires more far-reaching reforms," IMF said in its semi-annual World Economic Outlook (WEO).

Stating that fiscal sustainability remained a serious concern, the report said despite some commendable structural measures, the Union Budget for 2000-01 envisaged "disappointingly modest" fiscal adjustment in the coming year. Stressing on further deregulation and privatisation, IMF urged for "prompt and credible" progress in reducing deficit.

With budgetary slippages at central and state government levels, the consolidated public sector deficit is now expected to have risen to around 11 per cent of GDP which is two per cent higher than the budgeted figure, IMF noted. The report said, large fiscal imbalances raised public debt to 80 per cent of GDP while `crowding out' private investment and constraining the monetary authorities to ease the high real interest rate without diluting gains from the low inflation rate.

Acknowledging the 6.75 per cent growth last fiscal year, the WEO report said industrial recovery seen from 1999 helped offset slowdown in agriculture and growth is projected to continue at over 6 per cent in 2000. Wholesale price inflation has fallen sharply with easier agricultural supply conditions, but is projected to rebound to around 5.5 per cent in 2000, the IMF report said.

Robust exports growth, it said, is expected to keep current account deficit under 2 per cent of GDP. Indian equities finished the year with an 81 per cent increase partly driven by the fast growing IT sector. Deft handling of monetary policy has helped India to successfully weather the Asian crisis, while maintaining low inflation and a comfortable external position, it said.

Despite strong fundamentals, IMF said "even stronger economic growth is needed over the longer run for meaningful progress to be made in addressing poverty problem". Sustaining current growth rates may be difficult without significant policy action, it added.

Lauding India's progress in literacy and mortality, the report said poverty rates remain high with more than a third of the population still living below poverty line. "This uneven progress raises questions about the impact of economic and structural reforms implemented since the mid-1980's on growth in India," IMF said while admitting the recovery from 1991 crisis was rapid.

However, per capita growth has slowed recently, averaging four per cent 2000 compared to 4.75 per cent in 1997, it said. To some extent, this reflected the completion of cyclical catch-up following the 1991 balance of payments crisis, as well as the adverse impact of the 1997 regional crisis and agricultural supply shocks.

To sustain high growth in all sectors and alliviatepoverty, IMF suggested durable fiscal consolidation to raise National saving and crowd-in private investment spending, further liberalization of foreign trade and investment flows and labour market reforms. Reforms to remove price distortions, would promote efficiency and export competitiveness, it said adding that fiscal priorities also need to be redirected towards investment in human and physical capital.

Noting the broad agreement in India for further reforms, IMF said several factors argue for translating this consensus into swift action. Urging for a bold agenda, IMF said over seven per centgrowth is required in order to reduce poverty rate by 11 per cent by the end of Ninth Plan period.

For India to achieve maximum benefits from the liberal trade system, the structural impediments affecting domestic producers must be addressed in the interim, the report said. IMF appreciated government's initiatives including opening the insurance sector, automatic clearance for foreign direct investment in many sectors, and a landmark agreement on state sales tax rationalisation.

But it said the budget targets a modest deficit reduction in the coming fiscal year, and a clearly defined agenda for reform has yet to be established. "Critical and difficult challenges remain to be addressed," the report said.