Deterioration in European economy to hit India: IMF

Having already seen its effects on private investment, any further deterioration in the economic situation of Europe has the potential to hit the Indian economy, including a drop in exports, an International Monetary Fund (IMF) official has said.

"I think it is also clear that in India, as in other economies, demand for exports would certainly be hit, and certainly for India, we've already seen effects on private investment," IMF Director (Asia and Pacific Department) Anoop Singh said on the downside risks for India if the European situation deteriorates.

"My sense so far is that the financial effects on Asia are being contained. We are seeing Asian banks, including Indian banks, stepping in where deleveraging is taking place from European banks," Singh told reporters early this week.

"So far, my sense is that there is increase in funding costs, yes, for India and other countries. But supplies are generally being maintained in key areas," he added.

Noting that it is clearly the objective of the Indian authorities to cut India's fiscal deficit, Singh said it is clear that a smaller deficit would reduce the government's demands on savings, allowing more lending to take place to the private section.

"I think it is a clear objective in India to bring the fiscal deficit down as part of its fiscal consolidation," he said in response to a question.

In India, as well as in many other countries in Asia the priority comes to raising private investment, but this requires also greater infrastructure investment as part of the process of raising potential growth, Singh said.

"So in India, what is planned, for example, is to introduce certain fiscal reforms that would give more space for higher infrastructure investment, especially in the energy sector, which is affecting overall investment in India, among other factors," Singh said.

Masahiko Takeda, Deputy Director, IMF Asia and Pacific Department said the biggest challenge in India is reviving private investment, which is a source of medium-term growth.

"Reducing the fiscal deficit will create room for private investment to grow, by reducing the crowding out. So in that sense, that's an important factor.

"But even more important are all sorts of fiscal reform measures that the Indian government can take to improve investment and business conditions in India, so that the private sector has a bigger incentive to increase their investment. And this has been the major emphasis we have put in our recent mission in India," Takeda said.

Also, IMF Deputy Managing Director Naoyuki Shinohara said that emerging countries understand the International Monetary Fund must boost its firepower as the euro zone debt crisis threatens to hurt the global economy.

"Countries including emerging nations understand the need to boost a global institution such as the IMF at a time when Europe's problems are seen affecting countires outside the euro zone," said Shinohara.

The IMF is seeking to more than double its war chest by raising $600 billion in new resources to help countries deal with the fallout from Europe's financial crisis, but the plan faces roadblocks from the United States and other countries.

Shinohara made the remark when asked about his expectations for emerging nations' contributions to the increase.