Cut deficits for faster growth: IMF

India needs to check the rise in its fiscal deficit to ensure a faster growth.

While fiscal imbalance was not the only impediment to growth, its reduction was important to encourage growth and reduce poverty in developing countries, said Anne Kreuger, first deputy managing director of the International Monetary Fund (IMF).

"If India wants to sustain a high growth rate, its fiscal deficit has to come down. The government has to net more revenue and rationalise its expenditure," Kreuger said on the sidelines of a seminar on Fiscal Policy in India, organised jointly by the IMF and the National Institute of Public Finance and Policy (NIPFP), here today.

"The tax-to-GDP ratio in India is low, hence the government has to take measures to widen the tax base. A number of expenditure heads, which appear to be pro-poor, are actually not benefiting the poor," she added.

Finance Commission chairman C Rangarajan said the government needed to net more revenue and increase development related expenditures while keeping the fiscal and revenue deficits under control.

"Any increase in the level of fiscal deficit has to be considered in terms of its impact on revenue required to service additional debt. The achievable revenue-to-GDP ratio limits the level of government borrowing to a level that will be consistent and sustainable," he said.

Interest rates in the country had not gone up despite the rise in the fiscal deficit because private savings had been rising.

"However, once the demand for private investment rises, it will put pressure on the interest rates," he warned.

Addressing the seminar, Planning Commission deputy chairman KC Pant said the government could afford a certain level of fiscal deficit in order to finance public investment in infrastructure.

The lowering of interest rates on government debt and upturn in the tax-GDP ratio indicated that there might be no need to undertake severe fiscal correction measures at this stage, if the medium-term growth prospects remain unchanged, Pant said.

"The current state of infrastructure in the country is not conducive for a rapid and sustained growth and private investment is not forthcoming in this area." If fiscal deficit was used to finance public investment, it should not be a cause for concern, Pant added.

Public saving would not crowd out private investment since savings "" including foreign inflows "" have consistently exceeded total investment demand by 1 to 2 per cent of GDP over the past 4 years, he said.

Once investment demand starts picking up, the government will have to reduce its fiscal deficit. But, the consequences of excessive rapid fiscal correction on an incipient recovery have not been studied adequately.