Slowdown To Worsen: Ibrd

The World Bank has predicted a worsening of the country's economic slowdown and expressed concern that continuing fiscal imbalances could threaten its macroeconomic stability.

In one of the sharpest indictments of the country's economic management, it has warned that in the short-run some pressures on the exchange rate and foreign currency reserves could develop especially in light of a possible repatriation of foreign portfolio investment and slowdown in capital flows.

The Bank has, however, discounted the impact of economic sanctions following nuclear tests and said that "official flows are likely to remain fairly constant as they reflect disbursements from already committed loans".

 

Rejecting the pump-priming theory, it has called for fiscal consolidation and a reduction in government's fiscal deficit and acceleration of external and internal reforms to sustain annual growth at 7-8 per cent with the final objective of reducing poverty. The Bank says: "India now faces a more difficult environment and a possible further slowdown in investment. The government's concern focuses on returning to sustainable 7-8 per cent growth within a stable macro economy, which will reduce poverty rapidly."

These observations are contained in the Bank's annual `Macro Economic Update' released yesterday, which until last year used to be published as the `Country Economic Memorandum'. The report _ which focuses on poverty alleviation and growth through reforms as its theme _ has been prepared by the Bank's poverty reduction and economic management division.

The real economy: The report argues that the fiscal correction can be achieved through a cut in subsidies and broadening of the tax-base. The Bank has also recommended faster and deeper deregulation of internal and external markets, a reordering of the government's priorities with focus on basic human development and public infrastructure and ensuring more private sector participation in other areas.

Besides, the Bank has called for liberalisation of insurance. It says, "To improve the long-term funding for infrastructure, the country could liberalise insurance, beginning with the government's proposals to increase competition, and moving toward a fully-funded pension system, beginning with the public sector where again deficit reduction is a precondition."

The Bank has pointed out that the high public sector deficit is a cause for concern, and it feels it remains "a major risk to macroeconomic stability and absorb resources that would otherwise go to the private sector. Since the major adjustment in 1991-93, further adjustments have been limited, leaving the Central government's deficit at about 6 per cent of GDP, one of the world's largest." Continuing in the same vein, "The states' lack of deficit reduction has put them in an increasingly unsustainable position." Drawing attention to the cut-backs in expenditure on education, health and infrastructure, the report has predicted mounting fiscal pressures after the effects of implementation of the Fifth Pay Commission filters down to the states.The report has lashed out at the increase in imports duty in the budget and hints that the higher protection level could dampen GDP growth.