New Delhi: International Monetary Fund (IMF) on November 25 warned that mounting fiscal deficit has heightened the "short-term risk" posing dangers to the Indian economy.

"It is not a time bomb, but high fiscal deficit has certainly posed danger of short- term risks to the economy," the visiting IMF deputy managing director Anne Krueger told reporters.

Krueger, who was in New Delhi to participate in the G-20 Finance Ministers' and central bank governors' meet during the weekend, said, "I think the combined fiscal deficit in India is now at 10 per cent of gross domestic product (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 the opportunity to meet Indian leaders because her visit 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, he said.

"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 cautioned.

"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."

PTI