Bangalore: World Bank (WB) on May 22 warned India's growing public debt was squeezing out investment, making it difficult to achieve the targeted annual eight per cent economic growth.

"Eight per cent growth is difficult without hastening reforms," WB senior vice president and chief economist Nicholas Stern said on the sidelines of the Annual World Bank Conference on Development Economics being held for the first time in the country.

"I don't see any macro economic stability problem. But public debt to GDP (gross domestic product) ratio has been raising, squeezing out public investment, particularly in infrastructure," he said earlier in his keynote address on the second day of the three-day meet.

India did not face any deficiency of doctors, engineers or teachers, but did not have adequate resources due to large public debt for spending in building hospitals, infrastructure and schools.

Through proper governance, government would have to provide necessary investment climate, which require reform of public finance, so that expenditure was not squeezed.

Stern, however, said he was cautiously optimistic about prospects of growth in India because of its extraordinary advantages, particularly "very strong human capital".

But he emphasised that the barriers to trade and investment would have to be removed, which was agonisingly difficult.

Stressing that political barriers and vested interests were coming in the way of reforms in India, Stern said liberalisation needed "leadership, coalition and political smartness" to help bring about changes faster.

However, the positive aspect of India's reforms was that despite changes in government and ministers, the process had not been "turned back", but it was "less fast".

Just as in many other developing countries, Stern said improving the investment climate was especially important for small farms and firms, which were the main source of jobs for poor people.

"But smaller enterprises have more difficulty than larger ones in coping with inadequate infrastructure and bureaucratic impediments to their business," he said.

India has made significant strides in improving investment climate in recent years, but some neighbouring countries have moved faster, Stern said.

Quoting recent surveys, he said starting a new business in India requires 10 permits and an average of 90 days, compared to just six permits and 30 days in China.

Stern emphasised the need to ensure that public expenditure was efficiently used to promote growth and poverty reduction.

"I would argue that a radical reform of the subsidy culture is needed to cut non-merit subsidies that largely fail to reach targeted beneficiaries, incur huge opportunity costs, and distort factor prices, while hurting the economy and the environment," he said.

For example, Stern said large state subsidies to fertiliser were poorly targeted and the gains accrued largely to better off families.

These funds would be better used for agricultural extension services and infrastructure, particularly in rural areas and among disadvantaged groups, he said.

On trade, Stern said India benefited significantly from cuts to tariffs in the 1990s, and would receive additional benefits from further tariff reductions. The size of India's economy suggests that annual trade should be much higher than it is today.

Such an increase in trade, according to him, would result in higher incomes and employment, as well as positive spillovers on economic activity in neighbouring countries. At the same time, past and future liberalisation is in danger of being eroded by other forms of protection, such as anti-dumping action, he warned.

India had become the second largest user of anti-dumping sanctions in the world after US, Stern added.

PTI