Washington: The World Bank on September 3 warned that India's high fiscal deficit, coupled with political risks and regional instability, could slow down reforms, undermining the growth prospects.

"The persistent fiscal deficits continue to be a risk in a number of South Asian economies, particularly in India, as they can undermine the fiscal sustainability, contribute to a growing debt-GDP (gross domestic product) ratio, and lead to higher interest rates," the World Bank said in its Global Economic Prospects.

This could lead to divergence of public outlays from investments to interest payments and limit the scope of fiscal and monetary policies, the bank said.

Noting that India's general fiscal deficit (both the Centre's and the states') was little changed from 11 per cent of GDP, despite increased revenue collection, the bank suggested fiscal consolidation, saying it would not only mitigate such vulnerabilities, but also provide scope of action in macroeconomic policies to pursue sustained higher growth.

"Political risks and uncertainties also remain a concern because of both internal and external factors. Heightened domestic and regional instability could undermine the growth prospects and slow the pace of economic reforms," the bank said.

The bank said growth was expected to accelerate throughout the South Asian region (including India) up to an average of 5.4 per cent, assuming a return to trend agriculture production, a recovery in external demand and continued improvement in political stability and regional security.

"Real GDP growth in South Asia is projected at 5.4 per cent in 2003," the bank said, adding that excluding India, it is expected at 4.8 per cent.

Domestic demand, especially private consumption and fixed investment, is expected to accelerate, spurred by recovery in agricultural incomes.

However, it noted that severe weather conditions and associated poor harvests remain a "significant" risk to growth outcomes.

The bank said the growth is likely to be supported by continued strong expansion in the services sector, especially in Information Technologies now burgeoning in Bangalore.

On external risks, it said remittance could be affected by increased stability in the Middle East and significantly higher-than-forecast energy prices would pose an additional burden on current account positions.

"Recovery in external demand and a gradual return to lower oil prices is likely to be more than offset by generally firming import demand, which is expected to lead to moderate decrease in the region's aggregate current account surplus, the bank, however, said.

PTI