Washington: India's robust economic growth is expected to push up growth in South Asia to 7.2 per cent in 2004, but high fiscal deficit and infrastructure bottleneck was coming in the way of sustaining such high growth, a World Bank report said today (Apr 19, 2004).

"Sustaining such high level of growth in future is possible. There are significant challenges. Infrastructure bottlenecks remain pervasive in the region. India remains saddled with a large fiscal deficit," the 'Global Economic Development Finance 2004' report released by World Bank said.

"Recent tax cuts may raise the deficit further, especially if accompanied by populist spending in this election year," it warned.

World Bank, however, said "continued reforms in India - including tax cuts early in 2004 and capital account liberalisation - will contribute to future growth."

Considering the high gross domestic product (GDP) growth of India in 2004, the report forecast that economic growth in South Asia is expected to be 7.2 per cent in 2004, boosted by IT exports from India and the growing practice of outsourcing from OECD (Organisation for Economic Cooperation and Development) economies.

The South Asia GDP rise in 2003 was 6.5 per cent, a sharp pick-up from the 4.3 per cent registered in 2002, and is expected to touch 7.2 per cent in 2004, it said.

Peace talks between India and Pakistan, coupled with the regional trade initiatives of the South Asian Association for Regional Cooperation (SAARC) may further boost international confidence in the region, the report said.

The smaller countries in the region will face difficulty from the impending phase-out of the international multi-fibre arrangement (MFA) in 2005, it said.

On the demand side, says the report, growth was driven by rising domestic demand, especially fixed investment.

The investment rate has consistently increased in South Asia to reach nearly 25 per cent of GDP currently.

Relief from drought was an important factor on the supply side, it said.

International reserves rose to a record $ 114 billion in 2003, more than double the size in 2002, the report said, adding India accounted for most of this increase.

But other countries, notably Pakistan, also experienced sharp increases in reserves.

A decline in the current account deficit - a noteworthy development in the face of rising oil prices, for this region is a net oil importer - and rising inflows in the capital account contributed to the increase in international reserves.

Workers' remittances to the region rose further to $ 18.2 billion in 2003 from $ 13.1 billion in 2001.

India remained the second largest recipient of remittances (after Mexico) with $ 8.4 billion.

In Pakistan, remittance receipts tripled between 2001 and 2003, to reach $ 4.2 billion last year.

During the same period, remittance flows to Bangladesh also increased nearly 50 per cent.

India joined the top five developing country recipients of Foreign Direct Investment (FDI) at $ 4.1 billion in 2003.

FDI to South Asia is expected to rise from $ 5.0 billion in 2003 to over $ 7.0 billion in 2005, assuming that India's reform programme continues and it continues to attract FDI into call centres and other outsourced businesses.

FDI in India is understated because, unlike many other countries, it excludes from FDI the earnings reinvested by foreign investors, other direct investments between investors and subsidiaries, branches and associates, investments by offshore and domestic venture-capital funds set up by foreigners.

The region, led by India, became the largest recipient of portfolio equity flows with $ 7.0 billion net inflows in 2003.

In India, stocks surged and reached record highs towards the end of the year. India has continued to modernise its stock exchanges and introduced new instruments for stock trading.

It is, for example, one of the few emerging markets that have exchange-traded funds.

Taking advantage of rising reserves and portfolio equity flows, the region repaid both public and private sector debt. Net inward debt flows were $ 2.3 billion in 2003.

The region's creditworthiness improved significantly in 2003 backed by strong growth, rising reserve levels, continued policy reforms and progress in peace talks between India and Pakistan.

India was upgraded to investment grade. India's long-term foreign currency rating was upgraded to investment grade by Moody's in January 2004. Pakistan's rating was also upgraded last year.

In February, S&P assigned a "B" rating to Paksitan's issuance of $ 500 million fixed rate bonds due 2009.

Aid flows to the region, especially to Pakistan, rose in 2002. Pakistan received $ 2.1 billion, up sharply from $ 0.7 billion in 2000.