Thursday, April 14 2005 07:54 Hrs (IST) - World Time -

Washington: The International Monetary Fund (IMF) yesterday (Apr 13, 2005) advised India to reduce the ten per cent budgetary deficit of the Central and State Governments, saying this is needed to find funds for necessary infrastructure.

Raghuram Rajan, the IMF's Economic Counsellor and Director of the Research Department, indicated that the IMF would not object in principle to deficits if they are incurred for expenditure on infrastructure.

Asked at a press conference where he presented the IMF's World Economic Outlook, that what level of reduction of the deficit the IMF would recommend, Rajan said that there is "no magic level". It depends on a variety of factors, he added.

"Capital spending is one but, clearly, ten per cent is too high. It is also too high because it gives relatively little room for the much needed infrastructure spending that has to take place in India," Rajan said.

"Clearly, there has to be some Government support for infrastructure spending and in such a stretched budget, you don't have much room. So, reducing the deficit will be important both in its own right and also for creating room for necessary spending."

A correspondent asked whether, despite the deficit to which the IMF objects each year, India is having the second highest growth rate in the world.

Rajan said, "I don't think the problem in India is with the current level of growth. It is a high level of growth but the intention is to (raise) it by a few percentage points and that will need increased investment, especially in infrastructure."

"So, it is quite possible that kind of investment, if properly done, would create more of a deficit but a current account deficit," Rajan added.

Referring to India and China as "two fast-growing Asian giants," Rajan said they have different problems.

Investment in China, which accounted for an extraordinary 45 per cent of the Gross Domestic Product (GDP) in 2004, has picked up again. "We have been concerned about the quality of investment, and financial sector as well as public enterprise reform will be critical to improving it. Greater exchange flexibility can also help.

"India, by contrast, needs more investment, especially in infrastructure. In order to create room in the already overstretched Government budget, expenditures will have to be rationalised and revenues expanded. Policy frameworks will also have to be strengthened to draw in the private sector."

Developing countries and emerging markets, said Rajan, will account for an increasing share of the world GDP.

Not only is GDP in these countries more volatile but also it will be more commodity intensive. Even at a conservative estimate, over the next quarter of a century China should see car ownership multiply 15 times and India will only be little behind. "While the spectacular growth of these countries will benefit all, it will strain existing resources," he said.

The second major transition, he said, is that rich industrial countries are aging. Not only should they be restructuring their own work environment to make better use of their changing labour force but also many should be sending capital to younger, poorer countries.

"Rich countries should be saving more and running larger current account surpluses. Poor countries should be investing more and running larger current account deficits."