fall of the Bharatiya Janata Party-led government on Saturday, April 17.
ADB Vice-President (East) Peter Sullivan, at a special briefing arranged in Washington yesterday on the ADO, said the political uncertainty in India is bound to adversely affect economic growth.
Both the lending agencies pleaded for gearing up process of economic reforms to put the country back on the higher growth of over 7 per cent that was obtained during Narasimha Rao's rule.
In the case of Pakistan, despite debt relief, a resumption of lending by international financial institutions, and the introduction of a large number of structural measures, growth in 1999 is unlikely to exceed 3 per cent, largely because of severe import constraints, tightened fiscal policy, a wait-and-see attitude among investors and poor cotton crop.
A rebound in foreign exchange reserves is allowing a rapid winding down of the trade and payments restrictions introduced during the 1998 crisis, says the IMF.
The Fund says India's medium-term growth prospects continue to be constrained by domestic structural weaknesses. The banking system, though unaffected by contagion effects, in large part due to the limited exposure of Indian banks to exchange rate movements and the economies of the rest of Asia, suffers from significant structural problems which financial reforms are only just starting to address, it said.
The IMF document says inadequacies in the government's revenue system, as well as rapid growth in current outlays, including the public-sector wage bill and subsidies, will need to be addressed to bring down the fiscal deficit that is expected to exceed 9 per cent of the GDP [gross domestic product] in 1998-99.
It says that the 1999-2000 Budget for the central government, which was presented on February 27, holds the promise of a reduction in the deficit of only about 0.5 per cent of the GDP and a more ambitious and front-loaded fiscal adjustment programme continues to be needed.
It calls for reinvigorating the momentum for structural reform, including in trade policy, the financial sector, and the privatisation of enterprises.
The IMF says India is a relatively closed economy -- exports comprise only 8 per cent of the GDP, with about 13 per cent of that directed at the rest of Asia (excluding Japan) -- so the effect of the Asian crisis on the balance of payments and domestic activity was modest.
The Fund's outlook says capital controls, while entailing longer-term costs, appear to have helped to limit India's vulnerability to abrupt movements in short-term capital.
Net inflows of private capital during 1992-96 averaged only 1.5 per cent of the GDP in India, compared with 8.8 per cent in Thailand, 10.5 per cent in Malaysia and 4.8 per cent in Indonesia.
Though longer-term inflows have been affected by the regional turmoil, as well as the sanctions that followed the nuclear tests in May 1998, India's limited dependence on foreign capital as well as the $4.2 billion issue of Resurgent India Bonds to non-resident Indians in late 1998, have helped to cushion the impact, it adds.
Consequently, during the recent period, India's foreign exchange reserves have remained at the equivalent of a comfortable 6.5 months of imports.
The IMF says the main priority for macroeconomic policy continues to be how to rein in the public-sector deficit, which has widened to almost 10 per cent of the GDP.
It highlights the need for containing rapid monetary growth to reduce the risks of a renewed upturn in inflation.
But to bring about sustainable improvement in the growth performance that is needed to reduce poverty over the medium term, structural reforms will also need to be strengthened, it says.
UNI
April 20, 1999: The RBI's Credit and Monetary Policy
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