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WB cautions India on oil price surge and fiscal deficit

The World Bank has hinted at the possibility of two factors -- surge in oil prices and high fiscal deficit -- adversely affecting India's economy in the near-term, telling upon its high growth path.

Its report Global Economic Prospects and the Developing Countries notes that domestic business confidence in India is strong and both major political parties -- the Bharatiya Janata Party and the Congress -- are committed to a broad range of economic reforms. ''But the fiscal deficit remains a serious concern,'' it adds.

It says the projections assume progress in macro-economic stabilisation and conflict resolution throughout the region. The resolution of political uncertainties may help sustain growth in near terms.

It says that all countries of the region will be adversely affected by the surge in oil prices but they should benefit from a jump in external demand, especially in Europe and, more generally, in Asia.

The report says substantially faster growth in the near term would require increased fixed capital formation and saving and foreign direct investment would be a crucial element of financing.

It says India's long-term potential output growth is linked to policy actions, which must redress the current fiscal deficit (over six per cent of GDP), continued high (and increasing) tariff barriers, and increases in non-performing loans and other structural problems in the banking system.

It, however, says in India, home to almost half of the world's poor, the rate of poverty reduction appears to have slowed in the 1990s, particularly in rural areas.

India's poorest states exhibit slow progress in human development indicators, including health and education indicators, low growth rates, particularly in the agricultural sector, inadequate infrastructure and weak and fragmented institutions.

''Based on experience, these states will not see much impact on poverty even with higher growth rates; if present trends continue, the bulk of the poor in these states will be unable to participate in future growth,'' the World Bank document said.

Overall, developing countries are expected to grow this year by 2.7 per cent and accelerate to 4.2 per cent in 2000. For developing countries, excluding those in transition, growth is significantly less than the rate of the pre-crisis 1990s.

But, it says South Asia in 1999, for a second consecutive year, was the fastest growing developing region, averaging 5.4 per cent GDP growth. Among the domestic factors, the most positive was a favorable Indian monsoon, which led to impressive agricultural sector performance.

Relative independence from external influences is a constant structural feature of the Indian economy and India experienced only moderate spill-over effects from the series of crises in 1997-99.

The country's main export markets are in Europe and the United States, so the crisis did not greatly reduce demand for India's exports, it says.

UNI

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