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The World Bank has cautioned India and countries in South Asia against “risks of fiscal slippages,” as the task of ongoing fiscal consolidation is complicated by the desire to maintain the pace of growth-enhancing infrastructure investments.
In its ‘Global Economic Prospects' released in Washington on Thursday, the bank told its developing and emerging economy members, including India, that “the challenges that high-income European countries with large deficits and large debt-to-GDP ratios are encountering are an important reminder of the importance of maintaining fiscal sustainability.”
Fiscal deficit
Stating that despite some modest progress towards fiscal consolidation in 2010, the bank said South Asia has the largest fiscal deficit among developing countries with the region-wide deficit at 8.2 per cent of GDP in 2010. India's fiscal deficit as a share of its GDP was 9.6 per cent.
Even as the region's high fiscal deficit reflects a host of long-standing structural factors with significant pressures supervening both the revenue and expenditure side, the other factor that led to the region's large deficits, including “in the case of India, for example, us elevated countercyclical spending that has yet to be fully unwound.”
In this context, it suggested that “a recent move towards tighter policy needs to be pursued further, given the region's high fiscal deficits, high inflation and deteriorating current accounts.”
Yet another concern pertains to the deterioration in the regional current account deficit in 2010, reflecting the relative strength of domestic demand, as growth of imports of goods outpaced that of exports and led to a sharp deterioration in merchandise trade balance. “Partly as a result, India's current account deficit rose to a projected 3.7 per cent of GDP in 2010, up from two per cent in 2009,” the bank stated.
Private capital inflows
Although India and Sri Lanka account for the bulk of private capital flows in the region, it said compared with other developing regions, where portfolio inflows averaged 0.8 per cent of GDP in 2010, such inflows are relatively high in the region “and largely reflect record high foreign portfolios into India during 2010” . Net portfolio equity inflows to the region are projected to diminish to $37 billion by 2012 from an estimated $43 billion in 2010, largely led by a projected gradual moderation of portfolio inflows to India (the largest recipient in the region) following record inflows in 2010.
On GDP, it said India's economic growth which was 5.3 per cent in calendar year basis in 2009, was 8.3 per cent in 2010 and would be 7.8 per cent in 2011 and 7.9 per cent in 2012. The projected slowdown in growth partly reflects expected further tightening of fiscal and monetary policies, bringing fiscal deficits down to sustainable levels, creating fiscal space and avoiding the build-up of large external imbalances.
Domestic challenge
A major domestic challenge facing policymakers in the region is bringing inflation back down to the low levels observed in the pre-boom period, when regional inflation averaged 3.3 per cent from 2000 to 2003. It said the rise in headline prices in Bangladesh, Bhutan and Nepal, also partly reflects spillover from India, a key trade partner. Temporary price shocks have been a factor, such as the disruption of flooding in Pakistan and liberalisation of fuel-price subsidies in India.
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