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WB cautiously upbeat about India's economy

The World Bank on Wednesday said India is unlikely to face a financial problem due to relatively closed nature of its capital market and substantial foreign exchange reserves but warned that the consolidated public sector deficit would remain high at 10.6 per cent of gross domestic product.

The major source of India's gains in the medium term will be exports of services, particularly software, data and business services, according to the just released annual 'Global Development Finance' of the World Bank.

The service sector in India, which makes up for 50 per cent of the country's economy and about 35 per cent of the regional GDP, increased by almost seven per cent in 2001.

India's software exports grew 25 per cent despite the malaise in the global high-tech markets.

"It is unlikely that the Centre will meet its deficit target of 4.7 per cent of GDP for fiscal 2002. The consolidated public sector deficit in India remained unchanged at 10.6 percent of GDP," the bank says.

India, however, has substantial foreign exchange reserves.

Removal of sanctions against India and Pakistan by the US and Japan will benefit the two countries in the medium term.

The region is not expected to cut import tariffs in the near term and, therefore, import growth is expected to remain slow.

This forecast, says the bank, faces significant downside risks. Tensions between India and Pakistan remained at high levels. Even if recent moves towards peace bear fruit, the potential for additional terrorist attacks cannot be ruled out.

However, continuation of military activity in the region is likely to have a depressing impact on exports due to an increased risk perception by the Organisation of Cooperation and Development.

The war in Afghanistan appears to be drawing to a close, but the country may still be a source of regional instability.

"Chronically high fiscal deficits," says the bank, are the Achilles heel of the region, and it increased across the region in 2001.

Assuming that the countries in the region follow declared policies, the average fiscal deficit is expected to decline from 10.3 per cent of GDP in 2001 to 9.2 per cent in 2004.

Over the longer term, the success of efforts to restrain fiscal deficits while continuing to achieve high growth rates remains uncertain. And the entry of China into the World Trade Organization creates a major competitive challenge for the manufacturing industries of the region.

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