Fiscal situation, level of public debt in Indian states a concern

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SummaryIndia’s GDP growth would fall to a decade-low of 5.6% this fiscal and it could tick up a bit to 6.7% in the next fiscal only if the government expedites the reform measures announced in September and clears the backlog of projects soon, Asian Development Bank (ADB) managing director general Rajat M Nag tells FE’s Arun S in an interview.

India’s GDP growth would fall to a decade-low of 5.6% this fiscal and it could tick up a bit to 6.7% in the next fiscal only if the government expedites the reform measures announced in September and clears the backlog of projects soon, Asian Development Bank (ADB) managing director general Rajat M Nag tells FE’s Arun S in an interview. Nag said a major uncertainty facing India’s and Asia’s growth is the economic situation in the United States and Europe. ADB forecasts inflation in India to touch 8.2% in 2012-13 and then slip marginally to 7% in 2013-14, he said. The government could find it challenging to meet the fiscal deficit target of 5.3% in 2012-13 and bringing it down to 3% in 2016-17, he added. Another issue that Nag said India and China have to deal with is the rising inequality and the need for inclusive growth, as well as ‘green growth’ or lack of it. Nag also said the world is viewing the robust debates on corruption in India as part of a welcome process. Good governance is a key condition for democracy, he said in the interview, adding that good institutions and accountability that goes beyond corruption are necessary conditions for India’s growth story to continue. Edited excerpts:

What is your view on India’s subsidy regime and its impact on the fiscal deficit?

The high fiscal deficit has been a major concern. The government has recognised it. We appreciate that the government has put together a fiscal consolidation plan. The diesel price hike and capping of subsidised LPG cylinders are steps in the right direction. Any subsidy is regressive because you end up subsidising the rich who consume more. However, we do recognise there are political imperatives. But there are well-known measures of dealing with that by having, for example, a lifeline tariff or saying that a minimum consumption of LPG or fuel will be at a certain limited price.

ADB had recently loaned $400 million to West Bengal. Have other similarly debt-troubled states, like Punjab, approached the ADB for loans and is that a concern?

The situation in the states often is almost similar to what we see at the national level. The fiscal situation is a concern as is the level of public debt. We look at public resource management issues as high priority for the states as well.

Within our overall resource envelope

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