High Fiscal Deficit Could Hit Growth, Admits RBI Guv

Dubai, September 23: | Updated: Sep 24 2003, 05:30am hrs
After his brief oral presentation at the joint annual Fund-Bank discussion where he focussed on the prospects for emerging economies; issue of exchange rate management and the importance of Millennium Development Goals Reserve Bank of India governor Y V Reddy addressed an equally brief press conference.

In response to a question whether Indias high fiscal deficit was a hurdle in attaining the 8 per cent growth objective, Dr Reddy admitted that managing it was a challenge and that it could serve as an impediment to further acceleration of growth.

But, he said, a closer analysis of the underlying features revealed a number of positive features, including high domestic savings, a public debt that had less of a foreign currency component and a substantial build-up of foreign exchange reserves.

That opened the floor to further questions on the whether such forex reserves were adequate or not.

In his customary academic style of response, he said if any one could tell me what an optimal level of reserves is, I will be happy to learn at his feet.

To a question as to whether it was a problem of plenty, the RBI governor again mentioned that there was no answer to whether it was a problem or opportunity; in any case, this was not a matter to go public on.

In his oral presentation earlier, Dr Reddy elaborated on the build-up of reserves in many countries.

These, he said, stemmed from a broad context where private capital inflows to emerging markets tended to be pro-cyclical even when underlying fundamentals were strong and that such reserves provided self-insurance in this context.

This was indeed a strong defence of Indias reserve build-up of $85 billion, which reflected more of medium-term than short-term considerations.

To a question on whether India had called for a resumption of multilateral trade talks, Dr Reddy reminded the questioner that India was one of the founding members of GATT and WTO.

He then alluded to paragraph and verse of the three statements made by India to the International Monetary and Financial Committee, Development Committee and his oral presentation where the need for strengthening multilateral forces in trade was strongly emphasised; that the potential gains from free and equitable multilateral trading system outweighed the costs; that it was necessary to reach a mutually agreed agenda within the overall WTO framework.