The World Bank has cautioned that India's economic growth is slowing and it will need to provide fresh impetus to fiscal adjustment along with other reforms to achieve the targeted 8 per cent growth rate.
"Economic growth is slowing, many Indians still live in poverty and regional and urban-rural disparities are growing. At current trends, India's rate of progress is insufficient to meet its Tenth Plan targets as well as the international community's Millennium Development Goals," according to the World Bank's first India Development Policy Review.
Referring to fiscal adjustment and reforms to improve investment climate, the review said these challenges were especially great in the poorer states.
Development progress has been uneven and, as a result, poverty is getting concentrated in the less developed states.
For example, more than half of India's poor now live in four states: Uttar Pradesh, Bihar, Madhya Pradesh and Orissa.
"India has undoubtedly done well in the past two decades, but with one-third of the world's poor and a billion people, it needs rapid growth and job creation to reduce poverty and sustain the recent rise in incomes. In the absence of comprehensive reforms, growth will be moderate. India is a country with huge potential and a new round of reform could accelerate growth to 8 per cent by the end of the Tenth Plan," says Michael Carter, the World Bank's Country Director for India.
The India Development Policy Review says economic growth has been the key driver of poverty reduction in the country and its recent slowdown is a cause for concern.
From an annual average of 6.7 per cent between 1992-93 and 1996-97, growth fell to 5.5 per cent between 1997-98 and 2001-02 and then slipped to 4.4 per cent in 2002-03 partly because of the drought.
"This deceleration has been accompanied by a slowdown in investment and a deterioration in the fiscal position of both the central and the state governments," says the review titled 'India: Sustaining Reform, Reducing Poverty.'
Fiscal indicators such as primary deficits and public debt are worse than what the country faced in 1991 and worse than many countries that have suffered macroeconomic crisis.
Though the risk of crisis in India is offset by its strong external position, the review expresses concern about the consequences over the medium term and warns that it will not be prudent to assume that India can simply grow out of its fiscal problem.