Disregarding the multilateral institutions' overbearing concern over India's high level of fiscal deficit, Reserve Bank Governor Y Venugopal Reddy on Tuesday said high domestic savings rate, minuscule foreign ownership of public debt and a borrowing programme where interest rates were fixed and securities had a long maturity, were crucial redeeming factors.
Addressing mediapersons after the first day of the International Monetary Fund-World Bank annual meetings, Reddy also defended India's accumulation of foreign exchange reserves, which has come under scrutiny by the IMF.
Not only did such a build-up reflect the Asian countries' lack of confidence in the global financial architecture and their effort to mitigate risks from external shocks, it also acted as a cushion and insurance against possible flight of capital and strong volatility in foreign exchange markets, Reddy said.
Another explanation for the strong reserves, Reddy said, could be the availability of abundant international liquidity at this juncture following the easing of the monetary policy in industrial countries.
The resultant excess liquidity was flowing into emerging markets, he said, only to quickly add that if interest rates hardened in industrial countries, such liquidity may quickly dry up.
Reddy said, the high level of fiscal deficit was not a problem. It was only an impediment to the high level of growth that India was aiming and trying to achieve.
In assessing the extent of fiscal deficit, it was not just the sheer numbers that mattered but several other factors. India had it all right, he said.
However, he admitted that if India wanted to achieve 8 per cent growth rate or hopefully 10 per cent, then it had to get out of this high range.
Reddy further said that the public debt dynamics was something that could be worked out in the medium-term and not in the short-term.
"So what do you do? You address the issue in two areas: one is the structural management of debt and two, build a cushion," he said.
According to him, the RBI is undertaking debt management in an admirable fashion and as far as building a cushion is concerned, India has a cushion of almost $ 88 billion of foreign exchange reserves.
Earlier, addressing the joint annual session as India's alternate governor, Reddy said emerging countries in Asia continued to remain a bright spot.
The outlook for the US, eurozone countries and Japan, however, presented a mixed picture.
While there were indications of a recovery in the US, the widened and historically high fiscal and current account deficits posed a threat of possible disruptive adjustment of the dollar against other major currencies.
Reddy also made a strong case for substantially stepping up the quantum and improving the quality of development assistance to the joint boards.
Developing countries had huge unmet financing needs relative to the millennium development goals.
To ensure equitable allocation in a multilateral setting, he said, there was a critical need to meet the admittedly genuine concerns of developing countries for expanding their trade opportunities.