NEW DELHI (Reuters) – India needs to alleviate infrastructure constraints if it wants to sustain economic growth of 9 percent and should let the impact of record oil prices feed through to the economy, a senior World Bank official said.
Shanta Devarajan, South Asia Chief Economist at the World Bank, said India must tighten spending to cut its fiscal deficit. The bank estimates India grew at 9 percent in the year ended December 2007, and expects it to slow to 8.4 percent in 2008.
“India is facing severe infrastructure constraints and those have to be addressed. The economy has been doing well despite the difficulties of high oil prices and infrastructure constraints,” he told Reuters in an interview late on Monday.
“Obviously, I would say it could do even better if those constraints were relaxed. Nine percent growth is achievable but it won’t be easy.”
India’s economy grew 9.4 percent in the fiscal year ended March 2007, the fastest pace in 18 years, and the central bank expects growth to moderate to 8.5 percent in 2007/08.
The Planning Commission has projected average annual growth of 9 percent between 2007/08 and 2011/12. Policy makers say India will need investment of about $500 billion to upgrade infrastructure in the world’s second-most populous country to meet the growth target.
High oil prices , which recently touched a record $100 a barrel in global markets, were a threat to the Indian economy, but this could be managed, Devarajan said.
“The Indian policy makers have shown how to manage these constraints as a way of minimising the impact,” he said.
India cut state-set retail fuel prices once last year, but did not raise them even as global prices rose to record highs.
It has been issuing bonds to state-run oil firms to partially compensate them for selling fuel at government-set prices, which are a cost to the budget.
“It is very important to make sure that it does not create huge fiscal deficits, and which in turn can then undermine overall macroeconomic management,” Devarajan said.
The government is now thinking of a moderate hike in retail fuel prices.
“Whenever you subsidise oil and price of oil goes up, it creates fiscal problems, no question about that. The best way to manage a oil shock is to pass the oil price increase to consumers,” he said.
“That may sound harsh, but it is actually one way to protect growth, control inflation and cushion the poor.”
The World Bank economist expects India to focus on expenditure management in the next budget, due in February.
“Revenue growth has been very good but expenditure control has not been that significant. And remember, you are going for an election next year.”