“If India did not have its current central government deficit at some six per cent of GDP, the gross rate of capital formation could rise from 24 per cent of GDP to 30 per cent,” Martin Feldstein, President and CEO of the National Bureau of Economic Research, said in a speech at India’s central bank.

“Over the next decade, this greater rate of net capital accumulation would be enough to add nearly a full percentage point to the annual growth rate, raising India’s level of GDP (gross domestic product) a decade from now by about 10 per cent.”

Mr Feldstein, who is also the George F Baker professor of economics at Harvard University, was delivering the LK Jha Memorial Lecture at the Reserve Bank of India (RBI) in Mumbai. India’s combined fiscal deficit of the federal and state governments is about $55 billion, or more than 10 per cent of GDP, one of the highest in the world.

The federal government aims to trim its fiscal deficit to 5.6 per cent of GDP for the current fiscal year to March from 5.9 per cent last year, but analysts say with early national elections likely in April, the target will be difficult to achieve.

Last week, India’s federal government cut taxes on a host of consumer durables like white goods, computers and mobile phones in what analysts saw as sops to voters in an election year. Finance minister Jaswant Singh said the loss of revenue from the tax cuts would be Rs 90-100 billion ($1.98-2.2 billion).

International rating agencies cite the high deficit as the main reason for maintaining India’s rating at junk bond status. Economists say India needs to achieve eight per cent growth on a sustained basis in order to raise living standards for its billion-strong population, a quarter of whom live below the poverty line.

India is expected to grow at more than seven per cent in the financial year to March 2004, up from 4.3 per cent last year.

— Reuters