WASHINGTON, July 17: While lavishing handsome praise on the United Front Government for its economic policies so far, the International Monetary Fund (IMF) has underlined the need for an urgent and ``substantial'' increase in petroleum prices and phasing out fertiliser subsidies in order to control the deficit and carry forward the economic reforms.

The IMF recommendations follow the Executive Board consultations with India earlier this month. Expressing concern over the large public sector deficit which was ``a drag on economic performance'', the IMF directors warn that there is a ``significant risk'' of revenues not responding to recent bold tax cuts as buoyantly as anticipated by the authorities, and even the modest deficit reduction targeted in the latest budget might not be achieved, unless contingency measures are adopted, including hiking petrol prices and accelerating the disinvestment program.

An IMF background paper that follows the latest round of consultations between the agency and the Indian Government notes that the central deficit declined to 5 per cent of gross domestic product (GDP) in line with the Budget target, but the deficit on the oil pool account rose sharply, ``mainly because increasing oil import prices were not passed on fully to consumers''.

The executive board noted that India's overall economic performance had remained broadly favourable, despite the recent slowdown in industrial production and exports. Although the UF government has given renewed impetus to structural reforms, ``the consequences of the incomplete nature of the reforms are increasingly evident... in the relatively slow pace of new investment in infrastructure sectors now open to the public sector''.

The IMF board said the recent tax rate cuts needed to be complemented with measures to expand the base, reduce tax exemptions, and improve tax administration.

Among other recommendations made by the board are:

* reduce civil service employment

* more effective exit policy, labour market reforms

* cut and better target subsidies

* reorient spending from unproductive expenditure, such as subsidies, towards infrastructure and social spending on health and education;

* more vigorous efforts to improve public enterprise performance -- including full privatization of many of these companies.

* adjustments at the state level to lower deficits and to improve the composition of state spending

* more flexible approach to exchange rate management

* ease entry of foreign banks.

The IMF directors also called for a careful stance on monetary policy. Noting the present high level of liquidity in the banking system, they cautioned particularly against the possibility of rapid rates of credit creation. They stressed that the authorities should not resist increases in interest rates -- particularly at the short end -- in the event of a pickup in credit demand.

Discussing the agenda for reforms, directors emphasized the importance of further trade liberalization -- including further tariff cuts and a more rapid elimination of remaining quantitative restrictions on consumer goods and a more comprehensive easing of small scale sector reservations.

In this context, some directors expressed disappointment over the failure of talks at the World Trade Organisation (WTO) Committee on Balance of Payments Restrictions on the phasing out of quantitative restrictions.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.