In its latest report, the World Bank says that "policy drift" and weak industrial performance have slowed down the Indian economy.

Besides, depressed export markets in East Asia and Japan are a blow since they had come to account for a significant share, and consequent growth, of South Asia's exports. ``Competition from East Asia in other markets will slow down the growth of exports, especially from India and Pakistan,'' it said.

The Bank calls India's alternative strategy to increase revenues through higher excise collections and import tariffs as "potentially a step in the wrong direction." ``If growth targets of over six per cent do not materialise, the total public sector deficit could well persist at more than nine per cent of GDP representing one ofthe biggest challenges for the Indian economy," the World Bank said.

It also said South Asia would achieve a five per cent economic growth in the next two years despite global recession. The seven nations in the region together would see their economies growing at 4.9 and 5.6 per cent in 1999 and 2000 respectively, the bank's annual "Global economic prospects and developing countries 1998/99" released today said.

The Indian economy slowed to five per cent in fiscal 1997-98, following three years of rapid advances averaging 7.5 per cent. While a decline in agricultural output was a contributing factor, non-agricultural GDP growth had begun to slow down in 1996-97.

Indeed, industrial output has fallen from 12.5 per cent in 1995- 96 to 6.4 per cent in 1996-97 and then further to 5.7 per cent in 1997-98.

Contributing to the slowdown was the persistence of large public sector deficits (crowding out private investment), a decline in export growth since 1995-96 and cutbacks in investment because ofuncertainty about reforms, the report noted.

It draws attention to the slight fall in the public sector deficit to 9.1 per cent of GDP thanks to a cut in subsidies on petroleum products that brought domestic oil prices closer to world prices. But it faults the 1998-99 budget for absence of any provision for further reduction.

The bank's chief economist Joseph Stiglitz and senior economists Mick Riordon and Milan Brahmbhatt say domestic financial weaknesses remain a concern and will need to be addressed if the financial system is to be a source of strength rather than a drag on longer-term growth -- as evidenced most recently by a run on deposits on the UTI. "Domestic stock markets, already depressed, slumped further in response," the World Bank said.

The bank painted a bleak growth prospect for world economy in 1998-2000 and said the developing countries would face serious social and economic slowdown in 1998-2000. Holding Asian economic crisis and its contagion effect responsible for slowdown in globaleconomy, Stiglitz said "what many expected to be no more than a slight blip has instead become a destablizing factor in the global economy."

The per capita growth rate for developing countries for 1998 would nosedive to 0.4 per cent, a far cry from the rate of 3.2 clocked last year, it said. Brazil, Indonesia and 34 other developing and transition economies - with 42 per cent of total GDP for the developing countries - would see negative per capita growth this year. However, per capita income in 1997 fell in 21 countries, accounting for 10 per cent of GDP.

While the tone of the report is pessimistic for the short term, the bank has sounded upbeat on recovery prospects for the developing countries beyond 2000 and is of the view that growth could reach the record setting rates of the period between 1991 and 1997. This would happen only if the policies to prevent a deeper global slump are implemented quickly and developing countries strengthen their financial sector, it said.