Drastic reforms must for 8-10% growth: IMF

International Monetary Fund, which hiked India's growth projection for 2003-04 to 7.6 per cent, said drastic reforms were required to push the GDP growth to the desired 8-10 per cent annually in two decades.

IMF Chief Economist Raghuram Rajan listed labour reforms, bringing agriculture under tax net, further relaxation in foreign direct investment norms, speedy disinvestment and full capital account convertibility as the thrust areas.

"An 8-10 per cent growth is a good aspiration level, but lot of action is needed," the Indian-born economist said, when asked whether the present growth rate could be sustained.

Although the economy fared well this fiscal, he cautioned that growth in 2004-05 might be lower than this fiscal, which got a boost from a robust growth in agriculture.

IMF raised India's growth forecast to 7.6 per cent for this fiscal from 4 per cent in 2002-03. For calender year 2003, IMF pegged the GDP growth at 6.9 per cent, compared with 4.8 per cent in 2002.

While wondering whether the high growth of this fiscal was a "temporary factor" and if it could be sustained, Rajan said, "There is a reason for being optimistic in India. There has been a rise in productivity and a surge in the young work force, which in turn will raise the savings rate and financial capital."

But, for India to be shining, he said, "We need more investment in infrastructure "" both physical and social. But a lot of this is not happening due to the high fiscal deficit."

To sustain higher growth in the coming two decades, Rajan said the investment climate should improve through the adoption of good bankruptcy laws, transparency in corporate sector and labour reforms.

While favouring the "hire and fire system" in labour laws, Rajan cautioned that to implement such a policy the government needed to put in place adequate "safety nets" in the form of unemployment insurance, pension and cheaper healthcare facilities for employees.

A strong advocator of disinvestment, the IMF economist said, "Privatisation is important in the sense that the government should not be in areas where it is not effective. Some areas, like airlines, are uncompetitive since the government is there."

Rajan also favoured tax on agricultural income saying, "There is no reason why a rich farmer should not be taxed as a rich living in urban area."

Although agriculture is regarded as a "holy cow" and hence continues to remain untaxed, he said the bold measure would broaden the tax base and remove distortions.

Rajan also mooted a "big-bang" approach for full capital account convertibility as it would enable the people to prepare for the risks.

The full float of rupee can be implemented within 2-20 years but Rajan feels that the next government should do it within its tenure of five years.

"The cost of not opening up has been the huge build up reserves. There has been little outflow because of the significant constraint in investing abroad," Rajan said.

Full convertibility would also raise foreign direct and portfolio investments into the country, he added.