International Monetary Fund on Friday warned the Centre of high fiscal deficit that could come in the way of sustaining high growth in the economy, which clocked 8.4 per cent rise in the second quarter of 2003-04.

Supporting IMF's view, Planning and Finance Commissions have asserted that the government needs to raise revenues and step up developmental expenditure to foster growth while at the same time keep fiscal and revenue deficits under check.

"If India is going to sustain high growth, its fiscal deficit has to come down. The government has to raise tax revenues and rationalise expenditures," Anne Krueger, deputy managing director of IMF, said on the sidelines of a conference organised by IMF and NIPFP in New Delhi.

She said the Tax:GDP ratio in India was low and so the government has to take measures to widen the tax base. Many of the expenditures, which appear to be pro-poor, are not actually benefiting the poor, she added.

While endorsing prospects of over 7 per cent growth, high forex reserves and nominal interest rates in the country, Finance Commission Chairman C Rangarajan said high fiscal deficit and low domestic investment was a matter of concern for long term sustained growth.

While Tenth Plan estimated fiscal deficit of Centre and states at 6.8 per cent and Finance panel pegged it at 6.5 per cent by 2004-05, it was close to 10 per cent in 2002-03.

"Failure to step up expenditure on necessary items (like physical and social infrastructure) or failure to achieve fiscal consolidation will dampen growth momentum," he added.

Planning Commission Deputy Chairman K C Pant said the focus should be on reducing the revenue deficit.

While fiscal deficit rises in times of recession, Pant said it should come down in times of high growth period.

He said the declining trend in Tax:GDP ratio appears to be reversed and the ratio of government salaries to GDP ratio has started to decline.

"A process of fiscal correction has begun and we need to consider the implications of accelerating the process," he said, while indicating the Centre should reduce the deficit further from 5.6 per cent estimated for 2003-04.

Instead of stressing on fiscal deficit, he said the focus should be on revenue deficit, which always has a negative effect on growth since it implies diversion of funds from investment to current consumption.

He said the Indian financial sector was still "fragile" as interest rates have fallen and banks were offering credit at sub-PLR to many sectors, despite the fact that private investment was less than the savings.

When fiscal deficit starts falling, there would be over-supply of savings and a further reduction in interest rates leading to a distress in the financial system and possibly a systemic collapse, Pant said.

The Plan panel deputy chairman also pointed to the need to reduce the regional disparity and macro economic stability and said, "We will have to evolve fiscal structures and transfer modalities and device methods by which fiscal imprudence at all tiers of government can be held in check."

Rangarajan said an overall programme of restructuring of public finance must include other elements such as expenditure prioritisation and better expenditure management, improved tax administration and widening the tax base and reducing exemptions.