The International Monetary Fund on Wednesday warned India that it must rein in its ballooning fiscal deficit to sustain the present high growth as it would put upward pressure on interest rates.

"Further progress in addressing India's fiscal imbalances is urgent because recovery will increase the private sector demand for financing, putting upward pressure on interest rates," the IMF said in its semi-annual World Economic Outlook.

"Clearly, the overall deficit is important. In India it is sizeable (10 per cent)," Raghuram Rajan, Economic Counsellor and Director of Reasearch at the IMF, said in Washington, addressing a press conference on the Fund's World Economic Outlook.

By overall deficit, he meant the central and state deficit as well as the losses of the state-owned corporations.

"Part of problem in India," he said, is that "we have not seen the effects of this deficit so far, in part because private investments have been subdued."

With the growth in economy, especially the rapid growth last year, and expectation of the growth going forward "we expect the private investment will start showing up again in significant magnitude, at which point there will be competition between the government and the private sectors for funds which will push up international aid more than desirable," Rajan said.

"This is why, we have been harping on the deficit. Clearly, it is the overall deficit that matters in this case."

Observing that the way forward to correct the imbalance was spelt out in Fiscal Responsibility and Budget Management Act, it said there was a need to balance the current budget by 1 per cent of gross domestic product.

"Given India's low revenue-to-GDP ratio, the bulk of the adjustment will need to come from revenue-enhancing measures, including improving tax administration, broadening the tax base and simplifying the tax regime," the IMF report said.

However, the report also highlighted the plus points of the Indian economy, which had accelerated, reflecting both cyclical and structural factors.

The structural factors included the lagged impact of the economic liberalisation during 1990s on manufacturing, the recent further opening up of the external sector, the effect of investment in infrastructure (especially road and telecom), the recent corporate restructuring and the impact of global outsourcing of customer support services on exports.

The cyclical factors comprised the effect of good monsoon on agriculture production, the impact of low interest rates on consumer and real estate credit, it said.

Though appreciative of the initiative to strengthen the financial system, the IMF said, "Vigilance over credit quality will continue to be necessary to limit risks from rapid credit growth."

On the appreciation of the rupee against the US dollar, it said the 'management float' was welcome and 'even greater flexibility would be desirable.'

On Asia, whose growth accelerated to 7.0 per cent during 2003, it said for expanding its contribution to world growth, the region would need to 'nurture' domestic demand and the 'growth is expected to remain high in 2004.'

In particular, the IMF said, structural reform will be required to strengthen and deepen financial markets, improve public and private sector governance, increase competition and 'raise the labour productivity of the large rural population in India and China.'

These measures, it said, would not only help balance the emerging Asia's economic growth and make it more resilient, but would also help 'turn the region into a major engine of the global economy.'

Noting the intra-regional trade in emerging Asia, it said the region was a whole was becoming less dependent on the rest of the world and was becoming more of 'autonomous engine' of growth.

"Increased trade integration has clearly resulted in closer links between economies in the region and greater business cycle correlation across countries," the IMF said.

The rise in intra-regional exports accounted for over 50 per cent of export growth in emerging Asia during 1998-2002, it said.