Mumbai: Reserve Bank governor Y V Reddy warned yesterday that fiscal consolidation was a major concern for the Indian economy as it was difficult to deal with the fiscal situation within the political compulsions of a democracy.

Speaking at the 18th annual forum on the ''Outlook for financial markets, for their governance and for finance'' in Italy, Dr Reddy said that in any polity, fiscal consolidation was hard, "particularly in our setting of democratic compulsions." He, however, added that there were grounds for optimism."

According to the RBI governor, the two major areas that needed to be tackled to bring in fiscal consolidation were elimination of subsidies, which were not directly targeted at the poor and the other, elimination of "distortionary" tax exemptions..

According to Dr Reddy the poor state of the physical infrastructure was the most critical hindrance for India''s progress.

The other challenging issue related to agriculture on which though 60 per cent of the workforce was dependent, yet the GDP growth generated from it was only marginally above the rate of growth of the population, he said.

He was also of the view that the judicial processes needed to be aligned with the compulsions of fast-growing globalising economy, especially in terms of timeliness.