India Says Economy May Grow as Much as 9.25% Next Year Amid Inflation Risk

India’s finance ministry said economic growth may accelerate to as much as 9.25 percent in the next financial year, the fastest pace since 2008, and signaled a cut in the budget deficit to help slow inflation.

“With continued growth momentum, the prospects for sustaining and deepening the fiscal consolidation process remain bright,” the annual Economic Survey prepared by advisers to Finance Minister Pranab Mukherjee said yesterday. “Inflation is clearly the dominant concern.” Mukherjee is due to unveil the budget on Feb. 28 for the year starting April 1.

India needs to narrow the fiscal deficit alongside interest- rate increases to curb inflation that has been “uncomfortably high” this year, the ministry said. The gap in the nation’s finances will be the highest in 2011 among the so-called BRIC economies that include Brazil, Russia, India and China, according to the International Monetary Fund.

“The budget will focus on reducing the fiscal deficit and taming inflation,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “The government may unwind the fiscal stimulus announced during the global financial crisis.”

Shankar expects Mukherjee to raise excise and service taxes, both currently at 10 percent, by one percentage point.
Stocks Gain

The Bombay Stock Exchange’s Sensitive Index rose 0.4 percent in Mumbai yesterday. The rupee gained 0.3 percent to 45.32 against the dollar. The yield on the 8.13 percent bond due in September 2022 was little changed at 8.13 percent.

India is the world’s fastest-growing major economy after China, according to Bloomberg data. China’s economic growth may be 9 percent this year, the People’s Daily reported on Feb. 25, citing the State Council’s Development Research Center.

“The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflation,” the Indian finance ministry’s report said.

India’s benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, which is the most in the past decade, the report said. Inflation slowed to 8.23 percent in January, and “this trend may continue in the next two months,” it said. The economy may expand 8.6 percent in the year ending March 31, the government said Feb. 7.

‘Unacceptable’ Inflation

“The present level of inflation is unacceptable,” Kaushik Basu, the chief economic adviser in the finance ministry told reporters in New Delhi yesterday. “We want to bring it down much further.”

Prime Minister Manmohan Singh’s government is under pressure to contain price gains as inflation erodes the spending power of the more than three-quarters of Indians the World Bank estimates live on less than $2 a day.

Thousands of workers from across India rallied by trade unions marched toward the country’s parliament in central New Delhi on Feb. 23 protesting rising food prices, low wages and job insecurity.

The Reserve Bank of India, which has raised its benchmark repurchase rate seven times in the past year, estimated last month that inflation will slow to 7 percent by March 31. The repurchase rate is 6.5 percent. The central bank on Jan. 25 signaled it will raise borrowing costs further.
Anti-Inflation Stance

“Current growth and inflation trends warrant persistence with an anti-inflationary monetary stance,” the finance ministry said.

The state-controlled Indian Railways left passenger and freight charges unchanged in its budget yesterday, a move Prime Minister Singh said will help tackle inflation.

India’s federal budget deficit may narrow to 4.8 percent of gross domestic product in the year ending March 31, less than the earlier target of 5.5 percent of GDP, the finance ministry report showed. The IMF estimates a deficit of 8.5 percent of GDP by including the shortfall in state government budgets.

Mukherjee has room to maneuver in the budget because less bonds are due for repayment and the government earned double the targeted amount from the sale of phone licenses to companies including Vodafone Group Plc in the previous year.

Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowing in the year starting April 1. The finance ministry may have 4.3 trillion rupees ($95 billion) in gross borrowing, about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.
Policy Aim

“The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term,” according to the report.

The ministry said that the inflation outlook depends on food prices and “demand-side pressures” in the economy.

“The domestic food price situation could be exacerbated by the increase in global food prices because of dependency on import of some food items like edible oil,” the report said.

Growth may accelerate as India’s savings and investment rates “have turned around,” the report said.

The savings rate rose to 33.7 percent in the year ended March 31, 2010, from 32.3 percent in the previous year, while the investment rate climbed to 36.5 percent, the report showed.

“Since savings and investments now show a positive momentum and the government is implementing a gradual exit from the stimulus package, the savings and investment rates are likely to rise further,” according to the report. “Hence, it is expected that the economy’s growth will breach the 9 percent mark in 2011- 12.”