India’s economic growth is poised to return to boom levels but the government should move slowly in rolling back stimulus and cutting its hefty deficit, an influential official panel said yesterday.
The economy is seen growing 8.2 percent next year and at least 9 percent the year after — the rate at which it was expanding before the global financial crisis — the prime minister’s Economic Advisory Council forecast.
The estimate came in a report released a week ahead of the national budget in which the government is expected to lay out a roadmap for winding down the stimulus aimed at shielding India from the global slump that began in 2008.
Without reducing the fiscal deficit from a 16-year high of 6.8 percent, New Delhi cannot continue with “the kind of large revenue and fiscal deficits recorded in the last two years,” the council said.
But “we need to strike a balance between the need for growth and [fiscal] consolidation” and maintain “adequate stimulus,” said council head C. Rangarajan, a former Reserve Bank of India governor.
His statement echoed calls by Indian business leaders for the government to go slow in rolling back stimulus measures, arguing that economic recovery needs to be entrenched.
The government also says it needs annual growth of 9 percent to 10 percent to make a meaningful impact on India’s widespread poverty with a fast-expanding economy required to generate jobs.
The council said most of the forecast growth would be domestically driven — from billions of dollars in spending on India’s dilapidated infrastructure and personal consumption reflecting rising incomes.
It said it expected global conditions “to be somewhat better” in coming years, helping lift India’s exports after they were sideswiped by the downturn, but it cautioned the pace of recovery in advanced economies would be “subdued.”
The council stuck by an estimate that the economy would grow 7.2 percent in the current fiscal year to next month, up from 6.7 percent last year, but said the actual number figure be higher due to strong industrial output.
Rangarajan said he expected the government could reduce the fiscal deficit to 5.5 percent to 5.8 percent of GDP in the next fiscal year.
“We want fiscal consolidation,” he said. “But we really need to ensure that the impact on growth is minimized.”
Rangarajan said food-driven inflation was a serious concern but he expected prices to moderate in coming weeks as produce from India’s winter harvest hits the market.
Last month, annual inflation jumped to 8.56 percent, its highest in 14 months, driven by food inflation of 17.97 percent as a result of last year’s weak monsoon which hit crops.
The central bank says hiking benchmark borrowing rates is an ineffective tool to tackle food price inflation but adds it is on guard for any signs of economic overheating.
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