Govt sees growth at 7.75%; RBI urges reform

RELATED NEWS FY11 borrowing to be within this year's: Govt India FY10 GDP growth at around 7.75%: Pranab Mukherjee

The economy will grow faster in 2009/10 than the government has forecast, the finance minister said on Wednesday, adding to expectations that a strong recovery would lead to tighter fiscal and monetary policy.

A top economic adviser said plans for an exit from stimulus policies may be in the national budget on Feb. 26, and the deputy governor of the Reserve Bank of India (RBI) said reforms were needed to sustain growth in a weaker global environment.

Economists said the finance ministry and the RBI were betting on better-than-expected growth in the second half of the current fiscal year, which ends in March, and markets have firmed up their expectations for a rise in official interest rates.

Finance Minister Pranab Mukherjee said the economy would grow 7.75% in 2009/10, slightly above the central bank's view and higher than a forecast of 7.2% issued by the government's statistical office on Monday.

"Overall the growth number seems ambitious as the investment cycle won't pick up and agriculture will be hit in the second half," said Sujan Hajra, chief economist at Anand Rathi Financial Services.

"However, on the inflation side, concerns have not yet been solved," he added.

Asia's third-largest economy has been picking up momentum since mid-2009, and data on Friday is expected to show industrial output grew an annual 12% in December.

At a policy review last month, the central bank increased banks' reserve requirements but held key interest rates steady.

Analysts expect a rate rise at or before the next review in April, and the 10-year bond yield equalled its 2010 high on Wednesday as traders positioned for tighter policy.

Budget focus

Attention is increasingly focused on the budget, with investors looking for signals as to how the government plans to cut a budget deficit forecast to hit a 16-year high of 6.8% of gross domestic product in 2009/10.

The government has been reluctant to commit to withdrawing stimulus steps such as spending and duty cuts which it took since late 2008 to shore up the economy against the global crisis, in case it derailed confidence in the recovery, but there are some signs it thinks the recovery is firmly based.

Since December 2008, India has announced stimulus packages equalling about 12% of GDP to boost infrastructure and support economic recovery.

"The budget can attempt a roadmap for exit," C Rangarajan, chairman of the prime minister's Economic Advisory Council, told reporters on Wednesday.

Strong growth could ease pressure on the government's finances by easing welfare spending and increasing tax receipts.

A finance ministry source on Wednesday said gross market borrowing in 2010/11 was likely to be within the current year's record Rs 4.51 trillion ($97 billion).

Infrastructure needs

The government has said it wants to get the USD 1.2 trillion economy back to growth rates of around 9% seen before the crisis, but inadequate infrastructure has long been an obstacle to sustained high growth.

Further, a lack of financial sector reforms means local markets cannot produce the funding needed to upgrade poor roads, ports, railways and airports.

RBI Deputy Governor Subir Gokarn said domestic reforms were needed to offset the changed global environment, and infrastructure investment needed to be accelerated.

"We will need to see a huge amount of frontloading of investment in infrastructure, a lot of which will come from outside because of the fiscal constraints," Gokarn said.

That could impose significant pressures on managing capital inflows, he said.