India forecasts nearly 9 percent growth

(FT) CNN -- The Indian economy will sweep aside the ill-effects of the global downturn to grow up to 8.75 percent in the coming fiscal year, the country's finance ministry predicted on Thursday. The annual Economic Survey, one of New Delhi's most important policy documents, forecast that Asia's third largest economy would return in the fiscal year beginning in April to the high-growth trajectory that it enjoyed before the crisis.

But the report, led by Kaushik Basu, the government's chief economic adviser, warned that double-digit food inflation was a "major concern" and urged serious policy initiatives to address faltering agricultural growth. Farm production fell 0.2 per cent this year in a country where more than 60 percent of the 1.2bn population earn their living from the rural economy.

The analysis of India's economic performance came out a day before a crucial national budget expected to signal the withdrawal of fiscal stimulus measures as part of an effort to narrow the widest fiscal deficit for 20 years.

Pranab Mukherjee, the finance minister, said India had shaken off the "despondency and gloom" that had pervaded the economy a year ago as the global financial crisis was felt in large emerging markets. In the last quarter of the 2008/09 fiscal year, growth slumped to 5.8 percent from earlier highs of near 9 percent. Growth this year is estimated at about 7.5 percent.

"We began the fiscal year with a sense of uncertainty; we end it with confidence," he said as the Economic Survey was presented in parliament.

The confidence in the domestic economy is in part based on a savings rate of 32.5 percent and an investment rate of 34.9 percent that has propelled India among the fastest growing nations.

The finance ministry has also taken satisfaction in India becoming the 10th largest gold holder with 557.7 tonnes of bullion.

Some economists have warned that India's resilience to the global economic downturn should not lull policymakers into a sense that they need do nothing. They are urging the government to take steps to close a fiscal deficit running at 6.8 percent of gross domestic product and implement reform in the financial, health and education sectors and press ahead with infrastructure development.

"Complacency is our biggest foe," said Suman Bery, director-general of the National Council for Applied Economic Research. "The time to fix the roof is when the sun is shining."

The Economic Survey recommended that the government reform public spending, including shifting hefty state subsidies to a coupon system targeting the poor. It said a government panel had recommended capping total federal and state debt at 68 percent of GDP by 2014/15. The combined central and state debt is currently 80 percent of GDP.

Brian Jackson, senior emerging markets analyst at the Royal Bank of Canada, said that in spite of targets to cut deficits and debts, India was gambling on growing itself out of "fiscal purgatory".

"Today's Economic Survey mentions the possibility of India achieving double-digit growth rates in the years ahead but this is easier said than done, and if growth falls short then it will be much harder to get the fiscal numbers back in shape," he said.

Mr Jackson also said he doubted that the budget would show a firm commitment to accelerating fiscal consolidation by withdrawing stimulus measures.

CNN