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The Indian economy could grow at a faster pace in 2009/10 compared with the previous year although inflation and high fiscal deficit are major challenges for the government, the finance minister said on Wednesday. Surging food prices and faster industrial growth have pushed up headline inflation, putting pressure on authorities to take steps such as importing food items and raising the cash reserve ratio for banks and interest rates to check inflation.
The outlook for economic growth during the December and March quarters looked better than previous quarters, Finance Minister Pranab Mukherjee said, adding the economy could expand around 7.75 percent for the full fiscal year that ends in March 2010. "It would be more appropriate to say that it (growth) would be around 7.5 to 8 percent," Mukherjee told an industry conference.
A 16-year high fiscal deficit of 6.8 percent of gross domestic product projected for 2009/10 (April-March) increased borrowing needs to a record 4.51 trillion rupees and kept bond yields firm this year. "Some of the important issues and challenges in the short-to-medium term include price rises, (and) return to the path of fiscal consolidation," the minister added.
The worst monsoon since 1972 and flooding in some parts of the country have pushed up food inflation to near 20 percent by early December, while the headline inflation accelerated to 4.78 percent in November. On Tuesday, the government cut the open sale price of wheat, while ministers have pledged in parliament that the government would import food items that are in short supply to boost local supplies and stem inflation.
Mukherjee said farm output must grow 4 percent for the economy to expand 9-10 percent annually in the coming years. For the government, "sustained economic growth remains a high priority," he said. A series of stimulus measures such as cut in policy lending rate by 425 basis points by the central bank between October 2008 and April 2009, and duty cuts and additional expenditures by the government helped the economy turn the corner from March quarter.
Asked if faster economic expansion could bring forward the time for withdrawing fiscal stimulus, the minister said: "You have to wait till the budget." The economy grew 7.9 percent in the September quarter, accelerating from 6.1 percent in the June quarter and 5.8 percent each in the December and March quarters, as India weathered the impact of global financial crisis faster than many other nations. The economy expanded 6.7 percent in 2008/09, slower than 9 percent or more in the previous three years.

Copyright Reuters, 2009

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