India Says Economy Will Grow by 8.75% This Year, but Obstacles Remain

The Indian economy will grow by as much as 8.75% in the coming fiscal year, the country's finance ministry predicted on Thursday. But concerns about inflation and a growing deficit have some analysts worried.

The annual Economic Survey released in parliament yesterday (Thursday), one of New Delhi's most important policy documents, said Asia's third largest economy will return to a high rate of growth as it stages a "remarkable recovery" from the global recession. Economic growth this year is estimated at about 7.5%.

The comprehensive annual assessment of India's economic performance was released a day before the government is scheduled to reveal its national budget, which is widely expected to outline policy changes to wind down fiscal stimulus measures and reduce the country's worst deficit in 20 years.

India has shaken off the "despondency and gloom" that had haunted the economy a year ago as the global financial crisis stifled growth in large emerging markets, said Finance Minister Pranab Mukherjee. Growth fell to 5.8% in the last quarter of the 2008-09 fiscal year, after peaking at close to 9%.

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

The economic report painted an even rosier outlook for the future, projecting that economic growth could be as high as 10% in four years, making India the fastest growing economy in the world.

But the survey also highlights the specter of high inflation. Prices for staples like sugar, lentils and rice have been soaring recently, after weak monsoon rains last year fostered a drought, hampering farm output. The report warns that food inflation, which is presently hovering around 18%, could persist for a year and spawn inflation in other sectors of the economy.

Sushma Swaraj, the leader of the opposition in the lower house of parliament, said yesterday that high economic growth means little to millions of poor people in the country for whom basic food items are becoming unaffordable, Voice of America News reported.

The Economic Survey also recommended that the government take steps to rein in public spending, referring to a report by a government panel's recommendation to cap total federal and state debt at 68% of gross domestic product (GDP) by 2014-15. Combined federal and state debt now hovers around 80%.

The country appears headed for the economic equivalent of a one-two punch -- a simultaneous monetary crisis and fiscal crisis, according to Money Morning Contributing Editor Martin Hutchinson.

"Inflation will get uncomfortably high while the government struggles to fund its budget deficit and "crowds out" small- and medium-sized business borrowing while doing so," Hutchinson wrote in a recent article.

While reining in spending could solve both problems, Hutchinson sees that as unlikely because the governing Congress Party has a history of heavy public spending. Either way, he says, there is likely to be a period of considerable retrenchment among India's business and consumers.

Additionally, India's emergence from the financial crisis has pushed Sensex stock prices sharply higher.

"At some point India is likely to run into crisis," said Hutchinson. "That's when you should buy the market, because the long-term-growth prognosis is unquestionably positive."

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