INTERVIEW - FY10 growth to be around 7 pct - adviser

Posted 10 14 2009 9:12PM

NEW DELHI (Reuters) – India's economy can expand 7 percent in 2009/10, and the Reserve Bank of India (RBI) must weigh the trade-off between growth and inflation when it reviews policy settings later this month, a top government adviser said on Tuesday.

The forecast for the fiscal year ending March is higher than 6 percent estimated by the RBI and private analysts, and the 6.3 percent predicted by government's Planning Commission.

Arvind Virmani, chief economic adviser at the Finance Ministry, told Reuters global uncertainties were receding and domestic industrial output has revived, helping boost growth.

Faster expansion of factory output would help the broader economy grow at annual rates in excess of 7 percent in both the December and March quarters, he said in the interview.

"This year, I expect 7 percent. Next year, with some basic reforms, it should go to 8 percent-plus," he said, referring to fiscal reforms such as cutting the deficit.

He added that the country could get back to a higher growth trajectory of 8.5 to 9 percent in 2011/12.

Last year, the global slowdown cut growth in Asia's third-largest economy to 6.7 percent, from 9 percent or more in the previous three years.

The RBI slashed interest rates between October and April, reduced the cash reserve ratio for banks and pumped cash into financial markets, while the government cut duties and stepped up spending to pump-prime a slowing economy.

Just as the economy started recovering, the weakest monsoon in nearly four decades and floods in some parts of the country boosted food prices and cast a shadow over growth prospects.

Virmani said the faster pace of growth in manufacturing would help offset the adverse impact of drought on the economy.

Data on Monday showed industrial output grew at its fastest annual pace in 22 months in August on strong consumer demand.

For a graphic on industrial output, click: http://r.reuters.com/met33f

For a graphic on GDP growth, click: http://graphics.thomsonreuters.com/089/IN_GDP0809.gif

POLICY DILEMMA

Faster industrial growth coupled with inflationary pressures have boosted the case for higher interest rates, although analysts do not expect the Reserve Bank of India (RBI) to raise them at its policy review on October 27.

India's RBI chief said last week that lifting rates was a question of when, not if, but government officials have stressed the importance of maintaining pro-growth measures.

Virmani said monetary policy had to balance growth and inflation. While monetary policy would not be effective in addressing food price inflation, any tightening could choke faster recovery in the economy, he said.

"The tricky problem is that to the extent that the monetary policy affects the demand side, there is a supply-side element in the form of food (price inflation)," he said.

"Ultimately, what the RBI has to decide is the trade-off between growth and inflation."

FISCAL REFORMS, BORROWINGS

Bond yields have risen recently as analysts expect the RBI to raise cash reserve requirements of banks by early next year ahead of a hike in policy rates.

A record 4.51 trillion rupees ($97 billion) government borrowing plan for 2009/10 has also kept the pressure on yields this year, but Virmani said borrowing as a percentage of gross domestic product (GDP) would come down next year.

Higher economic activity and corporate earnings would boost revenues and help the government cut its fiscal deficit to 5.5 percent of GDP in 2010/11 from 6.8 percent this year, he said.

Stake sales in state-run firms would pick up in the coming months, Virmani said, adding the government was considering changing rules to use those proceeds to help bridge the deficit.

On the recent appreciation in the rupee , he said it was mainly because of the dollar's broad weakness along with a surge in inflows as foreign funds bought Indian shares.

"Capital flows will be an important factor," he said on the outlook of the rupee.

To reduce volatility in the currency market, Virmani said: "We need to develop our derivative market. You have to gradually free them up. Restrictions have to be gradually reduced."

(Editing by Tony Munroe and John Mair)