ABC Finance

India’s economic growth may surpass 8 percent in the coming financial year, Finance Ministry projections showed, allowing scope for a reduction in stimulus measures that would help the nation restrain its debt burden.

“The economy has posted a remarkable recovery from the global recession,” according to the annual Economic Survey prepared by officials advising Finance Minister Pranab Mukherjee, released in New Delhi today. “The recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15 to 18 months.”

The challenge for Mukherjee is to unwind 7.5 trillion rupees ($162 billion) of fiscal stimulus and curb consumer-price inflation that’s the highest in the Asia-Pacific region, according to data compiled by Bloomberg. The payoff may be cheaper debt-financing costs and averting investor concerns at the sustainability of faster economic growth such as in China.

“India wants to avoid a China-like overheating problem,” said Shashanka Bhide, chief economist at the National Council, a corporate-funded analysis group. “Mukherjee has a tough balancing act — to support growth and cut the budget deficit to control inflation.”

Prime Minister Manmohan Singh’s administration, which won reelection last year, will also aim to avoid hampering an economic rebound that’s yet to produce earnings gains for DLF Ltd., India’s largest real-estate developer, and has left out an agriculture industry hammered by a poor monsoon.

Higher Taxes

Mukherjee may raise the excise tax by 2 percentage points and the service tax to 12 percent from 10 percent, Goldman Sachs Group Inc. said last week. He also may accelerate sales of state-run companies including Coal India Ltd., India’s monopoly coal producer, and Steel Authority of India Ltd., the nation’s second-largest steelmaker, to boost revenue.

“You can’t maintain your policy settings at crisis levels” when growth rebounds, Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an interview in Mumbai this month. “If monetary and fiscal accommodation persists for an indefinite period, you run the risk” of consumer and asset- price inflation, he said.

Since December, there have been signs of food-price inflation spreading to manufactured goods and services, the Finance Ministry said today. India’s benchmark wholesale-price inflation accelerated to 8.6 percent in January, the fastest pace since October 2008. Sixty percent of India’s inflation reading is contributed by food items after monsoon rains were deficient last year, the ministry said.

‘Controling’ Demand

“Inflation management therefore should involve controlling the demand situation as well as reining in inflationary expectations through various monetary measures,” the Indian finance ministry said.

Mukherjee is scheduled to unveil the budget for the fiscal year starting April 1 tomorrow at 11 a.m. in parliament in New Delhi. He had cut excise tax by 4 percentage points and stepped up government spending on roads and power since December 2008 to support the economy amid a global recession. The budget deficit may widen to 6.5 percent of GDP in the year ending March 31, a 16-year high, the ministry estimated today.

India’s central bank governor Duvvuri Subbarao last month said the government must withdraw fiscal stimulus steps and cut the budget deficit to help cool inflation. The central bank, on its part, last month raised the proportion of deposits that lenders need to maintain as cash reserves to 5.75 percent from 5 percent to contain inflation.

Debt Burden

India must cut its debt to 68 percent of GDP by March 2015 from the current 82 percent, the ministry said, citing recommendations of the 13th Finance Commission, a government panel appointed to suggest a roadmap to reduce government debt guaranteed approval cash loans.

The debt level is almost quadruple China’s, according to International Monetary Fund figures. Fiscal restraint may help stoke India’s bonds and currency, Goldman Sachs analysts said this month. It may also aid a sovereign-debt rating that’s the lowest among the BRIC nations, which include Brazil, Russia and China.

“If the exit path is well articulated and well executed, the local-currency rating could be upgraded,” Moody’s Investors Service sovereign analyst Aninda Mitra said in a Feb. 19 interview. Moody’s ranks India’s rupee-denominated debt at Ba2, two levels below investment grade.

Hit to Stocks

Debt woes have become an investor focus after a Greek rating downgrade spurred a sell-off in the euro. India’s Sensitive stocks index declined about 7 percent since Jan. 1, while China’s Shanghai Composite Index fell 8.5 percent this year.

Bonds have retreated, with benchmark 10-year Indian government note yields climbing 20 basis points to 7.79 percent this month. Bond sales may rise 2 percent in the fiscal year to a record 4.6 trillion rupees, according to the median forecast in a Bloomberg survey, reflecting the need to refinance a surge in maturing debt.

Mukherjee can start to reverse tax cuts as India’s $1.2 trillion economy may “breach” a 9 percent growth pace by March 2012, the Finance Ministry said, citing the country’s savings rates that now match the range of those in Japan, South Korea and Malaysia. The economy may grow 7.2 percent in the year ending March 31, the nation’s statistics department said today.

India’s savings rate is at 32.5 percent of gross domestic product compared with 28 percent in Japan, 30 percent in South Korea and 38 percent in Malaysia, according to the report.

Boon From Savings

“Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak well for India’s medium-term growth prospects,” the ministry said. “The savings rate is likely to rise further as the demographic dividend begins to pay off in India.”

The finance ministry estimates 440 million Indians out of a total population of 1.2 billion are under the age of 18. India’s population will rise to 1.7 billion by 2050 and will overtake China as the world’s most populous nation, according to the United Nations.

“It is entirely possible for India to move into the rarified domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years,” the finance ministry said.

Rising demand helped Tata Motors Ltd., India’s largest truckmaker, post a 68 percent gain in sales in the three months ended December, while sales at Bajaj Auto Ltd, the second- largest motorcycle maker, more than doubled in January.

At the same time, expansion in gross capital fixed formation, a proxy for investment growth, is at 5.2 percent, below the economic growth rate. That makes it necessary to watch the growth recovery in private investment in the fiscal third and fourth quarters while scaling back fiscal stimulus, the ministry said.

“We have seen some growth in the last two quarters,” Ravi Sud, chief financial officer at Hero Honda Motors Ltd., India’s biggest motorcycle maker, said in an interview. “But is a two- quarter period sufficient to take a call on withdrawal of all the stimulus packages? One is not too sure.”

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Filed under: money by Specialist