India should start rolling back its economic stimulus and cap government debt, the finance ministry said on Thursday, forecasting economic growth in years ahead strong enough to make its fiscal targets look achievable.
A day ahead of the annual budget, India proposed to more than halve its fiscal deficit to 3 per cent of GDP by the year ending in March 2014 and said economic growth should reach 8.5 per cent in the year starting in April and accelerate thereafter.
"There seems to be a view that they can grow their way out of fiscal purgatory, rather than making large cuts to the absolute level of the deficit," said Brian Jackson, senior emerging markets analyst with the Royal Bank of Canada in Hong Kong.
A government panel pegged the fiscal deficit for the next financial year at 5.7 per cent of GDP, slightly higher than the 5.6 per cent forecast by economists in a recent Reuters poll.
Bond yields jumped late in the day after Planning Commission Deputy Chairman Montek Singh Ahluwalia said strong growth in 2010/11 could absorb higher borrowing, raising concerns that the government may look to tap bond markets for more than had been expected.
The yield on the benchmark 10-year bond ended at 7.83 per cent, up from Wednesday's close of 7.80 per cent. Stocks ended flat.
A show of fiscal discipline in Finance Minister Pranab Mukherjee's budget would be heartening to investors and the Reserve Bank of India, which manages the government's borrowing and has called on New Delhi to rein in its deficit.
"The government has recognised arguments that support fiscal consolidation. Obviously they have got political considerations. Tomorrow we're going to see how they balance the two," Jackson added.
The finance ministry's report called for efforts to remove hurdles to infrastructure funding. Inadequate electricity, roads and water management have long hindered India's economic growth.
The ministry's economic survey for the 2009/10 financial year urged a calibrated exit from fiscal stimulus, which cushioned India's economy from the worst of the global downturn but pushed the fiscal deficit to a 16-year high of 6.8 per cent of GDP.
However, Mukherjee is expected to take only gradual measures to roll back stimulus, counting instead on sales of government assets and a strong economy to bolster revenue and avoid making cuts in popular social programmes.
Strong growth along with supply-side inflationary pressures are pushing up inflation, and high food prices could spill over into general inflation, the report said.
India's food price index rose 17.58 per cent in the 12 months to Feb. 13, a touch slower than previous week's 17.97 per cent rise, data released on Thursday showed. The fuel price index was up 9.89 per cent.
The report forecast economic growth at 8.25-8.75 per cent in 2010/11, accelerating to over 9 per cent the year after, compared with projected growth of 7.2-7.5 per cent in the current year that ends on March 31. Double-digit growth is possible within the next four years, the report said.
A Reuters poll of economists in January forecast that Asia's third-largest economy would grow 8 per cent in the fiscal year ending in March 2011.
"It's good to see recommendations on consolidating government finances. Medium-term targets for both growth and debt levels can be attained provided strong policy push and fiscal prudence is maintained," said Vivek Kumar, economist at ICICI Bank in Mumbai.
The report also said a top government panel had recommended capping total federal and state debt at 68 per cent of GDP by 2014/15. Now, combined central and state debt runs at 80 per cent of GDP.
The government is financing its fiscal gap for the current fiscal year with a record 4.51 trillion rupees ($97 billion) of market borrowing and analysts fear high government borrowing in the next fiscal year runs the risk of crowding out private credit demand and hurting the economic recovery.