India's market will be able to absorb record government borrowing announced in the budget, Planning Commission Deputy Chairman Montek Singh Ahluwalia, one of the country's most powerful economic advisers, said on Saturday, despite an initial negative reaction from bondholders.
Montek said reforms, such as opening up the insurance sector, would pick up after a slow period in which the government has focused more on managing the impact of the global economic crisis.
"I think overall the debt we have in mind can certainly be absorbed by the market," Montek told Reuters in an interview.
"The fact that the absolute levels of borrowing is a little high shouldn't be allowed to distract the attention from the fact that as a per cent of GDP it is actually reducing."
Finance Minister Pranab Mukherjee unveiled a $239 billion budget for the new fiscal year on Friday, partially rolling back a stimulus and counting on surging growth to help cut a fiscal deficit.
Mukherjee told parliament the government plans to increase market borrowing already at a record level by 1.3 per cent in FY 2011, pushing bond prices lower as investors anticipated a flood of fresh debt supply.
Analysts said the borrowing plan cements the likelihood that the central bank will raise interest rates at its next meeting on April 20.
But Montek, Prime Minister Manmohan Singh's closest adviser on economic policy, said a planned cut in the fiscal deficit was more important than borrowing. The deficit is estimated to fall to 5.5 per cent of GDP in the new year from 6.9 per cent this year.
"I think the budget did give across a very clear message," Montek said.
"Bouncing off the need to stimulate and keep the growth momentum up, making a start on a lot of quite important reforms in the system, and very unambiguously committing the finance minster to a medium-term return to fiscal prudence."
Some analysts said India had missed a chance to take more aggressive fiscal measures as Asia's third-largest economy gathers speed, reinforcing perceptions that the coalition government may not have the heart to make tough decisions.
But Montek said the government would now be more focused on policy reform after it navigated the global crisis and the sales of stakes in state firms.
"The reform agenda that we follow is gradual and I don't see any political obstacle preventing that kind of forward movement," he said. "We are now in a state where we can legitimately say next year we will be able to make progress on many of these things."
EXPORT GROWTH TO SLOW
Despite the recovering economy, Montek said he expected export growth to fall amid the global slowdown.
"Frankly in terms of capital flows India could sustain for several years a current account deficit up to 3 per cent GDP.
Montek echoed Mukherjee's concerns on inflation on Saturday and said that headline inflation will stay high. But he said that food inflation, at an 11-year-high, would start to ease.
"I think the finance ministry has done its bit to reduce the fiscal deficit so I think we are well situated to bring the inflation rate down over say the next three or four months."
Montek said that food inflation would not be a major problem over the next three to four years.
"Actual demand of food grains is not going to increase by more than 2 per cent per year. I don't anticipate this as a major disruptive force for India in the next three or for years."