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India says growth for the fiscal year ending March will be 7.2 pct, up from 6.7 pct

By: Erika Kinetz, THE ASSOCIATED PRESS

8/02/2010 3:42 PM | Comments: 0

MUMBAI, India - India's government said economic growth will likely hit 7.2 per cent for the fiscal year ending March, adding to the case for withdrawal of stimulus measures that helped lift Asia's third-largest economy out of the global slump.

"It's a fairly strong number," said Jyotinder Kaur, an economist at HDFC Bank. "The finance minister will have to take a harsher stand" on unwinding stimulus.

The Ministry of Statistics said Monday that strong growth in industry and services helped compensate for shrinking agricultural output, which was hit by widespread drought.

Agricultural output is likely to decline by 0.2 per cent for the fiscal year, against 1.6 per cent growth last year, the Ministry said.

Industrial growth, which has swung back faster than expected, is likely to be 8.2 per cent for the year, and growth in services, like finance, real estate and hotels, should reach 8.7 per cent, the Ministry said.

Per capita income is expected to rise 5.4 per cent in real terms, to 33,540 rupees ($716.66).

The strong growth in India's economy is good news for Canadian exporters of grain, fertilizers, chemicals and other resources needed to support growth in the rapidly growing Asian economy.

In India, the prime minister and and the Reserve Bank of India had forecast 7.5 per cent growth for the fiscal year, while the International Monetary Fund predicted 6.75 per cent growth.

The growth forecast initially disappointed investors, who sent the benchmark Sensex index down 1.8 per cent, to 15,652 points, but by late-afternoon the index recovered and was up 0.1 per cent.

The buoyancy in India's economy gives policymakers space to start unwinding pricey stimulus measures that fuelled a quick rebound but now threaten to stoke inflation.

India's growth surged to a surprise 7.9 per cent for the July-September quarter, thanks in large part to government spending, after slumping to 6.7 per cent last fiscal year - its worst showing since 2003.

Now, inflation is a growing concern for "aam aadmi" - "the common man" - and policymakers alike. Food price rises drove a 7.3 per cent jump in the headline wholesale price index in December, and inflation has begun to spread to non-food sectors as well.

Worried about price pressures, the central bank hiked the reserve requirement for banks from 5.0 per cent to 5.75 per cent in January - its first meaningful step toward unwinding monetary stimulus measures, which have infused India's economy with more than $125 billion in actual or potential liquidity since September 2008.

The bank also urged the government to unwind fiscal stimulus measures in tandem.

As the Great Recession roiled India's economy, the government announced tax cuts and increased spending worth at least 3.7 per cent of gross domestic product.

Spending on employment guarantees for poor farmers and food, fuel, and fertilizer subsidies - all of which help prop up consumer spending, acting as de-facto stimulus measures - amounted to at least another 1.8 per cent of GDP, according to the central bank.

India's yawning fiscal deficit, which is projected to swell to 10.2 per cent of GDP this fiscal year, up from 8.9 per cent last year, is also a growing source of concern.

The government has tried to insulate consumers from high global oil prices through expensive fuel subsidies. Last week, a special government panel recommended deregulating auto fuel prices and increasing the government-set prices of kerosene and liquefied petroleum gas.

The politically contentious move would ease some of India's fiscal strain and come as a boon to India's big state-run oil companies, which aren't fully compensated for their losses.

The government has yet to embark on a long-delayed auction of third-generation wireless spectrum, which the Reserve Bank says could yield 350 billion rupees ($7.5 billion).

But it has been raising funds through the slow sell-off of stakes in state-run companies, which account for 26 per cent of the market cap of the Bombay Stock Exchange. So far this fiscal year, the government has raised 42.6 billion rupees ($912.2 million) from disinvestment, according to the BSE.

The finance minister is scheduled to present the budget the last week of February.

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