India targets lower deficit, higher farm output to tame prices

NEW DELHI: Stubbornly high inflation could be tamed through reducing its fiscal deficit and boosting farm output, deputy chairman of the Planning Commission Montek Singh Ahluwalia said, as mounting price pressures threaten to slow the economy.

Headline inflation surged to nearly 9 percent in March, far above forecasts, on higher fuel and manufacturing prices, prompting calls for aggressive rate hikes by the Reserve Bank of India.

"We identified that the revival of inflationary pressures is one of the weak points in the global economic situation and in our own situation," said Ahluwalia after the commission's meeting.

"The solution to that lies in having a proper fiscal balance. I have already said that we totally endorse bringing the fiscal deficit under control plus very good performance in agriculture," he said.

Ahluwalia, an influential adviser to Prime Minister Manmohan Singh , said he expects average annual inflation in the five years to end-March 2017 to be 5 percent.

The government aims to cut its fiscal deficit to 4.6 percent of GDP in the current fiscal year through March 2012 from 5.1 percent a year ago. Farm output is expected to grow at least 4 percent in 2011/12 from an estimated 5.6 percent growth in the previous fiscal year.

Prime Minister Singh on Thursday held a meeting of the Commission to set out India's economic policy path for the five years to end-March 2017.

Analysts have been trimming their near-term growth forecasts for Asia's third-largest economy, citing high inflation and prospects of higher interest rates.

New Delhi expects the economy to grow at around 9 percent in the financial year that began on April 1. But private economists expect the economy to grow at a slower pace than an expected 8.6 percent expansion in the fiscal year that ended in March.

Goldman Sachs on Thursday cut its India growth forecast to 7.8 percent from 8.7 percent for this fiscal year. The Wall Street bank raised its inflation forecast for the fiscal year that began this month to 7.5 percent from 6.7 percent.

"We now expect the Reserve Bank of India (RBI) to hike policy rates by another 125 bp (basis point) in 2011, significantly higher than market expectations," it added.

The RBI has raised its main lending rate eight times since March 2010 and is expected to deliver another hike of at least 25 bps in its May policy review

Fast-growing India is prone to inflation after years of underinvestment in everything from power and roads to agriculture and education, which creates capacity constraints that will take years to rectify and leave the economy vulnerable to shocks like a bad harvest or a spike in coal prices.

Singh asked the Commission to target 9-9.5 percent annual economic growth in the five years to March 2017, higher than an estimated 8.2 percent average annual growth between April 2007 and March 2012.