Davos: India should be able to maintain economic growth of around 6.5-7% in the 2009-10 fiscal year but needs to ramp up infrastructure spending to boost growth, a senior policy adviser said on Wednesday.
Growth in India, Asia’s third-largest economy, has fallen from rates of about 9% in the past three years, as high borrowing costs at home and recessions in key overseas markets have hit demand for manufactured goods, cars and property.
The Reserve Bank of India (RBI), the central bank, on Tuesday cut its forecast for gross domestic product growth in the 2008-09 fiscal year ending 31 March to 7%, which would be the slowest pace in six years.
“If we’re somewhere between 6.5 to 7% this year, we could probably end up doing the same thing next year,” the Planning Commission’s deputy chairman, Montek Singh Ahluwalia, told Reuters.
Maintaining such momentum would depend in part on global financial markets starting to recover around the middle of the year, adequate fiscal stimulus and a pickup in private investment, Ahluwalia said in an interview on the sidelines of the annual meeting of the World Economic Forum.
Cutting interest rates further would not be critical to reviving growth, he said, as the central bank has already cut policy rates by 350 basis points since October and left banks with plenty of cash.
“We desperately need a lot of investment in infrastructure,” he said. “It’s the thing most likely to lead to a crowding in of private investment, rather than a crowding out.”
Ahluwalia said that the government should not be overly concerned about drastically reducing its budget deficit next year from the anticipated level of roughly 8% of GDP this year.
“You don’t have to go back to 3.5%, you can easily do that later,” he said.
“We should aim at a deficit that’s lower than in the current year, suggesting that we’re beginning to turn around, and all of the additional deficit above what would normally be the norm should be devoted to investment in infrastructure.”
Ahluwalia said he was hopeful that the higher deficits would not lead to ratings downgrades, adding that the government did not have plans to issue sovereign debt on international markets.
“The key issue is, these fiscal deficits are not the result of fiscal irresponsibility starting from equilibrium,” he said.