New Delhi: Finance minister, Pranab Mukherjee, warned Tuesday the country should not be complacent about its growth prospects in the face of a fragile global recovery and domestic challenges such as high inflation.
Pranab Mukherjee’s comments came a day after he presented a populist budget in which he forecast Asia’s third-largest economy could grow by 9% in the financial year starting 1 April.
Mukherjee told a business audience India’s economy had proved “remarkably resilient to external shocks” but warned against complacency. Domestic inflation was “unacceptably high”, he conceded.
General inflation is running at over 8%, the highest of any major Asian economy, while food inflation stands at nearly 11.5%.
Price rises have given the Congress-led government one of its biggest problems, causing hardship to the hundreds of millions of poor who powered the coalition to a second term in office in 2009.
New data on Tuesday showed inflation pressures mounting with HSBC’s purchasing managers’ index (PMI) pointing to manufacturing expansion and rising input costs.
An increase in global energy and other commodity prices threatened to feed into inflation in India, which imports 80% of its crude oil, Mukherjee added.
The challenge before the government and the central bank, which has already raised interest rates seven times in the past year in a vain bid to stifle inflation, was to contain price rises without choking growth, he said.
Mukherjee added he feared Europe’s debt crisis could spread to other countries in the continent amid mounting pressure on Portugal to seek an international bailout like Greece and Ireland.
“I am not confident from the recent G20 (Group of 20) finance meeting that the European sovereign debt crisis will be contained,” he said.
He pledged India would narrow its budget deficit to 4.6% in the coming year from 5.1% this year, via stronger tax revenues from high growth and privatisation earnings.
His subsidy-heavy pro-poor budget aimed at appeasing inflation-hit voters won plaudits from economists for seeking to cap the deficit but some questioned whether he would be able to succeed.
“It will be difficult for the deficit targets to be met as expenditures have been under-budgeted and revenues have been over-budgeted,” said Tushar Poddar, economist at Goldman Sachs.
Global credit ratings agency Standard and Poor’s also said “the government may struggle to meet its deficit target,” especially as it will not have any windfall gains as in the previous year from the sale of third-generation (3G) mobile telecom bandwidth.
Despite the scepticism about the government’s deficit pledges, India’s benchmark 30-share Sensex index jumped 3.5%, marking its biggest single-day rally in nearly two years, soaring 623.1 points to 18,446.5.
Shares were spurred by investor relief that “there was no damaging news” in the budget, said Gaurav Dua, research head at brokerage Sharekhan.