Mumbai: India may grow 8.5% in 2010/11 on increased infrastructure and rural spending and higher revenue that a proposed improvement of the tax system could generate, Shubhada Rao, chief economist of Yes Bank said.
The government’s plan to divest stakes in public firms could add to the income streams, said Rao who expects the economy to grow 7.3-7.4% in the fiscal to March 2010.
“Higher spending in infrastructure projects, a systematic disinvestment program and the rolling out of GST (Goods & Services Tax) will be the key highlights of the FY11,” Rao said.
Asia’s third largest economy grew 7.9% in the quarter through September from a year earlier, shattering forecasts, as stimulus measures boosted demand and manufacturing activity surged.
Finance minister Pranab Mukherjee said earlier in the month that the government was aiming to bring in GST in the second half of this year, although debates between federal and state governments are continuing.
The tax is expected to ease the burden of industry by replacing a multitude of levies such as excise duty, service tax and value-added tax.
Wholesale price inflation is expected to be near 10% year-on-year in March, mainly due to high food prices. However, prospects of better rabi output keep the likelihood of a reversal of trend in the food prices thereafter, Rao said.
The bank also sees sustained growth in the industrial output helped by strong domestic demand and improving conditions in global markets.
It expects the central bank to announce measures to tighten cash at the policy review this month and continue to use its monetary tools to fight inflation and inflation expectations.
“I expect the RBI to hike the cash reserve ratio (CRR) by 50 basis points at this policy and see hike in repo and reverse repo rates by up to 125-150 basis points by end-March 2011,” Rao said.
The CRR — the share of deposits banks must keep with the central bank — is now at 5% and the key lending (repo) and borrowing (reverse repo) rates are at 4.75% and 3.25% respectively.
The bank added that its growth expectations are based on an assumption that the monsoon next year would be normal.