Deficit, inflation seen threatening India recovery

A high fiscal deficit and rising inflationary pressure could derail India's economic recovery, an advisor to the country's prime minister said on Sunday.

A string of fiscal stimulus measures to revive the economy along with lower revenues in a slowing economy have hurt India's finances, with the fiscal deficit projected to rise to 6.8% of GDP in the year through March 2010, a 16-year high, compared with 6.2% in the previous year.

"Fiscal deficit is one cause for concern. We don't have that much room on the fiscal side," Raghuram Rajan told Reuters in an interview on the sidelines of a World Economic Forum.

To fund its record deficit the government has resorted to record borrowing of 4.51 trillion rupees ($96.4 billion) during the current fiscal year, which some market-watchers have said could crowd out private borrowers.

The government has laid a roadmap to bring down the deficit to 5.5% of GDP in 2010-'11, and to 4% in 2011-'12.

"I think it's an ambitious goal but it is appropriate that we should think about bringing it there, because we need to bring down our public debt to levels which are better than where they are now," said Rajan, former chief economist at the International Monetary Fund.

He said a lower deficit would also enable India to manage unforseen situations, as the global economy remained volatile.

Last week the government announced plans to sell stakes in all profitable state-run companies to the public to help bridge its deficit. A government report in July said 250 billion rupees could be raised selling stakes in state-run firms.

Rajan, said proceeds will provide resources to the government to carry on with its investment programme in social sectors and will also strengthen India's fiscal position.

"I think we should use the disinvestment programme to strengthen our fiscal situation, which at this situation is problematic," said Rajan, who is now a finance professor at the University of Chicago and an economic advisor to Indian prime minister Manmohan Singh.

Rajan said rising inflationary pressure following a poor monsoon is a concern that could threaten the nascent recovery.

The Reserve Bank of India has said the rising prices pose a challenge as it tries to support the economic recovery through its accomodative monetary stance.

Private forecasts say inflation could reach 8% by the end of the fiscal year, well above the RBI's comfort zone, which is seen as around 5%.

The government is also looking to underpin the economic recovery by pushing ahead with financial reforms.

Asia's third-largest economy is expected to grow by 6.5% in the year through March 2010, after growing 6.7% in the previous year. That would be lower than growth of 9% or more recorded by the economy in three years to 2007-'08 (April-March).

However, several data including factory output and exports are pointing to a rebound in the economy.

"It is recovering. It looks firm enough right now," he said.