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ShareNew Delhi: Finance minister Pranab Mukherjee said a wider budget deficit "right now" is critical to accelerate growth, justifying the record Rs 4.51 lakh crore the government plans to borrow this year.
"It's a tremendous risk we have taken with the hope that the economy will turn around," Mukherjee told Parliament on Tuesday, while urging them to pass the Budget he unveiled last week for the year ending March 31.
"The huge borrowing required to fund the mounting fiscal deficit might crowd out private investment at a time when economic recovery sets in," said Kaushal Sampat, COO at the Indian unit of Dun & Bradstreet Corp. "Monetary policy may have to be appropriately adjusted to take care of issues pertaining to fund availability."
Mukherjee forecast higher spending on infrastructure and the rural poor will see the budget deficit widen to 6.8% of gross domestic product in the year ending March 31, from 6% in the previous year.
The finance minister said the increase in the deficit won't "elbow out" borrowing needs of private companies, adding that the government "working in tandem" with the central bank will ensure enough money is available with the nation's banks.
Prime Minister Manmohan Singh's government, which won re- election in May for a second term, is focused on reviving consumer and investment demand as the nation's $1.2 trillion economy, pummeled by the global recession, is forecast to grow 6.7% this year, the weakest since 2003.
"Higher growth is essential because it means higher tax incomes -- and this is no longer a theoretical proposition," Mukherjee said.
India's record growth of close to 9% in the five years ended March 31 helped tax revenue more than double since 2004, he said.
The minister said the government's fiscal stimulus since December is showing positive results, though the economy is still "not out of the woods."
In June, steel and cement production grew by 13% each from a year earlier, while mobile connections in May rose by 12 million, or a 49% increase from the year before, the minister said.
"These are small beginnings that show that our strategy to generate internal demand is responding," Mukherjee said. "In the medium term, we should have clear objectives and come back to the path of fiscal discipline."
Mukherjee vowed to trim the budget deficit to 5.5% of GDP by March 2011 and to 4% in the following 12 months.
He said he plans to tap revenue from the sale of stakes in state-run companies and generate more revenue from the introduction of a goods and service tax from April 1 that will subsume all indirect taxes and will levy only value-added production so that manufacturers don't pay taxes twice.
State-owned companies NHPC and Oil India will sell shares to the public this year, Mukherjee had told lawmakers earlier in the day. Bloomberg
