Thursday July 2, 03:50 PM

Reforms needed to return India to high growth - govt

By Surojit Gupta and Tony Munroe

NEW DELHI (Reuters) - India could see growth of around 7 percent this year and more in coming years if it makes sweeping reforms including removal of fuel subsidies, and speeds infrastructure development, a government report said on Thursday.

The economic survey, presented to parliament by the finance ministry, also said inflation was no longer a worry and called for an urgent return to the targeted fiscal deficit of 3 percent.

Its release comes days before the new government unveils its budget on Monday for the fiscal year ending March 2010. The government is widely expected to expand both the budget deficit and its borrowing to support economic growth.

Analysts said any actual reforms would likely be gradual and Thursday's report should be treated as a signal of intent. Subsidies on gasoline, diesel and fertiliser, for example, have long been a drag on India's finances but are vote winners.

"Saying it in the Economic Survey is one thing but the political reality is different," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy.

India's fiscal deficit ballooned to 6.2 percent in 2008-09 as the government unleashed stimulus spending to insulate against the global downturn, but Thursday's survey included tough talk.

"It is heartening to see that the survey has seriously raised concerns on fiscal consolidation and gives confidence that the budget will see a good trigger for disinvestment and rationalization of fuel and fertilisers," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The partially convertible rupee was little changed at 47.85/86 after the survey, while bond yields fell as investors hoped government borrowing will not be as heavy as earlier expected. The BSE (^BSESN : 16158.28 +94.38) share index fell 1 percent before returning to positive territory.

GROWTH PATH

The finance ministry's snapshot of the economy was largely upbeat and said the outlook for a return to stronger growth was achievable if the government embraces reforms.

"India should be back on the new trend growth path of 8.5 to 9 percent per annum provided the critical policy and institutional bottlenecks are removed," the report said.

"It is therefore imperative that the government revisit the agenda for pending economic reforms in the first instance."

The Indian economy, Asia's third-largest, grew by 9 percent or more annually in the three years ended March 2008.

The ministry's forecast for growth of roughly 7 percent this year reflects its assumption that the U.S. economy will bottom out by the third quarter. It is towards the high end of forecasts, which range from 5.8 percent to 7.2 percent.

Also on Thursday, the government said the wholesale price index fell 1.3 percent in the year to June 20, compared with the previous week's annual decline of 1.14 percent, slightly smaller than analysts had forecast in a Reuters poll.

The annual inflation rate was 11.91 percent during the corresponding week of 2008.

REFORMS

Prospects for liberalisation of the economy are brighter after the Congress party won a decisive election result in May. Earlier reform calls from the finance ministry were blocked due to political opposition amid the previous government's power-sharing agreement with the left.

The finance ministry's report called on the government to sell stakes of state-run companies to generate 250 billion rupees ($5.23 billion) annually, reform of fertiliser and food subsidies and an auction of third-generation mobile phone spectrum.

It also called for "greater urgency" to removing hurdles to investment in infrastructure.

"The overall direction is that of gradually getting back to the path of fiscal prudence, moving away from subsidies and leakages and adopting greater market-pricing on a selective basis," said Edelweiss Capital economist Siddhartha Sanyal.

While the Reserve Bank has slashed interest rates by 425 basis points since October to revive demand, real rates remain high and continue to act as a brake on loan growth.

"The expectation that there could be further cuts in policy rates and in lending rates may have resulted in investment decisions being deferred," the report said.

It also called for implementation of a goods and services tax by April 2010 to maximise revenues and simplify the tax regime.

The report said government should take advantage of the recent low price in oil costs to free petrol and diesel prices.

Late on Wednesday, India unexpectedly raised gasoline and diesel prices by as much as 10 percent, passing onto consumers some of the recent rise in global oil prices.

The finance ministry urged other steps to improve the investment climate including an increase in foreign ownership caps in insurance to 49 percent from 26 percent, and allowing foreign investment in multi-brand retail. It also urged the removal of price controls on sugar and fertilisers.

(US$1=47.78 rupees)

(For full coverage on Budget 2009 click http://in.reuters.com/news/globalcoverage/budget2009)

(For Highlights click http://in.reuters.com/article/businessNews/idINIndia-40753920090702)