India's economy should grow by 6.5 per cent this financial year after surviving the "full fury" of the global slump, a top government advisory panel said Wednesday.
But the panel said interest rates should remain on hold until the next fiscal year starting in April to ensure that the country's nascent recovery remains on track -- even though inflation is emerging as a major worry.
The panel, which advises Prime Minister Manmohan Singh on economic policy, said Asia's third-largest economy could grow by 6.25 to 6.7 per cent in the fiscal year ending March 31, 2010.
But "our best estimate is that the economy will grow by 6.5 per cent," C. Rangarajan, chairman of the Economic Advisory Council, said.
That would make the economy "possibly the second-fastest growing in the world," the former central bank chief said.
India had withstood the "full fury of the international crisis" and "weathered the financial turbulence quite well," he told reporters.
He forecast growth next year at seven to eight percent thanks to a better global outlook and said the timing of interest rate increases from record lows would depend on "growth prospects and inflationary pressures".
Rangarajan said the central bank should continue its "highly accommodative" monetary policy this financial year but next year would need to change its stance as inflation picks up pace.
He added that "given the present signs of inflationary pressures," the central bank might "have to act earlier than the US and European economies" to tighten rates.
The panel forecast inflation, now still below one percent, would accelerate to six percent by the end of the financial year, one percentage point beyond the central bank's comfort zone.
Inflation is being stoked by rising food prices due to the worst monsoon rains in nearly four decades.
"In the short-term, managing inflationary risks, particularly food-price inflation, is the biggest challenge faced by our policymakers," Rangarajan said.
His comments came a week before a policy meeting of the central bank and were another signal of opposition in government policy circles to any hardening of monetary policy.
India's ruling Congress government is fearful any early move to raise interest rates could choke fragile economic recovery.
The central bank "could make a case for pre-emptive monetary tightening" at its next meeting, said HSBC economist Robert Prior-Wandesforde.
But with bank lending growth still at low levels and "political pressure not to act so high," the bank is likely to leave rates unchanged, he said.
India's economy grew 6.7 percent last year, sharply below the annual nine percent levels it logged during the three previous years.
Growth this year has been hit by a fall in agricultural output due to the dry monsoon.
The panel forecast India's consolidated fiscal deficit would rise to 10.09 percent this year from 8.6 percent last year due to government steps to stimulate the economy to revive growth.
AFP
