Chidambaram, top officials confident of 7 per cent growth

The government and the finance ministry are confident that the Indian economy, which recorded its slowest pace of growth in five years during the last quarter, will start showing signs of a recovery from October this year, and the targeted growth of seven per cent will be achieved.

Both home minister P Chidambaram, who was the finance minister till recently being handed charge of the home portfolio in the aftermath of the Mumbai teror attacks, and Arvind Viramani, chief advisor to the finance ministry, have said that the impact of the fiscal stimulus and softer monetary policies would make itself felt in a few months' time.

''The economy will start showing signs of recovery from October as the government will sharply step up spending and stimulus packages, which will help improve domestic demand,'' Chidambaram told the International Bar Association conference in Mumbai.

''I am confident that we will return to a seven-per cent growth rate by the third (or) fourth quarter of 2009. Beginning, 2010 India will return to a high growth path and by 2010-11 we will return to the nine per cent growth rate.'' he said.

''Even until about two-three months ago, we were pretty confident that we would navigate this difficult year and end with growth of a little over seven per cent. In the first half of the current fiscal year, growth was 7.8 per cent. We were hoping that in the second half we would do 6.5 per cent. But the results of our third quarter GDP growth have been quite depressing. It is only 5.3 per cent,'' Chidambaram said.

''In fact, we have followed a very prudent economic policy - high savings, high investment, encouraging both public and private investment, stimulating domestic demand by outlays for education, health, infrastructure, roads, bridges, ports. However, when the world economy collapsed, one can hardly expect India to remain unscathed,'' he said.

Chidambaram's views were echoed by Virmani, who also said that he expected the economy to clock a growth of seven per cent this fiscal. According to him the economy is set to move to a higher growth trajectory after September '09. ''We have an opportunity after September '09, assuming that the downside risk will be eliminated from the global and US economy by then,'' Virmani said at a meeting organised by the Confederation of Indian Industry in Mumbai.

The chief economic advisor argued that the Indian economy could increase its growth rate even if the global economy is on a flat growth trajectory, with a little help from policy and the country's entrepreneurial talent.

He said the current economic scenario offers a golden opportunity for fiscal reforms which are necessary to rein in fiscal deficit and maintain long-term fiscal responsibility and budget management (FRBM) Act targets.

Virmani justified the government's higher market borrowing, saying it is the only way to boost spending and support a slowing economy. The government plans to borrow about Rs300,000 crore in the year ending 31 March and a little more in the year starting 1 April, he said.

India's central bank cut its short-term interest rates by 50 basis points this week, saying the country's growth had been hit more than expected by the global financial crisis and downturn.

Virmani said he saw inflation continuing to ease in the coming weeks, but did not expect deflation in Asia's third-largest economy. "I expect inflation by March to be below three per cent. This I have been saying since December. What is happening now is not a surprise at least," he said. "I don't expect deflation in India."

Reserve Bank of India deputy governor Usha Thorat said that counter-cyclical measures such as increasing risk weights during good times among other things have helped in saving the banking system.

''The Indian financial sector has shown resilience and there are no signs of a currency crisis or a banking crisis," she said at the CII conference. She admitted to some slowdown in credit offtake in recent weeks, but said, ''Unlike in the developed markets, credit markets in India are functioning, though there is some evidence of deceleration.''

According to Thorat the bulk of the credit in the recent past has been absorbed by the real estate infrastructure and the non-banking finance sector, sector while there has been a sharp slowdown in retail loans.