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2nd UPDATE:India PM: To Take Steps To Exit Easy Fiscal Stance

(Adds comments from Planning Commission of India deputy chairman, ADB official)

By Abhrajit Gangopadhyay and Subhadip Sircar

Of DOW JONES NEWSWIRES

NEW DELHI -(Dow Jones)- India will take appropriate steps next year to wind down its accommodative fiscal stance, and the country's economy is posed to grow more than 7% in the next fiscal year, Prime Minister Manmohan Singh said Sunday.

"The performance in highly adverse circumstances indicates the resilience of our economy," Singh said at the India Economic Summit.

Speaking later at the same event, Deputy Chairman of the Planning Commission of India Montek Singh Ahluwalia said that an unwinding of the fiscal stimulus will help the government reduce the fiscal deficit, but exiting the easy stance will be in line with global policy moves.

"How we will remove the stimulus depends on how we control expenditure or increase savings," Ahluwalia said.

Like other major economies, there is animated discussion in India on how and when to exit the generous fiscal and monetary accommodation provided by the government and central bank without hurting a still nascent recovery.

The Reserve Bank of India, in its first step at monetary tightening last month, asked banks to set aside more government bonds against deposits and withdrew some special refinance facilities provided to mutual funds and housing companies during the downturn. It also took steps to cool the property sector. But, unlike Australia, it didn't raise key policy rates.

"India's exit policy will be a coordinated action [between the government and central bank], but the key to the exit will be inflation," Rajat Nag, managing director at Asian Development Bank, told Dow Jones Newswires.

The RBI has raised its fiscal March ending inflation forecast to 6.5% with an upward bias, from 5% previously, citing sharply higher food prices.

Ahluwalia said that although food price inflation is on the higher side, he expects it to come down by fiscal year end.

"I expect the inflation rate between 5%-6% by March end, but I prefer it to be at 5%," he said.

India's economy expanded 6.7% in the fiscal year that ended March 31, sharply lower than the average 8.8% growth in the previous four years. It is estimated to grow 6.5% this fiscal year, which ends March 31, 2010.

The government has spent heavily through the past year to shield the economy from global financial shocks. It cut factory levies and waived farm loans to stimulate demand in the economy.

The central bank has also cut its key repo rate by 425 basis points and reverse repo rate by 275 basis points since the onset of the global economic crisis to support the economy.

"In the current fiscal year we also felt the adverse impact of an inadequate monsoon and the resultant slowdown in agriculture," Singh said.

A late arrival of July-September monsoon rains, crucial for summer sown crops, has brought in the worst drought in 37 years, and the government expects farm sector output this fiscal year to shrink 2.5% from year earlier.

Still "there are clearly signs of an upturn in the economy and with a normal monsoon next year we hope to achieve a growth rate over 7%," Singh said.

A return to a high growth rate hinges on a strong rebound in global demand, though India's economy is primarily driven by local consumption.

"Our strategy therefore must aim at a high rate of growth on the strength of strong domestic demand," Singh said. "We wish to achieve this with a large investment in infrastructure."

India plans to spend $500 billion through March 2012 to fix its creaking infrastructure.

-By Abhrajit Gangopadhyay & Subhadip Sircar, Dow Jones Newswires; 91 22 61456113; djn.in@dowjones.com

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