NEW DELHI: India will need to keep monetary policy tight to fight inflation as economic growth rebounds to pre-crisis levels of around 9.0 percent, the finance ministry said on Friday.
The warning came ahead of the annual budget Monday and with pressure mounting on the Congress-led government, which has been buffeted by corruption scandals and protests over price rises.
"Inflationary pressure persists both from domestic demand and higher global commodity prices," warranting "persistence with an anti-inflationary monetary stance," the finance ministry said in its yearly economic survey.
On Thursday, Prime Minister Manmohan Singh vowed to rein in inflation but stressed it would not be at the expense of the country's economic "growth story".
Singh's political position has been weakened by opposition charges that he has failed to keep a check on price rises and corruption and deliver on pledges of "inclusive growth" for India's poor.
Even after seven interest rate hikes in less than a year, general inflation remains stubbornly above eight percent, while food inflation is running at 11.49 percent, causing hardship and resentment in poorer households.
However growth, boosted by a rebound in agriculture, manufacturing and services and a recovering global economy, should reach 8.6 percent in the current fiscal year to March 2011 and 8.75-9.25 percent next year, the survey said.
"The economy is expected to revert to pre-crisis growth levels next year," the survey said.
The buoyant growth forecast contrasts with predictions by some private economists who say growth could slow to as low as 7.7 percent next year as resurgent oil prices and further rate rises take their toll.
Signs of a slowdown emerged from data earlier this month that showed that industrial output growth in December slackened to 1.6 percent from 19 percent the same month a year earlier -- its weakest pace in 20 months.
The economic survey cited risks of overheating as the economy picks up pace and demand builds in the country of 1.2 billion people.
Gaps between supply and demand "still remain large," the survey noted.
At the same time, it said that "inclusive development" to ensure that India's poorest share in the country's accelerating growth "is an act of faith for the government".
The government's populist agenda makes Mukherjee's task in presenting the budget a tightrope, as he seeks to maintain high growth while cutting the fiscal deficit and curbing inflation, analysts say.
"Inflation is a matter of great concern," said Mukherjee after tabling the survey in parliament.
The fiscal deficit for the current fiscal year will be 4.8 percent, comfortably beating a 5.5 percent target thanks to windfall revenues from the sale of third-generation (3G) telecom licences, the document said.
The strong growth figures come despite an unwinding of massive stimulus measures put in place in the aftermath of the global financial crisis.
India posted average annual growth of over nine percent between 2006 and 2008 before the global slump slowed expansion to 6.7 percent in 2008-09. The economy picked up pace last year to advance 7.4 percent.
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