India said on Tuesday the country must not lose its nerve over the economy's rapid growth, saying the momentum is sustainable even though containing inflation would be a challenge.
The economy is expected to expand 9.2 percent in the current fiscal year to the end of March - its fastest pace in 18 years - sparking concerns of overheating as infrastructure fails to keep pace with rising domestic demand. With such strong growth and inflation running at a two-year high, analysts expect more steps to cool price pressures.
"From a near-term perspective, inflation would dominate policy attention, which would mean more corrective steps in the form of duty reductions, interest rate hikes and easing supply-side constraints," said Shuchita Mehta, chief India economist at Standard Chartered Bank.
The finance ministry said in its annual economic survey for 2006/07, which precedes a budget presentation on Wednesday, that economic fundamentals were robust and the outlook for Asia's fourth-largest economy was upbeat.
"The economy appears to have decidedly 'taken off' and moved ... to a new phase of higher growth," it said. The rupee edged up to 44.18 per dollar while the 10-year bond yield rose 1 basis point to 7.88 percent after the report.
Analysts say supplies are failing to keep up with demand and food prices have risen due to stagnating farm production. "We have to maintain a taut monetary and fiscal stance in order to contain inflation while supporting the growth process," said Saumitra Chaudhuri, economic adviser at ICRA.
The survey said rapid capacity expansion could avert capacity constraints and it saw rising investment sustained in 2007/08. Import growth, a major indicator of overheating, appeared to be "within reasonable limits".
"There is no scope for uneasiness or nervousness about high growth. International experience shows that troublesome inflation need not be the price to be paid for favourable high growth."
Since coming to power in 2004, the communist-backed coalition has pushed growth as the key to lifting 260 million Indians out of poverty. The survey said fiscal reforms and rising tax revenues would help rein in the federal deficit to 3.6 percent of gross domestic product this fiscal year, below a 3.8 percent target and down from 4.1 percent last year. But it said the government must still curb wasteful spending. "Like going up a hill, the adjustments become harder as the destination gets closer," it said.
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