Demand surge in India adds to stimulus exit debate

By Rajkumar Ray and C.J. Kuncheria

NEW DELHI (Reuters) - India saw a 34 percent surge in car sales in October from a year earlier, a sign of strengthening consumer demand, and chairman of the Prime Minister's economic advisory council C. Rangarajan said stimulus measures may need to be withdrawn next year.

India is widely expected to be among the first of the large economies to pull back from extraordinary fiscal and monetary measures introduced to help weather the global downturn, as inflationary pressures and a surge in capital inflows have started worrying policy makers.

Demand in Asia's third largest economy has been rising faster than expected, supported by low interest rates and government spending, helping to drive sales of cars and other consumer goods.

Consumer demand and supply shortages in food items after a weak monsoon have driven up inflation in recent weeks.

"If inflation pressures develop, monetary authorities may take measures earlier. RBI (Reserve Bank of India) will wait and see how price situation develops in Nov-Dec," said Rangarajan.

"Next year we might have to start the process of withdrawing some of the measures," he said, referring to fiscal stimulus.

He said excise duties, which were lowered twice between December and February, needed to be adjusted while the government's expenditure needed to be cut in 2010/11 to reduce the fiscal deficit by 1 to 1.5 percentage points.

India's fiscal deficit is forecast to be 6.8 percent of gross domestic product in 2009/10, higher than the 6.2 percent last year. India aims to cut its deficit to 5.5 percent of GDP in 2010/11.