* Expects 2011/12 growth to be close to 7.5 pct
* Sees 9 pct economic growth in 2013/14
* Says 2012/13 fiscal gap to be lower than 2011/12
* Says govt to keep market borrowing in check in 2012/13
(Recasts, adds details and quotes)
By Rajesh Kumar Singh and John Chalmers
NEW DELHI, Jan 4 For all the sudden
pessimism about India's economy, Kaushik Basu sleeps soundly at
night - and if something was going to keep him awake it wouldn't
be the risk of a balance of payments crisis.
Out of tune with a chorus of gloom, India's chief economic
adviser believes the tide has turned in a long battle against
inflation and the economy is set to rebound to its "full-steam"
growth rate of around 9 percent within two years.
"I believe it is time to focus on growth because inflation
is in its last stages," Basu told Reuters in an interview from
his finance ministry office in New Delhi, where closed-door
preparations are now underway for the 2012/13 budget.
Basu said that economic growth has faltered in fiscal
2011/12 and will end the year on March 31 at around 7.5 percent,
far lower than the 9 percent forecast in last year's budget,
which has since been pilloried for being so optimistic.
That slowdown was due to a combination of feeble growth in
the United States and Europe, a ratcheting up of interest rates
to quash inflation that has run at over 9 percent for a year and
a decision-making paralysis in government.
Basu said the United States was now on a "slow rise", Europe
looked set to avoid another recession and monetary tightening
has run its course as inflation heads lower, with the headline
rate set to drop to 6.75 percent as early as March.
"If these expectations are right, then I think India has
enough fundamental strength that we will get out of the current
slowdown and begin to move," he said.
POLICY RISK AVERSION
However, he had little hope to offer on the political and
bureaucratic constraints on economic growth, noting that policy
makers are avoiding taking risks because of a climate of fear
after a spate of corruption scandals.
"Given the corruption scandals last year and also some
mindless finger-pointing that is going on, we are going through
a phase of excessive risk aversion," he said.
Manmohan Singh, architect of the reforms that transformed
India's state-stifled economy in 1991, has taken few steps to
open the economy up further since he took over as prime minister
in 2004. Critics say his government is now mired in a policy
Plans to throw open the country's $450 billion retail sector
to global supermarket players were dashed by political
opposition last month.
That dented investor confidence in an economy that appeared
to be losing steam after averaging growth of nearly 10 percent
for three years before the 2008 financial crisis, and helped
knock the rupee currency to an all-time low.
Basu said growth in the third quarter of 2011/12 would come
in below 6.9 percent because industrial output was weak even
though services and agriculture held up. However, he expects a
rebound in the January-March quarter to above 7.5 percent.
Early signs of that recovery came this week with purchasing
managers data showing that manufacturing activity surged to a
six-month high in December thanks to a spike in factory orders
and new orders from domestic and international firms.
However, HSBC said in a research note on Wednesday that it
was too early to conclude that the growth wobble was over.
"The pace of growth still remains below its historical
average," it said. "Moreover, there is no denying that tight
monetary policy, domestic policy paralysis and adverse external
spill-overs will constrain growth in the months ahead."
BALANCE OF PAYMENTS NOT A WORRY
Sluggish tax receipts due to the economic slowdown and high
expenditure on subsidies have sparked concerns that the fiscal
deficit could miss the budgeted target of 4.6 percent of GDP by
almost one percentage point in the current fiscal year.
The cash-strapped government said last week it would borrow
an additional 400 billion rupees ($7.5 billion)) through bonds
in 2011/12. This comes on top of an increase in the borrowing
target for the second half of the fiscal year to 2.2 trillion
rupees from an originally budgeted 1.67 trillion.
Basu said 2012/13 would be a "very difficult" year for
public finances, but he reiterated the government's commitment
to fiscal consolidation.
"The deficit (next year) will be lower than this year. We
are determined about that," he said, adding that the government
would borrow less in 2012/13 to leave room in the market for an
expected pick-up in private borrowing.
A slowdown in exports has also blown out the country's
current account deficit beyond the government's perceived
comfort level of 3 percent of GDP.
Citi said in a report on Wednesday that it saw the deficit
widening to 3.5 percent in 2011/12 and further to 3.6 percent
the following fiscal year, gaps that would require capital
inflows equivalent to twice the amount India received last year.
Basu was sanguine, however, predicting that growth in
manufacturing exports will reduce the deficit from next year.
"While our exports have slowed down over the last two months
and the current account deficit has widened, I see no reason to
worry about the overall balance of payments situation," he said.
"If I am keen on losing sleep I can find better candidates."
($1=53.03 Indian rupees)
(Editing by Ed Lane)