India could see growth of around 7 percent this year and more in coming years if it makes sweeping reforms including the removal of fuel subsidies and accelerates infrastructure development, a government report said on Thursday.
The economic survey, prepared by the finance ministry, also said inflation was no longer a worry and called for an urgent return to the targeted fiscal deficit of 3 percent.
Its release comes days before the new government unveils its budget on Monday for the fiscal year ending March 2010. The government is widely expected to expand both the budget deficit and its borrowing to support economic growth.
But analysts said any actual reforms would likely be gradual and the report should be treated as a signal of intent.
"It is wrong to assume everything will be announced in the budget. It is the strategic intent, a clear roadmap. The market should take it positively," said Amitabh Chakraborty, president for equities at Religare Securities in Mumbai.
The partially convertible rupee was little changed at 47.85/86 after the survey release, while the yield on the most traded 2021 federal bond was steady at 7.19 percent. The 30-share BSE index edged higher but later surrendered the gains and was down 1 percent by early afternoon.
India's fiscal deficit ballooned to 6.2 percent in 2008-09 as the government unleashed stimulus spending to insulate the economy against the global downturn.
"It is heartening to see that the survey has seriously raised concerns on fiscal consolidation and gives confidence that the budget will see a good trigger for disinvestment and rationalization of fuel and fertilizers," said Rupa Rege Nitsure, chief economist at Bank of Baroda.
The finance ministry's snapshot of the economy was largely upbeat and said the outlook for a return to stronger growth was achievable if the government embraces reforms.
"India should be back on the new trend growth path of 8.5 to 9 percent per annum provided the critical policy and institutional bottlenecks are removed," the report said.
"It is therefore imperative that the government revisit the agenda for pending economic reforms in the first instance."
The Indian economy grew by 9 percent or more annually in the three years ended March 2008.
Also on Thursday, the government said the wholesale price index fell 1.3 percent in the year to June 20, compared with the previous week's annual decline of 1.14 percent, slightly smaller than analysts had forecast in a Reuters poll.
The annual inflation rate was 11.91 percent during the corresponding week of 2008.
While earlier reform calls from the finance ministry were blocked due to political opposition amid the previous government's power-sharing agreement with the left, prospects for liberalisation of the economy are brighter after the Congress party won a decisive election result in May.
The finance ministry's report called for a selldown in stakes of state-run companies to generate 250 billion rupees ($5.23 billion) annually, reform of fertiliser and food subsidies and an auction of third-generation mobile phone spectrum.
It also called for "greater urgency" to removing hurdles to investment in infrastructure.
While the Reserve Bank has slashed interest rates by 425 basis points since October to revive demand, real rates remain high and continue to act as a brake on loan growth.
"The expectation that there could be further cuts in policy rates and in lending rates may have resulted in investment decisions being deferred," the report said.
It also called for implementation of a goods and services tax by April 2010 to maximise revenues and simplify the tax regime.
The report said government should take advantage of the recent low price in oil costs to free petrol and diesel prices.
Late on Wednesday, India unexpectedly raised gasoline and diesel prices by as much as 10 percent, passing onto consumers some of the recent rise in global oil prices.
The finance ministry urged other steps to improve the investment climate including an increase in foreign investment caps in insurance to 49 percent from 26 percent. It also called for allowing foreign investment in multi-brand retail, starting with food retailing, and urged the removal of price controls on sugar and fertilisers.