India urged to take bold steps to curb inflation

India's fiscal situation is worse than it appears, the government of Prime Minister Narendra Modi said in an economic report on Wednesday that called for tough measures to shore up public finances and reduce inflation.

The report's tone will increase speculation that Finance Minister Arun Jaitley, in presenting his first budget to Parliament on Thursday, will give a higher, more realistic deficit target for this fiscal year than the 4.1 percent of gross domestic product figure set by the previous government.

India risks losing its investment-grade sovereign rating if it fails to get its finances into shape. Many economists believe the last government's accounting understated the size of the deficit, and Jaitley will need to present a credible recovery plan to keep the ratings agencies at bay.

The newly released report "shows the gravity of the economic situation that needs correction", Jaitley said after ceremonially placing it on a table in Parliament.

"Inflation needs to be moderated further. The fiscal deficit needs downward correction over the next two years," the former corporate lawyer and career politician said.

The report, which is an annual exercise and is known as the Economic Survey, is drawn up by finance ministry advisers and delivered the day before the federal budget.

Seen as a blueprint for the government's medium-term economic planning, the report forecasts GDP growth of between 5.4 and 5.9 percent in 2014/15. It warned that weak monsoon rains, which are essential for farming, could hold growth closer to 5.4 percent.

In June, India's central bank forecast growth of 5.5 percent in the financial year that ends in March 2015.

Jaitley's predecessor set the 4.1 percent deficit target in an interim budget before the new government took office. That may already be unrealistic, because the previous government left a stack of unpaid bills to state oil companies that have eaten into this year's finances.

D.K. Joshi, the principal economist at the Indian arm of Standard & Poor's, CRISIL Ratings, said he would welcome a higher deficit goal, as the number set by the last government was always under a cloud of doubt.

"If 4.5 percent is credible and arrived in a correct manner, then it shouldn't be a problem. It should be a feasible target," he said. "But if the fiscal deficit target is aggressive, it would again be a question mark."

Also on Wednesday, Prime Minister Modi tightened his grip on the reins of power by appointing his most trusted aide, Amit Shah, as president of the ruling Hindu nationalist party.

Shah, who has known Modi since the 1980s in their home state of Gujarat, is seen as a shrewd political organizer and tactician credited with engineering Modi's huge election victory in May.

"From today, and with immediate effect, Amit Shah will take over as the Bharatiya Janata Party president," said outgoing president Rajnath Singh, who has been named India's home minister.

Reuters - AFP