The rural sector is facing hardships because of poor monsoon rains. More spending in infrastructures is needed to attract more foreign investments. However, this could trigger higher inflation and eat away the benefits of economic growth.

New Delhi (AsiaNews/Agencies) – Indian Finance Minister Pranab Mukherjee announced today that the government would maintain high levels of public spending to support high growth, boost a flagging rural economy and modernise the country’s infrastructure. He also promised steps for the next fiscal year (2010-2011) to achieve greater fiscal consolidation, including higher fuel taxes, “without impairing the economic recovery”. His statement comes after months of waiting to see what the government would do in New Delhi.

The economy has posted a remarkable recovery from the global recession. In fact, India’s economic growth may surpass 8 per cent in the coming year. Inflation however also jumped significantly with food prices rising almost 18 per cent in January.

“The improvement of the economy encourages a course of fiscal correction,” Mukherjee said.

The fiscal deficit should fall to 5.5 per cent in the 2010-2011 fiscal year from 6.9 per cent in the current year. The minister further expects the deficit to fall to 4.8 per cent in 2011-2012 and to 4.1 per cent the following year.

However, Brian Jackson, senior emerging markets analyst at the Royal Bank of Canada, told the Financial Times that if growth fell short India would find it much more difficult to pull back the fiscal deficit.

D. H. Pai Panandiker, president of New Delhi-based RPG Foundation, an economic research group, told Bloomberg, “Slashing the deficit will send the right signal to investors about the government’s seriousness to cut debt”.

Central bank Governor Duvvuri Subbarao said last month that India needs to cut its budget deficit to help check inflation, which was a “bigger risk” to the economy than any other factor. Food prices are the main factor driving inflation high.

In its budget, the government will continue to exempt imports of rice, wheat and sugar from taxes. However, food imports are affectively negatively agriculture, already battered by last year’s poor monsoon rains.

In a country that needs foreign investments in infrastructure, the authorities want “to avoid a China-like overheating problem,” said Shashanka Bhide, chief economist at the National Council, a corporate-funded analysis group. “Mukherjee has a tough balancing act—to support growth and cut the budget deficit to control inflation.”

On the negative side, export-oriented companies have had to cope with fewer orders from the West. Food production has also suffered from last year’s weather. This is crucially important in a country where 700 million people are directly involved in the rural economy.

In the fourth quarter of 2009, agricultural output fell 2.8 per cent, slowing economic growth to 6 per cent. By contrast, manufacturing gained 14.3 per cent, whilst hotel, transport and communication services jumped 10 per cent.

Experts note that subsidies for food and fertiliser now consume 10 per cent of the budget. With another 14 per cent of the budget going to defence, 19 per cent to pay interest on the national debt and another 25 per cent given to states as their share of the federal government’s revenue, there is little left to pay for schools, power plants and other investments that can boost growth.

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