India forecasts faster economic growth, warns of fiscal challenge

India's government forecasts economic growth will pick up to 6.0% to 6.5% in the fiscal year beginning April 1, but warned it may have to miss its deficit target to revive growth.

India is facing its worst economic slowdown in a decade.

Growth fell to 4.5% in the July-September quarter. Consequently, the budget deficit may need to exceed this year's target, 3.3% of gross domestic product, the government said in an economic survey released on Friday.

Finance Minister Nirmala Sitharaman will present the budget for the coming fiscal year on Saturday.

"Going forward, considering the urgent priority of the government to revive growth in the economy, the fiscal deficit target may have to be relaxed for the current year," Krishnamurthy Subramanian, chief economic adviser to the finance ministry, said in the report.

The government estimates GDP will grow 5% this fiscal year, which ends on March 31. That would be the slowest growth since the global financial crisis of 2008-09.

Some economists believe the survey's growth forecast is too optimistic. They point out economic recovery remains fragile; inflation is accelerating and consumer demand and investments are likely to decline, even though the central bank cut interest rates by 135 basis points in 2019.

In the coming budget, Sitharaman is expected to announce a host of economy-reviving measures. Income tax cuts, higher spending on infrastructure and incentives for real estate are likely. So is a plan to revive stressed shadow banks.

However, the slowdown in growth has reduced tax revenues.

The government may be forced to channel its increased spending through quasi-sovereign bodies, which would not be included in its deficit calculations.

Friday's report said India would need to spend about $1.4 trillion in the next five years to expand the economy to $5 trillion from the current $2.8 trillion. It gave no projection for the deficit. Economists believe that is around 3.8%.

To accommodate higher spending, the deficit might be allowed to grow to at least 3.5%, missing the 3% target for next year, sources and economists have told Reuters.