MUMBAI: India's economic growth may accelerate this year for the first time since 2007, giving Finance Minister Pranab Mukherjee room to withdraw fiscal stimulus.

Asia's third-largest economy will probably expand 7.2% in the year ending March 31 from a year earlier after growing 6.7% in the previous 12 months, the Central Statistical Organisation said in a statement in New Delhi today. The median forecast of 15 economists in a Bloomberg News survey was for a 7% gain in gross domestic product.

Mukherjee is under pressure from the central bank to raise excise and service tax rates in the budget on Feb. 26 to check inflation in the world's fastest-growing major economy after China. His task is tough as companies including refrigerator maker Videocon Industries Ltd. resist removal of tax support, saying there are "uncertainties" in India's economic recovery.

"Premature withdrawal may hurt the India growth story," Venugopal Dhoot, chairman of Videocon, said before the report. "The government will have to tread a very careful path."

Reserve Bank of India Governor Duvvuri Subbarao on Jan. 29 raised India's growth forecast to 7.5% in the year ending March 31 and said the central bank will target inflation in the next few months. He estimated inflation to accelerate to 8.5% from 6.5% forecast earlier.

Political Pressure

India's inflation rate rose to 7.3% in December as shortages of rice, wheat and sugar after the weakest monsoon rains since 1972 pushed up food costs. Food prices are a top political issue in India, where the World Bank estimates about 800 million people live on less than $2 day.

India's Prime Minister Manmohan Singh Feb. 6 said the worst of food inflation is over and formed a panel of state chief ministers to ensure adequate supplies and tame prices. Bhartiya Janta Party, the main opposition, is staging protests in the country to highlight the government's failure.

Subbarao last month raised the proportion of deposits that lenders need to maintain as cash reserves to 5.75% from 5% to curb inflation. He said monetary policy alone won't be "effective" unless Mukherjee rolls back fiscal sops and cuts the budget deficit, which is forecast to touch a 16-year high in the current financial year. He called the budget deficit a "bigger risk" to India's economy than any other factor.

Stocks Plunge

Stocks plunged worldwide last week amid growing concern that European nations including Portugal, Spain and Greece will struggle to control their budget deficits. India's benchmark Sensitive stock index dropped 3.5% since Feb. 1 while the yield on the key 10-year government bond yield climbed 10 basis points to 7.68% during the period.

"Fiscal consolidation in India will be credible," said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. "There is now a political consensus on disinvestment."

Mukherjee, who in 2008 and 2009 cut taxes and stepped up government spending to provide fiscal stimulus worth more than 4% of GDP amid a global recession, is relying on asset sales to plug the budget deficit that may widen to the equivalent of 6.8% of GDP in the year through March.

Prime Minister Manmohan Singh's government plans to reduce stakes in 68 companies including NMDC Ltd., the nation's largest iron-ore producer and NTPC Ltd., the biggest electricity provider, after he returned to power in May last year without the help of communist parties, who as part of the previous coalition had opposed the policy.

Fiscal Stimulus

India may not immediately raise taxes or exit fiscal stimulus to cut the deficit, Pronab Sen, the government's top statistician, told reporters in New Delhi on Feb. 3. Even though industrial recovery in India's $1.2 trillion economy was "on track," the government may wait for economic data until March before it starts to remove any stimulus, Sen said.

Government data shows some areas in the economy such as textile, leather and other consumer non-durable goods gained 3% in India in November, the weakest pace since June.

Even so, economies across Asia are showing signs of improvement, led by China. China's economy grew 10.7% in the fourth quarter, the fastest pace since 2007.

India's manufacturing output as measured by an index compiled by HSBC Holdings Plc and Markit Economics' rose to 57.6 last month, the fastest pace in 17 months, indicating demand is gaining traction in the country.

Credit Rating

Companies including Bajaj Auto Ltd., India's second-largest motorcycle maker, and Tata Motors Ltd., the country's biggest maker of trucks and buses, reported sales growth of more than 70% in January.

"The improving data on demand is likely to encourage policymakers to gradually withdraw stimulus," said Nikhilesh Bhattacharyya, an economist at Moody's Economy.com in Sydney. "The authorities may opt to consolidate the deficit in the upcoming budget."

Improvement in public finance is vital for India to upgrade its credit rating.

Currently, Moody's Investors Service ranks India's local currency debt at Ba2, two levels below investment grade, while Standard & Poor's has assigned a BBB- rating, the lowest level in the investment grade.

"We could be encouraged to downgrade if we see further fiscal slippage in the budget," Andrew Colquhoun, Hong Kong- based Director at Fitch's Asia-Pacific Sovereign Group, said Feb. 1, when it maintained its foreign and local currency rating at BBB-, its lowest investment grade.