NEW DELHI: India's government pledged to shrink its budget deficit by more than 1 percentage point of gross domestic product this year from the highest level since 1994, spurring a rally in the nation's stocks and bonds.

Finance Minister Pranab Mukherjee, presenting the annual budget to parliament, said he plans to narrow the gap to 5.5 percent of GDP in the year starting April 1 from 6.9 percent the previous year. He also said economic growth may reach 10 percent in "not-too-distant future". Government figures earlier showed GDP rose 6 percent in the fourth quarter from a year before.

The effort may help bolster investor confidence in India, which has the lowest sovereign-debt rating among the BRIC nations that include Brazil, Russia and China. India and China, the world's fastest-growing major economies, are both taking steps to rein in stimulus measures as the global economy emerges from recession and inflation pressures escalate.

"India and China have bounced back strongly and the challenge now is to check excessive demand and inflation," D.H. Pai Panandiker, president of New Delhi-based RPG Foundation, an economic research group, said before the budget announcement.

"Slashing the deficit will send the right signal to investors about the government's seriousness to cut debt."

India's Sensitive stocks index rose 1 percent as of 4:15 pm in Mumbai, helping pare its losses since the start of the year that were spurred in part by global investor concern about sovereign debt quality.

Yields on benchmark 10-year government notes fell to 7.78 percent, from 7.82 percent earlier, according to the central bank's trading system.

The reduction in fiscal stimulus also comes as Prime Minister Manmohan Singh's government is battling to restrain inflation that threatens to erode the purchasing power of the nation's consumers and worsen poverty rates.

Prices paid by industrial workers in India rose almost 15 percent in December from a year earlier, the most in 11 years. Industrial production grew 16.8 percent in December, the quickest pace since at least 1994, prompting the central bank to say manufacturers are nearing capacity.

Rising prices prompted lawmakers on Friday to debate the issue in parliament and blamed Singh for failing to keep his promise of taming inflation within 100 days of his reelection. Singh was voted back for a five-year term in May last year.

Central bank Governor Duvvuri Subbarao said last month that India needs to cut its budget deficit to help check inflation and that it was a "bigger risk" to the economy than any other factor.

Bloomberg News

(China Daily 02/27/2010 page10)