2 Jul 2009, 1712 hrs IST

MUMBAI: The Indian government proposed sweeping economic reforms on Thursday and said growth could revive to as much as 7.5% this year if the US economy bottoms out by September and the monsoon rains return to normal.

Economic growth for the fiscal year through March slowed to 6.7% from an average of 8.8% in the previous five years. “The speed at which the Indian economy returns to the high growth path in the short term depends on the revival of the global economy, particularly the U.S. economy, and the Government's capacity to push some critical policy reforms in the coming months,” the finance ministry said in its annual economic survey.

The report, released in advance of the nation's new budget, to be unveiled Monday, outlined a wish list of economic reforms, many of which had been blocked by left-leaning coalition partners during the previous administration.

Among the most crucial are proposals to sell down stakes in government-run companies to generate 250 billion rupees ($5.1 billion) a year and eliminate pricey fuel subsidies - both of which would ease India's gaping fiscal deficit. The central government's fiscal deficit more than doubled to 6.2% of gross domestic product last fiscal year, causing credit ratings agencies to threaten downgrades.

The ministry said it is ``imperative'' to trim that deficit back to 3% of GDP as soon as possible. The government's deficit has grown after it has enacted three fiscal stimulus packages of tax cuts and spending totaling 3.5% of GDP, on top of deep spending on fuel subsidies, government pay hikes, and farmer loan and employment programs.

The report also called for allowing more foreign investment in insurance, banking, defense and retailing, streamlining taxes, and deepening long-term debt markets.

``They are really working toward trying to restore fiscal discipline,'' said Sherman Chan, an economist at Moody's Economist.com. The end to fuel subsidies could help normalize India's fiscal balance in the long run, but is likely to prove controversial, she said.

``There are so many low income households in India,'' she said. ``Any policy change can spark social unrest. Just like China, India doesn't want that to happen.''

Late Wednesday, the government announced fuel price hikes of Rs 4 a liter for petrol and Rs 2 a liter for diesel, causing long lines at local gas stations. Retail prices vary by location, but the hikes brought the cost of petrol in Mumbai to Rs 48.76 (about $1) a liter and diesel to Rs 36.70 a liter.

Despite citing ``major concern'' about falling private consumption, the finance ministry was generally positive on India's economic prospects. India's sound banks, adequate foreign exchange reserves, falling inflation, robust rural demand, and strong agricultural production serve as ``shock absorbers'' that could help spur growth, the report said.

The Reserve Bank of India has also aggressively cut key interest rates, but commercial banks have lagged in passing through those savings to consumers.

The June-September monsoon has been delayed, and weak rainfall could reduce India's agricultural growth to 1.4% on an annual basis this year, half the long-term average, Citigroup said in a Thursday note.

The ministry of commerce also said on Thursday that India's key inflation gauge remained in negative territory for the third week in a row. The benchmark wholesale price index fell 1.3% for the week ended June 20 compared with a year ago.

Markets greeted the report tepidly, with the benchmark Sensex index up 13.02 points, or 0.1%, at 14,658.5 in afternoon trading.

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