Nov. 10 (Bloomberg) -- India will take “corrective” steps and pull back fiscal stimulus once economic recovery takes hold, Finance Minister Pranab Mukherjee said, stressing the need to cut the budget deficit.

“Fiscal consolidation is imperative,” Mukherjee told the India Economic Summit organized by the World Economic Forum in New Delhi today. He said fiscal stimulus will be withdrawn in “due course,” two days after Prime Minister Manmohan Singh said it will be done next year.

India’s exit from measures designed to shield the economy from the global recession may help reduce the widest budget deficit in 16 years and ease pressure on the country’s credit rating. Moody’s Investors Service, which ranks India’s local- currency debt at two levels below investment grade, said today the nation’s sovereign rating won’t be raised unless the government cuts borrowings.

“It’s a delicate balance between growth, inflation and public debt,” Sandeep Parekh, a finance professor at the Ahmedabad-based Indian Institute of Management. “The finance minister was more prudent. You can’t withdraw stimulus mechanically, and it must be done in coordination with the rest of the world.”

Singh said this week India’s $1.2 trillion economy, Asia’s third-largest, may grow 6.5 percent in the year ending March 31, the weakest pace since 2003. India’s government and the central bank have injected stimulus worth more than 12 percent of gross domestic product into the economy since October last year.

Tighter Policy

The Reserve Bank of India took the first steps to tighten monetary policy last month by ordering lenders to invest a greater proportion of their deposits in government bonds, on concern inflation may accelerate to 6.5 percent by March from 1.51 percent. The central bank also urged the government to take steps to cut the budget deficit.

The finance minister aims to reduce India’s budget shortfall to 5.5 percent of GDP in the year through March 2011 from an estimated 6.8 percent of GDP in the previous year. He plans to cut the deficit to 4 percent of GDP by March 2012.

Mukherjee wants to maintain spending on roads, power and other infrastructure even as he starts to withdraw excise and customs tax concessions, worth 1 percent of GDP in the current financial year. Shortage of infrastructure shaves 2 percentage points from India’s annual growth rate, the finance ministry estimates.

The minister said “massive” investment in infrastructure and agriculture is vital to spur India’s economy at a time when global demand is weak. India’s merchandise exports, 60 percent of which are sent to the U.S., Europe and Japan, fell 29 percent between April and September, the government said on Nov. 3.

India’s economic growth could accelerate to 7 percent in the next financial year starting April 1 and could reach the “magic” pace of over 9 percent by 2012, Mukherjee said. India wants to sustain a growth rate of over 9 percent for more than two decades to create jobs and reduce poverty.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Cherian Thomas in New Delhi at cthomas1@bloomberg.net

Last Updated: November 10, 2009 05:22 EST