Indian economic growth may accelerate to as much as 7.75 percent this year amid signs of a “bottoming” in the United States and harvests benefiting from monsoon rains, the finance ministry said before next week’s budget.

“The speed at which the Indian economy returns to a high growth path in the short term depends on a revival of the global economy, particularly the US economy,” the annual Economic Survey prepared by officials advising Finance Minister Pranab Mukherjee said. Growth could be as little as 6.25 percent if there are delays in a US revival, on Thursday’s report said.

The finance ministry is betting on an early turnaround in India’s economy and has urged a “rollback” of expansionary policies to prevent a flare-up in inflation. US manufacturing in June shrank at the slowest pace since August 2008, underscoring signs the world’s biggest economy may have begun to stabilize in the second quarter.

“Policy rates have bottomed out, but they may not rise for at least another year because current growth numbers do not suggest the economy has bounced back,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai.

Mukherjee will unveil the Indian budget for the year to March 2010 at 11 a.m. in parliament in New Delhi on July 6.

India’s key Sensitive stock index gained as much as 0.8 percent after the report, before declining 0.2 percent to 14610.23 at 12:30 p.m. on the Bombay Stock Exchange. The benchmark bond yield extended declines, falling 2 basis points to 6.34 percent.

India’s exports declined for an eighth straight month in May, while industrial output gained 1.4 percent in April. The $1.2-trillion economy expanded 6.7 percent in the year ended March 31, the slowest pace since 2003, as India was hit by the worst global recession since the Great Depression.

Prime Minister Manmohan Singh’s government and Reserve Bank of India Governor Duvvuri Subbarao have since October announced fiscal stimulus measures and six interest rate cuts worth a combined $85 billion, or 7 percent of gross domestic product.

“In respect of monetary policy, the effort to maintain ample liquidity in the system, as some would argue, might be sowing the seeds of the next inflationary cycle,” the finance ministry report said. “Excess liquidity” in the banking system must be drained as economic growth picks up, it added.

The report also said narrowing the budget deficit is “critical” to keep interest rates low and to restore the high growth rates that India reported in the past five years, when it expanded close to 9 percent each year. It said India has the potential to grow between 8.5 percent and 9 percent in the medium term.

Prime Minister Singh’s government, elected to a second five-year term in May, must make a commitment to return the budget gap to 3 percent of GDP “at the earliest,” according to the report. The budget shortfall stood at 6.2 percent of GDP in the year ended March 31.

The report said the government should aim to garner 250 billion rupees ($5.2 billion) from the sale of stakes in state- run companies and overhaul the process of providing fuel, fertilizer and food subsidies to trim the budget shortfall.

Economists including Rohini Malkani at Citigroup Inc. are maintaining their growth forecasts for India even though the nation’s weather office said on June 25 that monsoon rains, the main source of irrigation for India’s 235 million farmers, have been 54 percent below average in the June 1-24 period.

Malkani said the latest weather update by World Weather Inc. is “encouraging” because the outlook for precipitation is positive for the immediate term,which will likely help sowing of rice, cotton, corn, soybean and other crops. Malkani, who expects the Indian economy to grow 6.8 percent this year, said the forecast could be cut if rains don’t improve in July.

The Economic Survey said that compared with other emerging economies, India has “several strengths” that can help mitigate the adverse impact of the global recession.

Among them is the “relatively high share” of services in the nation’s GDP. Services, which make up 55 percent of India’s economy, historically tend to be less affected by “cyclical downturns” than manufacturing, the report said.

Six years of an average 4.4 percent growth in agriculture together with the government’s rural jobs program, that guarantees 100 days of work in a year to the poor, has also kept the “rural income and consumption strong,” the finance ministry said.

Pointing out that Indian banks are “well capitalized” and the nation’s foreign reserves position remains “comfortable,” the report said the “Indian economy has shock absorbers that will facilitate an early revival of growth.” (Bloomberg)