(Recasts, adds more comments from Finance Minister, background)

By Abhrajit Gangopadhyay and Mukesh Jagota Of DOW JONES NEWSWIRES

NEW DELHI -(Dow Jones)- The Indian government's fiscal stimulus will have to continue until the economy recovers fully, Finance Minister Pranab Mukherjee said Tuesday.

"For the present, I maintain that the fiscal stimulus will have to continue to allow its impact to fully run through the economy," Mukherjee said at a conference.

"It is, however, an imperative to come back to the path of fiscal prudence as soon as the current economic circumstances permit us to do so," Mukherjee added.

India's fiscal deficit is expected to rise to 6.8% in the current fiscal year to March from 6.2% last year as the government boosted spending to kick-start an economy battered by the global financial crisis.

However, the government is on course to lower the deficit to 5.5% in the next fiscal year when pay arrears to government employees will be out of the way and the introduction of a goods and services taxwill boost indirect tax revenue, Mukherjee said.

The government has spent heavily through the past year to shield the economy from global financial shocks and continues to subsidize retail fuel and some foodgrains to keep a lid on rising prices.

However, supply constraints are pushing up food prices, with the wholesale price index--India's main gauge of inflation--widely expected to sharply overshoot the central bank's March-end inflation target of 6.5% with an upward bias.

Mukherjee, however, said inflation was not yet a pressing area of concern.

He said there were indications that core growth may have moderated in September, even though there were signs of a pickup in industrial activity in the past few months.

"Some uncertainties related to the revival of the global economy also remain. We cannot therefore afford to drop our guard," he said.

The impact from poor monsoon rains is also yet to be felt, although it is likely that agricultural output may not fall as much as earlier estimated, he added.

India this year faced its worst drought in 37 years, raising worries of a sharp slump in agricultural output as about 60% of the country's farmlands are rain-fed.

Mukherjee said a recovery in the global economy is essential for India to achieve 9% growth and it may take a year or slightly more to return to the trajectory. Credit offtake to the non-farm sector continues to be a concern, he added.

India's economy expanded 6.7% in the last fiscal year ended March 31, sharply lower than an average 8.8% growth in the previous four years.

Mukherjee said concerns over the high cost of government borrowing and the availability of funds for private investment due to the high government borrowing plan were misplaced.

The government's cost of borrowing has been significantly lower this year and two-thirds of the borrowing had been completed by September, before the anticipated pickup in private credit demand, he added.

The government also does not plan to put any curbs on capital inflows now, he said.

-By Abhrajit Gangopadhyay and Mukesh Jagota, Dow Jones Newswires; 91 22 61456113; djn.in@dowjones.com

(END) Dow Jones Newswires

11-03-09 0827ET