Highlights: India says economy to grow 7-7.75 pct in 2016/17 - report

REUTERS - India should review its medium-term fiscal strategy, a government report recommended on Friday, an indication of the challenge Finance Minister Arun Jaitley faces to raise pay for government employees and bail out banks without increasing borrowing. The Economic Survey, which sets the scene for Jaitley's third annual budget on Monday, forecast that the Indian economy would grow by between 7.0 percent and 7.75 percent in the 2016/17 fiscal year that starts on April 1. The survey was prepared by the finance ministry's chief economic adviser Arvind Subramanian. Following are the highlights of the report: FISCAL DEFICIT * 2016/17 expected to be challenging from fiscal point of view; time is right for a review of medium-term fiscal framework * 2015/16 fiscal deficit, seen at 3.9 percent of GDP, seems achievable * Credibility and optimality argue for adhering to 3.5 percent of GDP fiscal deficit target INFLATION * CPI inflation seen around 4.5 to 5 percent in 2016/17 * Low inflation has taken hold, confidence in price stability has improved* Expect RBI to meet 5 percent inflation target by March 2017 * Prospect of lower oil prices over medium term likely to dampen inflationary expectations CURRENT ACCOUNT DEFICIT * 2016/17 current account deficit seen around 1-1.5 percent of GDP CURRENCY * Rupee's value must be fair, avoid strengthening; fair value can be achieved through monetary relaxation * India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment in China * Rupee's gradual depreciation can be allowed if capital inflows are weak BANKING & CORPORATE SECTOR * Estimated capital requirement for banks around 1.8 trln rupees by 2018/19 * Proposes to make 700 bln rupees available via budgetary allocations during current and succeeding years in banks * Govt could sell off certain non-financial companies to infuse capital in state-run banks * Corporate, bank balance sheets remain stretched, affecting prospects for reviving private investments * Underlying stressed assets in corporate sector must be sold or rehabilitated TAXES * Tax revenue expected to be higher than budgeted levels in 2015/16 * Proposes widening tax net from 5.5 percent of earning individuals to more than 20 percent * Favours review and phasing out of tax exemptions; easiest way to widen the tax base not to raise exemption thresholds CHIEF ECONOMIC ADVISER COMMENTS * Subramanian says there is scope for easing monetary policy * Says expenditure planning needs to be embedded in medium-term fiscal framework * Calls for liquidity to be injected into the financial system * Says need to find creative ways to leverage resources to address balance sheet challenge (Compiled by Sankalp Phartiyal and Tommy Wilkes in NEW DELHI)