India's finance minister yesterday forecast the economy would grow by 7.5 per cent this fiscal year and eight per cent next year, laying the ground for rolling back stimulus in this month's budget.

Finance Minister Pranab Mukherjee's forecast came on the back of official figures late last week that showed industrial output jumped by 16.8 per cent in December, the most in nearly two decades. The industrial production figures suggest the economy will "grow by 7.5 per cent this fiscal year (to March 2010) and perhaps over eight per cent in the next fiscal" year, Mr Mukherjee told reporters in New Delhi.

His forecast assumes extra significance ahead of the budget at the end of February with analysts saying India's strong performance has given the government reason to start slowly unwinding stimulus aimed at shielding the economy from the global slump.

Mr Mukherjee called rising inflation, fuelled by soaring food prices, "disturbing" but added he was confident prices would recede in the next few months.

Overall inflation rose to a 14-month high of 8.56 per cent last month, its highest since November 2008, driven mainly by higher food prices. Food inflation is riding at close to 18 per cent.

"We have taken adequate measures on the supply side which will take some time to have an impact on rising prices, particularly of essential commodities," Mr Mukherjee said.

But he added he expected inflation to moderate in the coming months.