By Cherian Thomas and Kartik Goyal

Nov. 18 (Bloomberg) -- India's economy will ``bounce back'' to 9 percent growth next year as local demand holds up amid a global recession, Finance Minister Palaniappan Chidambaram said.

``There will be a slowdown in India and steps taken and those that will be taken, to a large extent, will compensate the factors causing the slowdown,'' Chidambaram told the World Economic Forum's India Economic Summit in New Delhi today.

The Harvard-trained minister signaled interest rates will come down in Asia's third-largest economy and said he will examine further excise duty cuts to spur consumer spending. Record crop plantings by India's 400 million farmers will also boost rural incomes, Chidambaram said.

India's economy may slow to 7.5 percent in the year ending March 31, after expanding 9 percent or more annually in the previous three years, according to the central bank. India's government wants to sustain growth rates above 9 percent to cut poverty in the world's most-populous country after China.

``To sustain 9 percent growth, you need international economies to turn around as well,'' said Jai Sinha, partner and co-head, India, at Booz & Co., a global management consulting firm. ``International capital flows into infrastructure and exports must pick up.''

Export makes up about fifth of India's $1.2 trillion economy. Chidambaram said any shortfall in shipments and overseas investment will be ``compensated'' by spurring demand in the local economy.

Weaker Exports

India's exports have weakened as the U.S., Europe and Japan fell into a recession in the third quarter. That's spooked investors into withdrawing money from emerging markets such as India, where foreign funds have pulled out a record $12.8 billion from the stock market this year.

The benchmark Sensitive index fell 2.2 percent to 9090.75 on the Bombay Stock Exchange in Mumbai, while the yield on 10-year government bonds dropped 1 basis point to 7.5 percent. The rupee declined as much as 0.9 percent to 49.80 per dollar, the lowest since Oct. 29, before trading at 49.70.

Reserve Bank of India Governor Duvvuri Subbarao, after meeting Chidambaram this morning to discuss India's response to the global financial crisis, said the central bank would take ``appropriate action at an appropriate time.''

Subbarao has cut the central bank's benchmark repurchase rate by 1.5 percentage points to 7.5 percent in the past month, in addition to slashing lenders' reserve requirement in cash and bonds by 3.5 percentage points and 1 percentage points respectively.

`Classic Solution'

Subbarao has room to lower borrowing costs further after the inflation rate dropped at the sharpest pace in at least 18 years this month. Inflation has slowed to 8.98 percent from a 16-year high of 12.91 percent in August.

Chidambaram said it will be ``good'' if interest rates decline, adding that the ``classic solution'' to a demand slowdown is to reduce prices and he urged airlines, hotels and other companies to do so for a ``short period of time.''

``The problems that India faces are not insurmountable,'' the minister said. ``They have been easily identified and we can address these issues - liquidity, prices and credit delivery.''

He said Prime Minister's Manmohan Singh's government will balance the objectives of growth and inflation, while pointing out that at this point the ``bias is in favor of stimulating growth.''

``India is still relatively insulated from what is happening in the rest of the world,'' said K.V. Kamath, the chief executive officer of ICICI Bank Ltd., India's second-biggest bank. ``We need a significant drop in interest rates to accelerate growth.''

Winter Crops

Still, Chidambaram said the worst growth forecast for India this year is 7 percent, which is three times the world's economic expansion. Kamath said growth may not fall below 7 percent if the $700 billion that Indian companies plan to invest in the next two years proceed.

``The world economy has changed more rapidly in the last 60 days than it has over a long time,'' Chidambaram said. ``But the manner in which most Indians live and work hasn't changed.''

The minister said 65 percent of India's workforce depends on agriculture, which ``continues to grow at a robust pace.'' The total winter crop sowing area increased to 2.69 million hectares this year from 2.19 million hectares a year ago, the minister said.

``Farmers are busy with their work and we are going to have a substantial bumper crop,'' Chidambaram said. ``The sector that is affected by the global crisis is industry and the financial sector and our mind space has been occupied by them. We are extremely vigilant and will continue to be proactive in our policies.''

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

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