The economy is expected to grow at 8.2 percent next year and at least nine percent the year after - the rate at which it was expanding before the global financial crisis - the Prime Minister's Economic Advisory Council said.
The forecast came in a report released a week ahead of the national budget in which the government is expected to lay out a roadmap for winding down the stimulus aimed at shielding India from the global slump that began in 2008.
Reducing India's fiscal deficit from a 16-year high of 6.8 percent is important as the government cannot continue with "the kind of large revenue and fiscal deficits recorded in the last two years," the council said.
But "we need to strike a balance between the need for growth and (fiscal) consolidation" and maintain "adequate stimulus," council head C. Rangarajan, a former Reserve Bank of India governor, said.
His statement was welcomed by Indian business leaders who have said that the government should go slow in rolling back stimulus measures, arguing that economic recovery needs to be entrenched.
"With the global economy yet to recover, which poses significant downside risks to growth, there's a need to continue with the stimulus measures for some more time," said Confederation of India Director General Chandrajit Banerjee.
The government also says it needs annual growth of 9.0 to 10.0 percent to make a meaningful impact on India's widespread poverty, with a fast-expanding economy required to generate jobs.
The council said most the forecast growth would be domestically driven - from billions of dollars in spending on India's dilapidated infrastructure and personal consumption reflecting rising incomes.
It said it expected global conditions "to be somewhat better" in coming years, helping lift India's exports after they were sideswiped by the downturn, but it cautioned the pace of recovery in advanced economies would be "subdued."
The council stuck by an estimate that the economy would grow 7.2 percent in the current fiscal year to March 2010, up from 6.7 percent last year, but said the actual figure could be higher due to strong industrial output.
Rangarajan said he expected the government could reduce the fiscal deficit to 5.5-5.8 percent of gross domestic product in the next fiscal year.
"We want fiscal consolidation," he said. "But we really need to ensure that the impact on growth is minimized." Rangarajan added that food-driven inflation was a serious concern but he expected prices to moderate in coming weeks as produce from India's winter harvest hits the market.
Last month, annual inflation jumped to 8.56 percent, its highest in 14 months, driven by food inflation of 17.97 percent as a result of last year's weak monsoon which hit crops.
The central bank says hiking benchmark borrowing rates is an ineffective tool to tackle food price inflation but adds it is on guard for any signs of economic overheating.
