India FY-12 growth will be close to 8% and inflation will be at high levels

Tuesday, 20 September 2011 00:00 -     - {{hitsCtrl.values.hits}}

HYDERABAD: Prime Minister's Economic Advisory Council Chairman C Rangarajan has projected that the country's GDP growth will be close to 8 per cent this fiscal and inflation will continue to rule at high levels for the next 3-4 months.

The PMEAC chairman, who had earlier pegged GDP growth at 8.2 per cent in FY2011-12, said the industry may not do as well as policymakers initially expected, though the agricultural sector may do better on the back of a good monsoon.

"The GDP growth rate will be close to 8 per cent. And industry may not do as well as we thought earlier. However, agriculture will do better. Services will continue to do better. Therefore the overall growth rate can remain close to 8 per cent," Rangarajan told PTI on the sidelines of a Genome Foundation meeting here.

Finance Minister Pranab Mukherjee recently expressed disappointment over the slowdown in the country's GDP growth rate, which was pegged at 7.7 per cent in the first quarter of FY'12, down from 8.8 per cent in the corresponding quarter a year ago.

In line with the trend, the Asian Development Bank(ADB) has slashed its growth forecast for India in the current fiscal to 7.9 per cent from 8.2 per cent in the previous fiscal on account of the subdued growth of major economies worldwide and rising crude oil prices.

Concerned over high inflation, which stood at 9.78 per cent in August, 2011, the Reserve Bank recently raised key interest rates by 25 basis points, its 12th such hike since March, 2010.

Following the increase, the short-term lending (repo) rate stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is 7.25 per cent.

"But for the next three or four months, it is likely to remain at higher levels. However, beginning January, 2012, it can show definite signs of decline and by March, it could be closer to 7 per cent," the economic advisor said.

Rangarajan, however, hoped that interest rates may come down in six months, as inflation is expected to be tamed by then. In contrast, the ADB's 'Asian Development Outlook 2011 Update', which was released two days ago, raised its end-March, 2012, inflation forecast to 8.5 per cent from 7.8 per cent earlier.

According to Rangarajan, higher interest rates may hurt the sentiment in some sectors like retail and manufacturing.

However, growth in the manufacturing sector may remain at 7 per cent, as projected earlier, he said.

"Raising interest rates has become necessary because of the high level of inflation. Therefore, I believe that some segments of industrial production are more sensitive to the changes in interest rates. Particularly, the retail sector is sensitive to the interest rates," he explained.