Prime Minister's Economic Advisory Council Chairman C Rangarajan says the Reserve Bank of India’s (RBI) move of not cutting the repo rate is the right step in the context of high inflation. The former RBI governor tells Dilasha Seth that GDP growth will be higher than RBI's estimate of 6.5 per cent this financial year. Edited excerpts:
RBI did not cut the repo rate, though economic growth is declining. How do you see this move?
RBI’s move has been very appropriate, as it has struck the right balance between the need to contain inflation and at the same time, provide some incentive for growth. As inflation remains high, not changing the repo rate is a correct thing. But the reduction of SLR by one percentage point will inject liquidity into the system. This cut in SLR is also expected to be followed by OMOs. A repo rate cut would have sent a wrong signal when inflation is running high.
When do you see RBI going for a repo rate cut?
It all depends on inflation. Non-food inflation has certainly shown signs of decline. But we need to see how food inflation behaves on the back of weak monsoon. So, we just need to wait and watch. Any reduction in interest rates will depend on how inflation behaves.
RBI has forecast GDP growth at 6.5 per cent for 2012-13. What is your estimate for economic growth for this financial year?
The growth rate for 2012-13 is expected to be higher than RBI’s forecast of 6.5 per cent. It could be close to 7 per cent. At the Economic Advisory Council, we are still working on the forecast for the financial year 2012-13, but it will definitely be more than 2011-12.
The IIP contracted in April and grew just 2.4 per cent in May. As industry seems to have not performed well in Q1, the effect of this would also be seen in services. Do you feel Q1 GDP growth would be dismal?
Industrial growth is low, but then it is also due to the fairly high growth last year during this time, which had slowed considerably in the second half. On the whole, yes, industrial growth will be slow in the first half, but in the second half starting October, we will see a high growth rate.
Would revival in economic growth in the second half be based only on the low base in the corresponding period of last fiscal?
No. Low base is a factor, but then, coal sector is showing improvement. It is growing well. Last year, the coal production fell significantly. Moreover, action is being taken to revive growth. Groups are formed for giving quick clearance to infrastructure projects. Committees have also been appointed to assess the taxation issues.
How badly will the deficient monsoon hit agriculture?
Deficient monsoon will, of course, have an adverse impact on the agriculture sector output. However, there are indications that the performance of agriculture will not be worse than that of 2009-10, when agriculture and allied activities grew around 1 per cent. We should see a similar performance of agriculture this fiscal too, at 1 per cent. It will not be worse.