India's GDP growth is likely to decline to 7-7.25% this fiscal from 8.4% in FY11 due to slackening industrial output and slowdown in global economy, Prime Minister's Economic Advisory Council chairman C Rangarajan said here today.
He also said government will not be able to stick to the fiscal deficit target of 4.6% of GDP this fiscal.
"The overall growth rate in industry will be well below the initial expectations. The world economic situation is also not very encouraging. Under these circumstances, the growth rate during the current year may be between 7% and 7.25%," Rangarajan said at an Assocham meet.
Initially, the Prime Minister's Economic Advisory Council (PMEAC) had projected the GDP during FY12 at 8.2%.
Rangarajan, however, expressed hope the GDP growth "may turn out to be better" in FY13 due to likely decline in inflation, improvement in infrastructure and "greater clarity" on issues like land acquisition and environment.
He further said the broad macro economic parameters relating to savings and investment are conducive to achieving a growth rate of 8 to 9% in a sustained manner.
He said for a sustained high growth, inflation must be tamed and fiscal deficit contained.
"Inflation continues to remain an area of concern in the current fiscal...We must use all of our policy instruments... to bring down current inflation and re-anchor inflationary expectations to the 5% comfort zone," he said.
As the inflation showed signs of moderation in December, he said "perhaps, the headline inflation will come below 7% by March 2012".
Rangarajan further said: "We, however have to bear in mind that the rationalisation process in the pricing of petroleum products is still to be completed and, as and when this happens, it will impact overall inflation".
On the fiscal deficit target of 4.6% for this fiscal, he said "perhaps this is difficult to achieve," adding "to gain credibility, it is important that fiscal deficit remains close to this level".
Over the medium term, the government should draw up an appropriate road map to reach the FRBM (Fiscal Responsibility and Budget Management) target of 3% of GDP, he said.
"We must focus particularly on reducing the overall level of subsidies as a proportion of GDP," Rangarajan added.
The industrial output measured on IIP has been below 5%, August and September and in the following month contracted by 5.1%, while there was an uptick in November IIP, the data for December will be released in the second month of February.
Rangarajan further said the mismatch between Current Account Deficit and capital flows has put pressure on rupee, which has weakened against the US dollar.
"The current account deficit in the current year may turn out to be higher than last year...Efforts must be made to keep the CAD around the manageable level of 2.5% of GDP," Rangarajan said.
Taking up the issues of sectoral constraints witnessed by the economy, he said "the two sectors which pose a major challenge are the farm economy and the power sector".
He said it is imperative that India aims at GDP growth led by agriculture and allied activities growing at 4% per annum.
On power sector, he said a more aggressive path of capacity creation must start immediately.
"Constrains such as the availability of coal, land acquisition and environmental issues need to be tackled so that the desired growth in capacity expansion can be achieved," Rangarajan said.
He also pointed out that besides the sectoral constraints, good governance is critical for economic growth.
"That good governance is at the very heart of economic growth and poverty reduction, and even political legitimacy is now part of conventional wisdom," he said.
Talking about the country's increasing integration with the rest of the world, Rangarajan said, "it [India] will be increasingly affected by what happens externally".
While the slowing down of India's growth in the current year cannot be attributed solely to external factors, some segments of India's economy have been directly influenced by the external factors, he said.
"Since India's growth is largely propelled by domestic demand, we must on our own steam be able to grow at 8%," he said adding "if the world situation improves, we should be able to achieve the goal of 9% sooner".
