Rangarajan disappointed at IIP; hopes FY13 GDP to be 7.5%

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

Indian economy is growing at such a slower pace that even Prime Minister's Economic Advisory Council chairman C Rangarajan is disappointed with it.  In an interview to CNBC-TV18, he said dismal December IIP data was "disappointing" as other indicators like the PMI and car sales were showing definite improvements.

Industrial output in December had come in at 1.8% versus 5.9% in November, significantly below CNBC-TV18's estimates of 3.45%

Going forward in FY13, Rangarajan sees fiscal deficit lower by 0.5% than FY12's figure and hopes GDP growth to be higher at 7.5%. Rangarajan also assured that the government's immediate aim was to bring down inflation to 6%, but when it falls to 6.5%, one can expect the RBI to ease rates.

However, IIP is not the data that the Reserve Bank of India looks very closely at, especially the provisional numbers, because they tend to be very volatile. Definitely for policymaking, the WPI numbers are more crucial. The next WPI numbers are to be declared on February 14.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: This has come in at 1.8%. This looks like we are headed for a pretty bad number as far as GDP is concerned, your thoughts?

A: I think it is very disappointing. I had thought that all the other indicators were showing improvement. Particularly, what is not clear and why it is happening is the decline in the capital goods sector again by a large margin of 16.5%. Somehow, this doesn't exactly coincide with other indicators, but this is the data that has emerged and probably we have to keep that in mind. But certainly it is very disappointing.

Q: How does this leave the policy maker, especially the one in Mint Street? Should they therefore not get that perturbed about growth since a lot of corroborative data is not indicating that dismal a picture?

A: I think the primary concerns for Mint Street will be with respect to the behavior of inflation. They will be looking for what the inflation numbers will indicate for the month of January and so on. But certainly they would like to take into account what is happening to the overall economy and particularly the manufacturing industrial production. The numbers do indicate we had good pick up as far as the consumer goods industry is concerned and it is really the capital goods industry which is showing a decline. The mining sector has shown a decline of about 3.7%. That is because of the declining production of coal, but there are indications that the coal production is now picking up. Therefore I do not despair; I believe that in the month of January, February and March, there could be a revival.

Q: How long will it be before the Reserve Bank can move on rates, even if they do get a sub-7% print, will it be good enough for them to cut rates given the global environment?

A: One has to take into account the possible behavior of prices in the months ahead. If the inflation rate really falls to a level quite below 7%, that will be a good sign as far as the monetary authority is concerned in terms of looking at their policy. I would say that if there is a decline to close to 6.5% in the headline inflation, then that maybe a point at which the change in policy may be indicated.

Q: It's pretty much factored in for this fiscal at least that growth is going to come in at 6.9% to possibly even 7.1%. But how would you expect or extrapolate it to FY13 in terms of GDP growth for India?

A: I think for various reasons, the performance of the Indian economy in the coming fiscal will be better than the current fiscal year. Therefore, I would say that probably the growth rate will be in the region of 7.5% for next year.

Q: In light of that what would be a sustainable inflation level which the government would be comfortable with?

A: I think we must first get inflation down to about 6% and then see whether it can go further down. But I think our aim initially at least must be to ensure that the inflation rate comes to around 6%.

Q: As you speak about this 7.5% growth that you are hoping or expecting for the coming year, what are you factoring in by way of a fiscal deficit in that case?

A: I am hoping that the fiscal deficit for next year would be about 0.5% lower than whatever the level at which fiscal deficit in the current year is. I think the fiscal deficit in the current year is going to be above the budgeted level. But what should matter as far as the next year is concerned is a definite road map to fiscal consolidation. That will mean that some thing like a reduction in the fiscal deficit by about 0.5% from current year's level.