Excl: Why C Rangarajan sees 7.2% GDP growth in FY10

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS FY10 growth seen more than 7.2%: PM adviser See FY11 GDP growth around 8.5%: Experts FY10 GDP estimate at 7.2% feasible: Experts See GDP at 8%, 20% credit growth in FY11 : Uday Kotak India may grow at 9.2% in FY11: CMIE

The PM's Economic Advisory Council today upgraded its forecast for gross domestic product (GDP) growth in the current fiscal to 7.2 % with the expectation that it could rise further to 7.5 %.

In an interview with CNBC-TV18, C Rangarajan, Chairman, PM's Economic Advisory Council, speaks about the Indian economy and gives his outlook going forward.

Here is a verbatim transcript of the exclusive interview with C Rangarajan on CNBC-TV18. Also watch the accompanying video.

Q: Some of the key conclusions and forecast that this report has made, the first being the outlook on the GDP front, you are projecting a GDP growth of 7.2% with an upward bias for the current fiscal. More importantly for the first time you have given a forecast for two years after 8% and then 9%. Tell us what are the basis of these assumptions?

A: The Central Statistical Organisation (CSO) has already come out with an estimate of 7.2% as a growth rate for the current year and we agree with that estimate. We have some differences on the sectoral growth rates, but by and large we agree with that growth rate projection. In the context of the strong industrial production data that are now available, perhaps the growth rate maybe slightly higher and that is why we say 7.2% with an upwards bias, it could touch 7.5%, the growth rate this current year.

The reason why that we are projecting a much higher growth rate for the next year is that we think that there will be a substantial turnaround in agriculture. Agriculture growth rate went down in the current year; it also did not do that much well last year. Therefore, there will be a pickup in agriculture next year and if there is a turnaround of around 5% in agriculture next year that should give us the growth rate of almost 8.2%.

The following year we think that the growth rate will be even higher because we think by that time the world economy would have improved and the world trade would have improved and therefore that would how an additional beneficial effect on the Indian economy. Therefore, we think in 2012, we should be able to have a much higher growth rate of 9%.

Q: So what you are saying is that it will take us around three years after the slowdown to go back to pre-slowdown high levels of growth?

A: Yes, that is true. But the growth rate at 7-7.5 or 8% is not a low growth rate; it is picking up. To go back to the 9% rate of growth in the economy, we certainly need a better world environment, without such a beneficial benign world environment, it is somewhat difficult to grow at 9%. But I think we be there in two years from now.

Q: On the world environment do you think that it is completely out of the woods because there is still some talk, there are some nations which are struggling. What is your assessment on the overall international side?

A: I think the industrially advanced countries are coming out of the recession. But the recovery is going to be very slow, it is not going to be very strong. But I do no expect a double dip recession as some people expect to happen. I think the recovery is going to be slow, but it will be steady. I think we will see positive a growth rate in the year 2010 and in 2011.

Q: Let's discuss the two key elements related to the Indian recovery. One is the overall fiscal space that the Indian government has to continue with what was the post slowdown stimulus. The other is rather sharp increase in prices that we are seeing in the domestic economy and your report also categorically hints that the risk of transmission into the manufacturing side. How imperative is it for the government to start fiscal consolidation strategy and what would you advise it to do along with specific steps that you may feel should be taken?

A: The process of fiscal consolidation must begin, in the current year, the budget provided for a fiscal deficit at 6.8% of the GDP. This is a very high level of fiscal deficit and this level of fiscal deficit cannot be sustained over a long period. Therefore, we need to bring it down, but we cannot bring it down in a very abrupt way. It has to be gradual because the need for providing adequate stimulus for growth is still there. Therefore, we should balance the need for stimulating economic growth and the need to bring about a degree of fiscal consolidation.

Q: You also mentioned in the press conference that the RBI returning to neutral position very soon can you expand on that?

A: The RBI like every other central bank adapted an expansionary monetary policy it was an accommodative monetary policy because that was what the circumstances demanded, they not only reduced the repo and the reverse repo rates but they also introduced special means of refinancing banks and other institutions.

So a lot of liquidity was injected into the system so from that position they should move to a position to which they would operate as if they are under normal circumstances, I deliberated avoided the word tightening because it is not tightening that we are talking about it is essentially going back to a pre easing situation.