Sounding more optimistic than the Reserve Bank of India governor, chairman of the Prime Minister's Advisory Council C Rangarajan said the economy still has the potential to grow at 8-9%.
But to achieve this growth, policymakers must bring down inflation and the twin deficits — current account and fiscal — to manageable levels, Rangarajan said at an event on Thursday.
Curbing these would increase both investment and savings rate in the economy, he said. “Even with an incremental capital-output ratio of 4, the investment rate achieved in the past should enable the Indian economy to grow at 9%,” he said.
RBI governor D Subbarao had said on Tuesday that the growth rate of the economy may have slipped to 7% and slashed the gross domestic product growth rate for 2012-13 to 5.8% from 6.5%. GDP grew by 6.5% in 2011-12, the slowest in nine years. For the April-June quarter of 2012-13, GDP grew at 5.5%. Rangarajan expects GDP to grow at 6% in the current year.
The former RBI governor said a high growth rate does not warrant high inflation. “Fact that inflation is triggered primarily by supply-side shocks does not mean that monetary policy and fiscal policy have no role to play,” he added.
At the monetary policy review on Tuesday, RBI had kept its key policy rate unchanged against wide expectations of a cut citing inflationary pressures. Inflation had risen to 7.81% in September and is likely to rise further with most analysts putting the peak at around 8%.