New Delhi: India’s economy can expand 7% in 2009-10 and the central bank must weigh the trade-off between growth and inflation when it reviews policy settings later this month, a top government adviser said on Tuesday.
The forecast for the fiscal year ending March is higher than the 6% estimated by the central bank and private analysts, and the 6.3% predicted by the Planning Commission.
Arvind Virmani, chief economic adviser at the finance ministry, said that global uncertainties were receding and domestic industrial output has revived, helping boost growth.
Industrial thrust: Chief economic adviser Arvind Virmani. Ramesh Pathania / Mint
Faster expansion of factory output would help the broader economy grow at annual rates in excess of 7% in both the December and March quarters, he said in an interview.
“This year, I expect 7%. Next year, with some basic reforms, it should go to 8%-plus,” he said, referring to fiscal reforms such as cutting the deficit.
He added that the country could get back to a higher growth trajectory of 8.5-9% in 2011-12.
Last year, the global slowdown cut growth in Asia’s third largest economy to 6.7%, from 9% or more in the previous three years.
The Reserve Bank of India (RBI) cut interest rates between October and April, reduced the cash reserve ratio for banks and pumped cash into financial markets, while the government cut duties and stepped up spending to pump-prime a slowing economy.
Just as the economy started recovering, the weakest monsoon in nearly four decades and floods in some parts of the country boosted food prices and cast a shadow over growth prospects.
Virmani said the faster pace of growth in manufacturing would help offset the adverse impact of drought on the economy.
Data on Monday showed industrial output grew at its fastest annual pace in 22 months in August on strong consumer demand.
Faster industrial growth coupled with inflationary pressures have boosted the case for higher interest rates, although analysts do not expect RBI to raise them at its policy review on 27 October.
RBI governor D. Subbarao said last week that lifting rates was a question of when, not if, but government officials have stressed the importance of maintaining pro-growth measures.
Virmani said monetary policy had to balance growth and inflation. While monetary policy would not be effective in addressing food price inflation, any tightening could choke faster recovery in the economy, he said.