The Indian economy may grow between 6% and 6.5% this fiscal after expanding 6.7% last year, according to former Reserve Bank of India (RBI) governor and chairman of the Prime Minister’s economic advisory council C. Rangarajan. “I expect economic recovery in the second half of FY10," he said. Interest rates may harden by the end of 2009, Rangarajan said.

“The rainfall deficiency is estimated at 25%," he said. The scanty rainfall is likely to crimp agricultural growth, he said, adding that he expected a 16-17 million tonnes fall in the kharif, or summer, crop. Edited excerpts:

Being optimistic: Chairman of the Prime Minister’s economic advisory council C. Rangarajan says interest rates may harden by end of 2009. Ramesh Pathania / Mint

Are you still sticking with that 6-6.5% (economic growth) target despite the impact of the weak monsoon?

I think the Indian economy will grow between 6% and 6.5%. It is true that the growth prospects for the year have to be seen in the context of two factors. First is the impact of the international financial crisis on the global meltdown and the second is the impact of the drought.

As far as the international financial crisis is concerned, many analysts expect that the industrialized countries will show signs of recovery in the second half of the year. Green shoots are visible and people think that the economies will begin to stop declining...we should find the impact of that in the second half of the year.

As you know, in the second half of 2008, the Indian economy grew at 5.8%. I expect the economy to do much better than that in the current year. Taking into account both the impact of the international financial crisis as well as the drought, I still think that the it will grow between 6% and 6.5%. That seems to be a reasonable estimate at this point.

The other area of concern has been how prices of many essential commodities have moved up because of drought-like conditions, and which is leading to fear, also reflected in the bond market, that interest rates might start heading northwards as inflation picks up in the last part of the year. Are you concerned that monetary policy might start tightening before this calendar year is out?

We do not know what the stance of the monetary policy will be towards the end of the year but, certainly I do not think that there is going to be very much of hardening of interest rates. The borrowing programme of the government of India has been very large. But there are some factors that would also keep interest rates (from) not rising too fast. The private demand is still not picking up and, therefore, the government’s borrowing programme could move more smoothly.

Also, as the market stabilization scheme funds are maturing, that will provide additional liquidity... Taking all these factors into account, I believe that there may be some hardening of the interest rates towards the end of the year, but I expect that (the) bulk of the borrowing programme with the government of India would have been done in first six-nine months of the year and, therefore, there may not necessarily be any sharp increase in the interest rates. I think the interest rates may remain more or less at this level.

To labour that point about the GDP (gross domestic product) target that you have set out, how would you break it up between its constituents, which is, agriculture, industry and services, by way of contribution?

I think the agricultural GDP will go down. As you all know, the impact of the drought will have the result of a decline in agricultural production. The rainfall deficiency is estimated at around 25% and this will also mean that there will be a reduction in the area under sowing. It is estimated about 5.7 million hectares may be less in terms of the sowing. This will result in probably a reduction in the kharif foodgrain production of around 16-17 million tonnes.

At this particular point, there is no reason to expect that the rabi output would be affected. Therefore, the overall decline in the foodgrain output during the current year will be of the order of 16 million tonnes...Since agriculture contributes between 18% and 20% to the total GDP, this will have an effect of reducing the overall GDP by 0.5%.

The industrial sector may do a little better for two reasons. In the first quarter of the current year for which data is available, the two segments of mining and quarrying and electricity are doing reasonably well. Manufacturing is still not doing that well but, in the second half of the year, we can expect it to do better partly because of the base effect and partly because of the pick-up in the world economy, and this may result in our exports also doing better in the second half of the fiscal year. Therefore, I think industry may do a little better this year than last year. Last year, industrial production grew only by 2.7%. That was a very dismal figure, but this year we should expect industrial production to do much better.

The services sector may move more or less at the same level as it did last year, adding up all of these things, you will get somewhere around 6.3-6.4% as the GDP growth for the current year.