Mumbai: Raghuram Rajan, who headed a panel that in 2008 studied financial sector reforms in India, says in an interview that the Budget has laid out a road map towards fiscal discipline. Rajan, professor of finance at the Booth School of Business, University of Chicago, also sees the macroeconomic situation turning difficult as inflation accelerates. Edited excerpts:

Inflationary concern: Raghuram Rajan, professor of finance at the Booth School of Business. Rajkumar / Mint

I think the road map is laid out and I am glad to see that we have accepted a debt target. I think that there are assumptions built into whether we will be able to achieve the deficit reduction. We need to, over the next few years. And as the situation evolves, we will see whether those assumptions are optimistic or not. My sense, however, is there is a fair amount that the government can play with. For example, in terms of disinvestment, or broad-basing shares, as it is now termed... I also like the fact that at least, thus far, the government has been standing firm on petroleum price increases and so on. We do need to bring down the inefficient subsidies... So in terms of (the) road map, in terms of the key things addressed, I think the Budget is very good.

Would you fear that inflation could be a bigger problem than has been projected?

The fact is that we have been suppressing inflation by rolling back some of these duties, by holding down prices. And that inflation has to show up at some point. The problem with any of these measures in the past is that it holds it (inflation) down and then you have a steep adjustment at some point, in which case you get a big burst of inflation. The Prime Minister correctly says that if we don’t do it now, it is going to be be done at some point. So you cannot keep saying, postpone it. Then we will live in a make-believe world and prices do not reflect the true economic cost of those resources. So we need to take not just what has been done, but also look carefully at the Kirit Parikh committee report (on fuel prices)... We need to bring this economy quickly into a situation where prices reflect the fundamental values of the goods that are being consumed. Otherwise, we will have distortions building up, which will create problems down the line.

Would you remain confident of that 8.5% gross domestic product (GDP) growth that some people are talking about for FY11, especially given that we are going to see a sizeable jump in inflation, plus we have a not-so-small borrowing programme of 4.55 trillion? Putting all this together may jack up interest rates. What is your own idea of growth?

The macroeconomic situation is going to become more difficult to manage. Not only do we have the inflationary questions you just raised, there is also going to be the problem of tackling capital inflows. With monetary policy extremely accommodative in industrial countries and rates moving up in emerging markets, there is a potential that we could get more capital inflows. So it is going to become more difficult. I think there is no option but to start normalizing monetary policy. We have already started that; we need to do more of that.