As foreign brokerages cut India's growth forecast to sub-4.5 per cent, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan on Tuesday pegged economic growth at 5-5.5 per cent for the current financial year.
Economic growth had plunged to a four-year low of 4.4 per cent in the first quarter of the current financial year.
Rangarajan said though first quarter gross domestic product (GDP) growth was not encouraging, the economy still had the potential to grow more than the previous year's growth rate of five per cent. "Even if you assume that the non-farm sector, including industries and services, grows at the same pace as last year, the growth rate in agriculture can be anywhere between 4 and 5 per cent, which itself will give another 0.3 or 0.4 per cent growth rate," said Rangarajan, on the sidelines of a Skoch summit here.
On Monday, HSBC had cut its FY14 GDP estimate for India to 4 per cent from 5.5 per cent. CLSA and Nomura, too, had lowered growth expectations from 5 per cent to 4.2 per cent. On Tuesday, Goldman Sachs reduced India's growth forecast for FY14 to 4 per cent from 6 per cent and said it expected the rupee to touch 72 against the dollar in six months.
In his address at the event, Rangarajan said the country still had a healthy investment rate, as seen in the numbers released for the first quarter. "Investment rate is still around 30 per cent of GDP. In 2007-08 when we had 9.4 per cent growth rate, the investment rate was 38 per cent. Also, it has come down a bit now but the incremental capital output ratio was 4:1 in 2008-09 and was the same in 2012-13. Hence, the problem is with output flow."
He said the output flow due to project delays, deficiency in supply of crucial inputs such as coal and power did not commemorate the investment rate and, hence, this restricts the growth rate.
He advised the government to speed up completion of projects and overcome the bottlenecks so that there is minimum intervention to higher growth rate.
Rangarajan also said stability is needed on three fronts - price, foreign exchange and fiscal system - as the economy had deviated from it in the last few years. "As far as price stability is concerned, I see some light at the end of the tunnel. I hope that as foreign exchange rate is stabilised, it is possible for a easier stance on the monetary policy," Rangarajan said.
The Reserve Bank of India (RBI), he said, will have greater monetary space if the rupee stabilises "at an appropriate level".
Calling for a cap on subsidies, he said it was crucial for the government to decide which subsidies are more important. "Providing food to poor people is of paramount importance, but for other subsidies, it is important to maintain them at an appropriate level so that the total subsidies as a proportion of GDP is maintained at a suitable level," Rangarajan said.
Correction in prices of diesel is needed to bring down fiscal deficit to required levels, he added.
The government had recently raised diesel prices by 50 paise a litre. The Centre plans to reduce its fiscal deficit to 4.8 per cent of the GDP in FY14 from 4.9 per cent in the previous year.