"We are looking at a growth rate between 7.5 to 8 per cent this fiscal," Dr Rangarajan told reporters on the sidelines of a Conference here. Mr Rangarajan, however, said growth was expected to rebound in 2009-10. "I think inflation could moderate to 8 to 9 per cent by March-end," he said. The Former Reserve Bank of India Governor said the softening of global crude prices would help in lowering domestic prices. But Dr Rangarajan said the present tight monetary policy stance of the Central Bank ought to continue unless the price situation changes dramatically.
To a question relating to the government being able to meet the fiscal deficit target, Dr Rangarajan said this target of 2.5 per cent of the GDP in 2008-09 was likely to be met.
"Fiscal deficit as defined in the budget may not increase, but off-budget deficit may," he said.
The issuance of oil bonds to Oil Marketing Companies, the Rs 60,000 crore loan waiver to the farm sector and implementation of the Sixth Pay Commission Report are putting a strain on the finances of the government.
Oil Bonds to check that petrol and diesel prices do not increase at the retail level is a significant measure that will add to the off budget expenditure of the government.
Planning Commssion Deputy Chairman Montek Singh Ahluwalia, a key person in government's policy making, has lowered the growth target of the economy to eight per cent from 8.5 per cent plus for the fiscal.
Similarly, the Central bank, in its recent review of the credit policy, has projected that the Indian economy would grow at 8 per cent from 8 to 8.5 per cent earlier.
A vigorous debate has ensued among economists as to what would be the growth rate in 2008-09. Most economic analysts are betting for a lower growth rate than the Central Bank's forecast or the one made by Dr Rangarajan.
The repeated hikes of the repo rate and Cash Reserve Ration (CRR) as part of the tight monetary policy are expected to compress GDP growth rate and industrial production, especially the manufacturing sector.
Besides, lowering of import duties and ban of several export items, such as non-basmati rice, are also cited as reasons which will falter the growth rate.
Combating inflation is now the top priority of the RBI and the government and the squeeze on money supply is expected to continue.
The clock of inflation has been ticking towards 12 per cent and the government has put this on top of its agenda as it is to face Assembly elections this year and General Elections next year.
Others argue that if inflation were left unchecked, growth would, in the long run, decline. For instance, in 1972 India had an inflation rate of 10 per cent, in 1973, 20 per cent and in 1974, 25 per cent-- the highest in Independent India.
In 1974--one of India's worst years--GDP grew by only 1.2 per cent. Hence, this set of economists feel that checks on inflation can push up aggregate growth in the future to levels that are higher than what it would be inflation was allowed to rise unabated.
Crude oil fell to a three-month low by as much as 1.41 dollars or 1.2 per cent to 120 dollars per barrel on the New York Mercantile Exchange. Global commodity prices too may be cooling off, triggering hopes that inflation rate would be reversed and the RBI may soon soften its stance on interest rates.
But Dr Rangarajan endorsed the stance of the RBI and stuck to the optimistic projection of the GDP growth rate. Private assessments feel the GDP may be much lower than this.
In contrast to Dr Rangarajan's assessment, international ratings agencies have also expressed concerns over the country's deteriorating public finances.