India's economy is set to grow by 8.6% this year and 9% the year after, buoyed by a strong farm sector growth, but high food and manufactured product prices remain a cause for concern, the Prime Minister's Economic Advisory Council (PMEAC) said on Monday.
In its "Review of the Economy 2010-11" report, the PMEAC said benchmark inflation could come down to 7% by the end of March aided by strong farm output.
While food inflation has shown signs of abating, appropriate policy prescriptions are required to cool prices of manufactured products.
"Considerable care from the policy side, however, needs to be taken to ensure the manufactured goods inflation remains below 5% in 2011-12," PMEAC chairman C. Rangarajan said.
"Given that there is a healthy growth in investment and savings rates, the economy should be able to grow at 9%," he said.
Rangarajan said the agriculture sector is set to grow at 5.4% in 2010-11. "Agriculture will do very well this year. We might have a record harvest of wheat," he said.
Rangarajan also said there is a need to maintain tighter monetary and fiscal policies to fight inflation, besides managing fiscal consolidation
The fiscal deficit, budgeted at 5.5% for the current fiscal, could be marginally lower, Rangarajan added.
To sustain a 9% growth rate, controlling inflation though a combination of monetary and fiscal policies and supply side management would be critical, he said. Besides, there has to increased focus on infrastructure creation.
Rangarajan said agriculture holds the key. All steps must be taken " to ensure that the agriculture sector shows a sustained growth rate of 4%," he said.