India's economy will grow at a lower-than-expected pace of 8% during the fiscal year, but a slew of rate rises are not solely to blame, and the central bank should keep up its inflation fight, a top adviser to the prime minister said.
"Inflation remains way above what is considered as the comfort level," said C Rangarajan, the chairman of the Prime Minister's economic advisory council said on Thursday.
"In that situation it becomes absolutely essential for the central bank to act."
At a time when peers around the world are easing monetary policy to head off a downturn in the global economy, the Reserve Bank of India is widely expected to raise rates again at its October 25 policy meeting.
"The primary responsibility of the country's central bank is to tame inflation," Rangarajan said at a news conference in New Delhi.
In a further sign the rate increases have failed to rein in inflation, the latest weekly data showed the food price index was up 10.60% through Oct. 8 versus a year ago, compared with a 9.32% reading in the prior week.
Sluggish industrial output growth, high rates and fallout from the euro zone crisis have all taken their toll on Asia's third-largest economy, with its main policymakers revising down their growth forecasts for the fiscal year.
Businesses have seen a steady rise in their cost of funding following a dozen rate increases by India's central bank even as emerging economies such as Brazil and Indonesia have eased policy.
"Slow growth in industrial production should not be entirely put at the door of rising interest rates," he said, adding that economic growth was also hurt by bottlenecks on the supplyside, citing coal shortages and problems in the mining sector.
Economists expect India's slowing growth and inflationary pressures to stretch well into next year, a Reuters poll showed, and consensus predicts inflation at 8.8% in the year ending March 2012, much higher than their previous forecast in July.
Rangarajan, the adviser to Prime Minister Manmohan Singh echoed finance minister Pranab Mukherjee's comments on Wednesday that most observers expect India's economy to grow by less than 8% in the fiscal year.
The federal budget had projected economic growth of around 9% for this fiscal year that ends in March 2012.
Both officials appeared resigned to another rate hike, despite grumblings from industry leaders that high borrowing costs were damaging investment.
Rangarajan said India needs to use both fiscal and monetary methods to tame inflation and to maintain high growth. He predicted headline inflation would ease to 7% by March, when the current fiscal year ends.
The council provides economic forecasts twice every year. It had revised downward its initial forecast of around 9% growth to 8.2% in July.
Subsidies Pressuring Deficit
Rangarajan said it will be difficult for India to meet the budgeted fiscal deficit target of 4.6% of GDP this year, without controlling subsidies. However, he said he did not expect the deficit to breach 5%.
He said India needed to raise controlled prices for diesel to cut oil firms' revenue losses on retail sales, adding such a move could happen when inflation starts moderating.
India freed petrol prices in June 2010, but still subsidises diesel, which accounts for about 70% of all petroleum products used in the country.
Private economists see the fiscal deficit widening to up to 5.6% of gross domestic product in the current fiscal year, against government's target of 4.6% as the gap between tax receipts and spending widens.
India's industrial output growth has dwindled to low single digits, while car sales are expected to rise just 2-4% this fiscal year, an industry body had forecast, sharply lower than 30% growth last year.
Headline inflation has been above 9% for 10 straight months, driven up by snags affecting food distribution, weakness in the rupee and high oil prices.