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C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister on Thursday said that over the medium term, efforts must be made to keep the current account deficit (CAD) around the manageable level of 2.5 to 3% of GDP.
According to him, this is desirable to impart much needed stability on the external payment front and to reduce the risk the domestic economy runs from volatility in international financial markets.
Addressing members of the Bangalore Chamber of Industries and Commerce in Bangalore, he said that for the year as a whole, the CAD may show an increase over the previous year and may be around 5% of the GDP.
"We have had no problems so far in financing the deficit. The capital flows have been adequate to cover a CAD of $93 billion. We need to look beyond adjustments in the exchange rate to achieve better balance on our trade account," he said.
He further said that in addition to this main issue which is high on the agenda for the Indian government, inflation is the other aspect which must be tamed.
"We have had three years of high inflation. Inflation was largely due to certain severe supply constraints, particularly of agricultural products. The fact that inflation is triggered primarily by supply side shocks does not, however, mean that monetary policy and fiscal policy have no role to play," he said.
According to him, there are now definite signs of easing on the price front. The non-food manufacturing inflation has come down to below 3% as of April 2013 and this, according to him, gives room for the monetary authorities to ease monetary policy.
"High growth does not warrant a higher level of inflation. In fact for sustained high growth, we need price stability as a pre-condition. We must keep inflationary expectations to the 5% comfort zone," he urged.
Rangarajan further added that the current fiscal 2013-14 may turn out to be better.
"The growth rate can be around 6.4%. The full impact of the change in investment sentiment may be reflected through the year resulting in higher growth in manufacturing. There will also be a special emphasis on achieving the production and capacity creation targets in the key infrastructure sectors that lie in the public domain such as coal, power, roads and railways. A serious effort is being made to remove the bottlenecks in the clearance and implementation of large projects. The setting up of the Cabinet Committee on Investment should go a long way in achieving this objective," he added.
