"We would not be able to go back to nine per cent GDP growth rate, unless the world economy recovers."

Even as the Reserve Bank of India (RBI) Governor D. Subbarao recently held out an assurance that the massive borrowing by the government this fiscal would not impinge on the private sector’s fund requirements, former RBI Governor C. Rangarajan has expressed the view that tapping the market at such a scale was likely to have an impact on the corporate world by way of crowding out capital and hardening of interest rates.

In his lecture on ‘International financial crisis and its impact on India’ here on Thursday, Dr. Rangarajan, who was also the Chairman of the Prime Minister’s Economic Advisory Council (PMEAC) earlier and now a member of the Rajya Sabha, told members of Parliament that with the government slated to borrow Rs. 4 lakh crore during 2009-10, interest rates would go up by the end of the fiscal.

“Interest rates will harden by the end of the year,” he said while noting that as long as the demand for capital from the private sector does not pick up, “the government will be able to borrow at the same rate”. However, with the economy likely to show signs of definite improvement in the second half of fiscal year, he said it could lead to a pick-up in credit demand by the industry.

Dr. Rangarajan pointed out that while the GDP (gross domestic product) growth would be about 6.5-6.7 per cent in 2009-10 and go up further to 7-8 per cent during the next fiscal, anything above that would be difficult in the current environment. “We would not be able to go back to nine per cent GDP growth rate, unless the world economy recovers,” he said.

The Centre’s fiscal deficit at 6.8 per cent of the GDP, he said, was not sustainable and the country’s total deficit, including that of States and off-budget items, was likely to be at a high of 12 per cent. As for the Centre’s fiscal deficit, he said efforts would have to be made to bring it down to three per cent in the next three years.

Pointing out that the government should step up public spending to tackle the impact of the global economic crisis on the country’s exports and capital flows, he said: “It is not the level of government expenditure but the composition that is important”. For, additional domestic demand would have to be created to help those sectors which have been severely impacted by the slowdown and, therefore, the government must ensure the additional spending is on sectors which make up for the declining global demand for Indian goods. In this regard, some of the priority sectors for stimulation, he said, were textiles and auto components.

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