Rangarajan sees lower GDP on slow factory growth

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India's economy will grow a lower-than-expected 8 per cent during this fiscal year, a top adviser to the prime minister said, adding to a slew of forecasts showing rising inflation, slowing industrial output and global headwinds are slowing growth.

C. Rangarajan, the chairman of the prime minister's economic advisory council, also said on Thursday Asia's third-largest economy needs to use both fiscal and monetary methods to tame inflation to maintain high growth.

The council provides economic forecasts twice every year and had earlier predicted a growth of 8.2 per cent for the current year that ends March 2012.

"When inflation is remaining at the level which is way above the comfort level of central bank, therefore in that situation it becomes absolutely essential for the central bank to act," Rangarajan said at a conference in New Delhi.

Businesses have seen a steady rise in their cost of funding following 12 rate increases by the central bank since March 2010, and are bracing for another likely increase at the bank's next policy review on Oct. 25.

In a further sign that the rate increases by the Reserve Bank of India (RBI) have failed to rein in inflation, the latest weekly data showed the food price index was up 10.60 percent through Oct. 8 versus a year ago, compared with a 9.32 percent reading in the prior week.

Rangarajan's comments echo comments by Finance Minister Pranab Mukherjee on Wednesday that most observers expect India's economy to grow less than 8 per cent in the current fiscal year.

India's industrial output growth has dwindled to low single digits, while car sales are expected to rise just 2-4 percent this fiscal year, an industry body had forecast. That's remarkably down from a 30 percent sales growth last year.

"Slow growth in industrial production should not be entirely put at the door of rising interest rates," Rangarajan said.

Headline inflation readings have been above 9 per cent for 10 straight months, driven up by bottlenecks affecting food distribution, weakness in the rupee and high oil prices.

"Primary responsibility of the country's central bank is to tame inflation," Rangarajan said.

"Inflation remains way above what is considered as the comfort level of inflation."