India's economic growth this year may be slightly higher than the currently estimated 7.2 per cent but faster inflation is a big 'worry', according to Reserve Bank of India Governor Duvvuri Subbarao.

India may grow still faster; inflation a 'big worry': RBI

Speaking at the Peterson Institute for International Economics think tank in Washington on Monday, Subbarao did not suggest an exact number, but in a speech to the steering committee of the International Monetary Fund here he had given an estimate of at least eight per cent in the 2010-11 fiscal year.

The IMF itself estimates India's $1.2 trillion economy, Asia's largest after Japan and China, will expand 8.8 per cent this year and 8.4 per cent next year, higher than it projected in January.

"India's growth is getting more broad-based," Subbarao said. "Industrial growth is quite robust. Credit growth is picking up." With India already in near peak capacity utilisation and private sector economic activity increasing, he said he believes "the potential for growth in double digits is there."

But with rising prices for food, assets including property, contributing to inflationary pressure in India's otherwise good post-crisis economic prospects, Subbarao said the RBI plans to remove monetary stimulus in a gradual manner to ensure sustained growth.

"The big worry is inflation," he said. "Supply-side inflation pressures are abating only gradually, while demand-side pressures are building up.

While the tightening of monetary policy may be anti- growth in the short term, it is certainly in the best interest of the economy in the longer term, Subbarao said

"We have begun the process of monetary tightening in earnest," he said. "We need to be calibrated" in exiting from fiscal and monetary stimulus because private consumption and investment haven't fully recovered, he said.

While India is coping with the fastest inflation among Group of 20 nations, "supportive liquidity conditions" Subbarao said indicated India "may well employ" some form of capital controls on capital inflows from overseas in case such investments surge.

"If capital flows resume and we intervene in the foreign exchange markets for whatever reason, there'll be pressures on the liquidity side, and that will put further pressures on inflation," he said, but hastened to add that he was not suggesting the RBI will step in.

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