India's economy could expand by 8.5% in the year ending March 2012, spurred by a strong performance by the industry and service sectors even as the agriculture sector is likely to go through some moderation, the chairman of the Prime Minister's Economic Advisory Council (PMEAC), Dr. C. Rangarajan, said on Thursday.

"It is my estimate that the Indian economy will grow at 8.5 per cent in 2011-12. The growth from agriculture may not be so high, but services and industry compensate for that," Dr. Rangarajan said at the 26th Skoch Summit in Mumbai today.

Of late, there have been some concerns about the health of the Indian economy, especially the industry segment, as interest rates continue to rise and inflation remains sticky. In its monetary policy for FY12, the RBI projected GDP growth at 8%, lower than the Government’s original forecast of 9%.

On inflation, Dr. Rangarajan said that all tools must be used to contain inflation to 4-5%.

"The last few months have shown a declining trend in vegetable prices and it is expected that inflation will come down in the coming months, even though it may remain at a high level for some time," Dr. Rangarajan said.

He said he was hopeful of inflation coming down to 6-6.5% by March 2012.

The agriculture sector and the power sector are the two areas that could pose a major challenge in the medium term, Dr. Rangarajan said.

He also stressed upon the need to reduce the current account deficit to 2.5% of the Gross Domestic Product (GDP) and added that the fiscal deficit must be kept at 4.6% of GDP even if it means cutting subsidies.

IIFL