The Indian government's gross domestic product (GDP) growth estimate of 8-8.5 percent for the current fiscal year appears overly optimistic, says former Finance Minister Palaniappan Chidambaram, adding that the International Monetary Fund's (IMF) projection of 7.5 percent is more realistic.
"7.5 percent is achievable; it could be a few basis points above 7.5 percent, closer to 8 percent. But I can't see how it can be more than 8 percent. In fact, I would caution them not to attempt anything more than 8 percent, because that becomes a bit inflationary," Chidambaram, who most recently served as Finance Minister from 2012–2014, told CNBC.
An estimate of 7.5 percent, if borne out, would put India's economic growth rate ahead of economic rival China. The world's second largest economy is forecast to expand around 7 percent this year.
Important to note, however, is that the jump in India's growth rate is largely attributable to the government's new methodology for calculating GDP, say economists.
Nevertheless, Chidambaram believes the economy is on a far more stable footing than it was a couple of years ago, adding that it's well positioned to withstand volatility stemming from the impending normalization in U.S. monetary policy.
A large factor in this has been the precipitous decline in oil prices, which has eased pressure on the country's balance of payments, he said.
Read MoreMoody's ups India credit outlook as economy blooms
"We are forewarned, we have enough reserves. I think the RBI (Reserve Bank of India) and government working together can manage any volatility that will result if the Fed raises rates," he added.
RBI's next steps
Discussing the RBI's policy path, Chidambaram said the central bank needs to step up monetary accommodation.
"Going forward, he [Governor Raghuram Rajan] is obliged to ease interest rates. Rates have to move down, that is the single biggest factor inhibiting investors," he said.
Chidambaram expects Rajan is likely waiting on more data before making a decision on rates.
Last week, the RBI left its key lending rate unchanged at 7.5 percent, pausing after two off-cycle rate cuts earlier this year.
In its accompanying statement, the RBI said, "developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway."