Known more as an India friend within the World Bank, outgoing Chief Economist and Senior Vice President (Development Economics) Nicholas Stern gave way to French national Francois Bourguignon on September 19.

In Dubai to attend the World Bank-International Monetary Fund annual meetings, Stern shared his optimism about the economic growth prospects in India with P Vaidyanathan Iyer.

"At 11 per cent of GDP, the fiscal deficit is too high. Growth can be fast if deficit is down and faster if reforms continue," he said.

He made it a point to mention that he carried fond memories of India and said he would continue to remain a good friend of India.

Stern is leaving the Bank to become the second permanent secretary and managing director of budget and public finances at the treasury of the United Kingdom. He will also head the UK's Government Economic Service.

Excerpts from the interview:

You have consistently said that India's mounting fiscal deficit is a cause of concern. But one can perceive a sense of denial back home. The argument is high deficit can be taken care of by higher growth rates. . ?

Fiscal deficit remains a problem area. A high deficit means that the debt to gross domestic product (GDP) ratio too is high. This will definitely pose a risk to growth rates.

People's savings are being channelled to finance the government expenditure now. Further, it is also diverting investment from private resources to the government spend.

While some of this may be for meeting the development expenditure, it is certain that India will forego growth if the deficit continues to be high.

The other side to it is, if growth rate drops the deficit will go up further. In a low growth scenario, borrowing tends to be high resulting in a higher debt-GDP ratio.

This leads to lack of confidence and projects a picture of uncertainty.

The growth can be fast if deficit is down and faster if reforms continue. An 8 per cent economic growth is definitely possible.

How do you view the current build up in foreign exchange reserves in India? They have topped $88 billion now.

This is not an issue to worry about. It's a measure of strength in an uncertain world. I should think the situation is now very comfortable.

The Reserve Bank of India is managing the monetary policy well. Only when it is too large, you have to think about it since it costs to hold huge reserves.

Backed up by the strong reserves, can India now be aggressive in its path of capital account convertibility?

There is no need to rush. Capital account convertibility is a structural change and has long-term implications. What must be seen prior to moving on this direction is whether the financial institutions in the country are strong enough.

Are they capable of dealing with sharp changes in currency movement, in and out? It is fine to move along the path, but I will say again, there is no need to rush.

Given the constraints, what will be your formula for an 8 per cent growth?

I think growth rates in the 1990s and the last few years have been very encouraging. The challenge is to keep the growth going and making it more inclusive.

Growth should spread to rural areas and the northeast region and in states such as Bihar and Uttar Pradesh.

Also, infrastructure is a big part of the growth story. Investment in the sectors such as rural roads, water supplies, ports and power should accelerate.

We also need to see acceleration on trade. One regards Cancun as a setback and the finance ministers are already very concerned. Trade should be strongly put back on the agenda.

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