India's 8.5% growth rate has some 'fluff,' former central bank chief Raghuram Rajan says

There is some 'fluff' in India's economic growth rate, according to former Reserve Bank of India Governor Raghuram Rajan.

This isn't a reflection of "pessimism" as "even 6-6.5% growth is a pretty good number," he told CNBC's "Squawk Box Asia" on Thursday.

India's economy grew a robust 8.4% in the October to December quarter, blowing past expectations, on strong private consumption and manufacturing activity. Reuters had estimated GDP growth of 6.6%.

"The 8.5% has a little bit of fluff in it," said Rajan, currently a professor of finance at the University of Chicago Booth School of Business.

The Indian government raised its GDP growth outlook for fiscal year 2023-24 to 7.6% from 7.3% forecast earlier.

Rajan said one of problems with GDP data is that it mostly reflects India's large firms while smaller companies have only seen "tepid growth."

"When we eventually readjust the GDP numbers, with the fact that small firms haven't grown that much, my guess is — we'll come closer to the 6-6.5%," he said.

Last month,  IMF executive director Krishnamurthy Subramanian told CNBC that India was set to grow at an annual rate of 8%, as the government focuses on higher capital expenditure, which has increased significantly over the last few years.

India's finance ministry has forecast that the country is on track to becoming to be the world's third-largest economy by 2027, with a GDP of $5 trillion.

"It's good to be realistic about your GDP numbers because that forms the basis of policy. If you think you're growing fantastically, why change policy at all?" Rajan said.

The International Monetary Fund has called India "the world's fastest-growing major economy," where "public investment remains an important driver."

But to maintain strong rates of growth India's private sector investment "has to pick up strongly," to create jobs so that more people can join the labor force, Rajan said.

"With all the euphoria about Indian growth — why aren't private Indian firms investing at a larger rate than they have been?" he added. "Everybody says they're going to invest but the fact on the ground is they haven't invested enough so far."