Robust investment, buoyant industrial expansion and moderate agricultural growth will ensure that India’s economy remains on a solid growth path in 2007 and 2008, the Asian Development Bank (ADB) says in a new major report.


ADB’s key economic publication, Asian Development Outlook 2007 Update (ADO Update) projects India’s economy to expand by 8.5% in 2007 and 2008, up from an earlier forecast of 8.0% and 8.3%, respectively. India’s economy grew at a scorching pace of 9.4% in the fiscal year ending March 2007, the fastest expansion in the last 18 years.

The report, however, warns that inflation risks persist and any shock to food prices could stoke price pressures. It forecasts the inflation rate, measured by the wholesale price index, to remain steady at 5% in both fiscal year 2007 and 2008.

“While the Indian economy has moved to a higher growth trajectory, a major challenge for policymakers is to find ways to expand the market-based reforms so that the benefits flow to all sections of the population,” says Ifzal Ali, Chief Economist of the Manila-based multilateral development bank.

Accelerating growth and the capacity bottlenecks have piled pressure on prices that are also feeling the heat from fast rising prices for imported foodstuffs. Indian consumers are still being shielded from the costs of oil in the international market.

The report says the Reserve Bank of India, while ensuring that the credit and interest rate environment supports exports and investment demand, is successfully containing inflation pressures.

“Higher interest rates have not dampened business investment as a very buoyant long-term economic outlook has outstripped a cyclical rise in borrowing costs,” says Mr. Ali.

Interest rate rises, however, will encourage consumers to put off spending, leading to moderation of demand for consumer durables and a slowdown in the pace of construction activities.

The ADO Update says imports are expected to grow faster than earlier projected due to firmer global oil prices. It now expects the current account deficit to stand at 1.6% of gross domestic product (GDP) in 2007 and 1.9% of GDP in 2008.

The report warns that shocks which may undermine fiscal or monetary discipline and adversely affect food or fuel prices pose risks to India’s economic outlook. A further appreciation of the rupee would also likely hurt exports and profits of domestic companies in export-oriented sectors. Lastly, though India would not be immune were credit market convulsions to damage prospects for global growth, improved policies, strong domestic demand and healthy finances would provide room for adjustments.