However, the Manila-based multilateral development bank warned of inflation risks mainly due to food prices and forecast that inflation would remain steady at five per cent in the two fiscals.
“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, Manila-based ADB said in its Asian Development Outlook, 2007.
The report warned that inflation risks persist and any shock to food prices could stoke price pressure.
“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,” ADB Chief Economist Ifzal Ali said in a statement.
The report said 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 said 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,” Mr Ali said.
Higher interest rates
Hike in interest rate, however, will discourage consumer spending, leading to moderation of demand for consumer durables and a slowdown in the pace of construction activities.
The report also added that imports are expected to grow faster than earlier projected due to firmer global oil prices. It now expected the current account deficit to stand at 1.6 per cent of gross domestic product (GDP) in 2007-08 and 1.9 per cent of GDP in 2008-09.