Goldman Sachs warns about risks to India growth story

"We would like (India's) growth to be stable. However, there is a risk of a boom bust if the current account deficit continues to widen," Goldman Sachs Vice-President and Chief India Economist Tushar Poddar told reporters here.

"We have seen the real exchange rates appreciate over the last 12 months largely because of high inflation, which is a key risk to the Indian economy going forward," he said.

Goldman Sachs expects the Indian economy to grow at 8.7 per cent and 8.3 per cent in FY12 and FY13, he said, adding, "this is driven by investment and largely infrastructure."

"We are looking at an average inflation number of 6 per cent next year. But even this is at an elevated level compared to where the RBI may want inflation to be." Average inflation expectations are high with asset prices rising and with high fiscal and current account deficits, he said.

According to Goldman Sachs, the RBI is likely to hike key rates by one per cent in the next calender year. The current account deficit is expected to be around 4 per cent of the GDP this year, Poddar said, adding it may further rise next year.

The appropriate policy response should be to tighten fiscal policy at the first instance and also to tighten monetary policy which can reduce demand, Poddar said. Allowing greater FDI can ease some of the pressure on the external balance of payment, he said.

Such measures by the apex bank could reduce demand, but at the same time if the Government allows greater FDI, it would help ease some of the pressure on the external balance of payment, he said.

"The prospects for the economy look very strong for next year with high growth and high domestic demand. We would like the growth path to be stable rather than have a sharp volatility. A high inflation and high fiscal deficit is a risk to economy."

Goldman Sachs said that it expects the National Stock Exchange's main index, the S&P CNX Nifty, to rise 18 per cent in 2011 to hover around the 6,800 mark.