India to grow 8.5 pc in 2007-08, 8 pc in 2008-09

PARIS, May 24 (Reuters) India's economic growth is expected to slow to 8.5 per cent in 2007/08 and 8.0 per cent in 2008/09 from 9 per cent in the fiscal year that ended in March as fiscal measures and higher interest rates bite, the OECD said today.

In its semi-annual Economic Outlook, the Organisation for Economic Cooperation and Development (OECD) said investment growth could slacken due to higher interest rates and export growth may slow, although export projects in special economic zones could help and software service exports would probably remain strong.

''Tighter monetary conditions and continued fiscal consolidation are likely to result in a slight slowing of non-agricultural GDP in (fiscal) 2007 and 2008,'' the OECD said.

Fiscal 2007 refers to the year ending March 2008.

It said a normal harvest should limit the extent of slowdown in the whole economy.

''More broadly, with a wide-ranging programme of structural reform, it would be possible to increase potential growth above its current pace of 8 to 8.5 percent,'' it said.

India, which is not a member of the OECD, has averaged growth of 8.6 percent in the past four fiscal years and the central bank forecasts expansion of 8.5 percent in the year ending March 2008.

The OECD forecast the current account deficit would widen to 2 percent of GDP in 2008/09 from 1.8 percent in 2007/08 and a shortfall of 1.3 percent last fiscal year.

Inflation as measured by the GDP deflator, which the OECD said was a broader measure than consumer or wholesale price indexes, was forecast at 5.3 percent this year from 4.8 percent in 2006/07 and was expected to slow to 5.0 percent next year.

''Inflation should ease back to 5 percent as food prices stabilise,'' the OECD said.

Wholesale price inflation, India's most widely-watched indicator, touched a two-year high of 6.7 percent annually in January but has since eased to 5.4 percent.

The central bank aims to contain inflation close to 5 percent this fiscal year, and has a medium-term target of 4.0-4.5 percent.

''Although broad-based measures of inflation are stable, the longer the publicised measures of inflation continue to be above the government's target, the more likely it is that inflation expectations will increase, making the eventual slowdown in the economy even greater,'' the OECD said.

The combined fiscal deficit of central and state governments was likely to decline to 6.0 percent in 2008/09 from 6.7 percent in 2006/07, but further fiscal consolidation was needed to ensure adequate supply of domestic savings, it said.

''A general government deficit target of 3 percent of GDP over the five-year period beginning in 2008 would lay a sound foundation for faster growth,'' it said.

REUTERS SR DB2007