Multilateral lending agency Asian Development Bank has revised upwards India's growth projection to 6 per cent for the current fiscal on account of rising business confidence but warned that inflationary pressure would continue.
"Emerging signs of a recovery in private business confidence and a continued large fiscal stimulus announced in the July 2009 budget helped bolster India's projected economic expansion to 6 per cent this year, upgraded from 5 per cent in March," ADB said in its update on Asian Development Outlook 2009.
India, it added, would be able to clock 7 per cent growth rate during 2010-11. Country's growth rate slipped from 9 per cent to 6.7 per cent in 2008-09 on account of the impact of the global financial crisis.
Projecting an inflation of 4-5 per cent by March 2010, the ADB said, "inflationary pressures are likely to persist, driven by high food prices and expansionary monetary and fiscal policies."
The inflation has turned positive for the week ended September 5, after remaining in the negative zone for about three months.
Rising food inflation, ADB said, would create a dilemma for the monetary authority which is currently engaged in combating the impact of the financial meltdown by following easy money policy.
On the positive, ADB added, delayed rains appear to be filling water reservoirs to an adequate level to ensure a reasonable winter crop harvest.
The multilateral lending agency further said that if the large fiscal deficits are not reined in over the next few years, the public expenditure-led growth strategy, although appropriate given the global economic weakness, could prove counter-productive.
"Apart from global uncertainty, the key downside risk to the outlook emerges from financial crowding out of private investment," ADB said.
The RBI has pegged the growth rate at 6 per cent for the current fiscal, while the Planning Commission sees stronger economic expansion in the second half which could push up the growth rate for the current fiscal to beyond 6.3 per cent projected earlier by the panel.
Growth in the first quarter of 2009 reached 6.1 per cent, a modest rise on the previous two quarters, with the upturn reflecting a recovery in industrial growth to 5 per cent from less than 2 per cent in the previous six months.
"The government's strong fiscal stimulus, complementing the Reserve Bank of India's aggressive monetary policy easing, has successfully brought last year's economic slowdown to an end," ADB Chief Economist Jong-Wha Lee said.
The agency has projected economic expansion in developing Asia to come in at 3.9 per cent in 2009, up from the 3.4 per cent expected in March.