Asian Development Bank on Thursday pegged India's economic growth at 7.4 per cent for 2004 and said high growth is likely to be sustained in medium term.
The Manila-based bank, however, warned that fiscal situation remains a "cause for concern" and said if the new United Progressive Alliance government fails to come to grips with the fiscal challenge, macro-economic stability and growth buoyancy will be jeopardised.
"The near-term economic outlook is promising. The economy is on the upswing of a business cycle and the underlying long-term growth rate is accelerating. Based on the positive assumptions, GDP is forecast to grow at 7.4 per cent in 2004," ADB said in its Economic Bulletin.
The high GDP growth is forecast on the assumption that agriculture is slated to grow by 3.0 per cent, industry by 9.3 per cent and services by 8.5 per cent this year.
Projecting a downturn of industry next year, ADB said GDP is expected to grow by 7.6 per cent in 2005, mainly on the back of a robust 9.0 per cent growth in services sector.
If the new Congress-led coalition government fails to give boost to reforms and contain fiscal deficit, "it will erode business confidence and undermine investment, resulting in reduced growth."
Prescribing a "cautious policy" on capital account liberalisation, ADB said, "A shift in international investor preferences could curb or even reverse the inflow of foreign capital, which is largely in the form of reversible portfolio investments, short-term loans and banking capital."
In addition, ADB said, "Hardening of oil prices could trigger inflation and also widen the trade gap."
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