However, to achieve over 9 per cent economic growth, India has to step up investment and raise capital productivity along with determined reform efforts, the bank said in its annual Asian Development Outlook report.
"India' s economy is forecast to grow by 7.6 per cent in fiscal year 2006 and 7.8 per cent in 2007, slightly below the expected medium-term rate of growth," the ADB report said.
Growth, particularly in consumption and investment, will be held back by the fuel price adjustment process to reduce domestic petroleum subsidies, which is likely to boost inflation, the multilateral agency said. Rising interest rates will have some modest negative effects on investment, it said.
India's growth has averaged more than 8 per cent over the past three years driven by broad-based domestic demand and expensive business dynamics. ADB said India faces two key policy challenges as it continues its structural transformation.
First, India must maintain consolidation of its fiscal position, while ensuring spending on infrastructure improvements to support industry and services development, and investment to advance rural productivity and human development.
Secondly, it needs to improve the investment environment by lowering the cost of doing business.
Indian economy's growth surged to 8.1 per cent in 2005 due to strong performances in industry and services, as also agriculture, which put up a poor show in 2004. India has ambitions to lift its growth rate to over 9 per cent in the medium term.
"This is likely to require an increase in the ratio of its investment to GDP and raise capital productivity. Both will need determined reform efforts," ADB said.
In South Asia, ADB said, growth is expected to moderate to 7.3 per cent in 2006 as a result of some slow down in India and Pakistan, but then it would rise slightly to 7.5 per cent in 2007. The region grew by 7.8 per cent in 2005.
Average inflation for the region in 2006 is expected to increase to 6.1 per cent as removal of subsidies on some petroleum products in a number of countries boosts domestic prices, the Manila-based ADB said.
Most countries are projected to see somewhat larger current account deficits with the regional average projected at 3 per cent of GDP.
The flagship annual economic publication of ADB projected developing Asia to achieve an overall economic expansion of 7.2 per cent in 2006 and 7 per cent in 2007, a marginal easing from 7.4 per cent in 2005.
"Asian economies will take strength from the continuing upswing in global electronics sector and fast growth expected in China and India," Ifzal Ali, chief economist, ADB said.
Growth projections for developing Asia are heavily influenced by three key economies - China, India, and South Korea as these economies have a combined weight of 66 per cent of regional income.
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