India's economic growth is expected to slow down to 5.6 per cent this fiscal, mainly due to a decline in farm output by 2.5 per cent, according to the latest forecast by research firm Crisil.

However, the industrial and services sector remain buoyant and are expected to grow by 6.8 per cent and 8.4 per cent respectively, Subir V Gokarn, chief economist, Crisil, said in Chennai, addressing the AGM of Madras Chamber of Commerce and Industry.

"We are pretty sure about the agriculture growth figures and this is going to pull down the country's economic growth," he said, adding that agriculture growth was projected at minus 2.5 per cent this year.

India's economic growth rate for 2003-04 stood at 8.2 per cent on the back of a robust agriculture growth.

The inflation rate is expected to slide from this point and is likely to touch 6 per cent levels by this fiscal-end, Gokarn said.

However, much depends on the global oil prices. "Whole of the inflationary pressure is external and this limits our policy options. This is a dilemma that we find ourselves in," he said.

The Crisil analysis forecasts the interest rates to rise. The 10-year government securities yields are expected to increase by 100 basis points and the retail rates by 60 basis points, Gokarn said.

Gokarn said the global oil price rise would not be a threat to the country on the balance of payments front.

"Rising oil prices portend global turbulence, but India has good shock absorbers today," he said.

However, this would come at the cost of radical economic reforms in the country. "The possibility of radical reform increases during a BoP crisis," he explained.

The Crisil chief economist also advocated flexibility in the labour market to employment generation.

"Labour market flexibility is critical for employment generation," he said, pointing out that though the industrial economy was growing, the employment generation declined over the last many years.

Expressing apprehension on the impact of Free Trade Agreements with Sri Lanka, Thailand and other countries, Gokarn said it was difficult to understand the political rationale behind it.