India's GDP growth is likely to slow down over the next couple of years as a result of restrictive policies -- manifested as higher interest rates and fiscal tightening -- aimed at curbing inflation, a World Bank report has said.
Also, the high inflation is a result of the economy overheating, says the report, titled Global Development Finance, 2007. The report was released on May 29.
The bank has projected that GDP growth will slow to 8.4 per cent in the current financial year, 7.8 per cent in 2008-09 and 7.5 per cent in 2009-10.
"In India, more restrictive policy conditions are expected to lead to deceleration in investment growth and weaker private consumption and government spending, contributing to a slowdown in the GDP growth," the report said.
The World Bank's projection is in line with the International Monetary Fund's World Economic Outlook, 2007, which projects GDP growth at 8.4 per cent in 2007-08 and 7.8 per cent in 2008-09.
The estimates come at a time when the government has been saying that the economy will grow at 9 per cent during the 11th five-year Plan period (2007-2012) with the last year of the Plan delivering 10 per cent growth.
However, Chief Statistician of India Pronab Sen has a different take on the matter.
"These projections are based on current trends. A Plan target is not a projection, it is what we intend to achieve during the five-year period. The growth projections by these agencies are along the expected lines as we have also said in the approach paper for the 11th Plan that given the current trend, the country will grow at 8 per cent during the Plan period," he said.
The challenge, he added, was to move from 8 per cent growth to 9 per cent. "The real trick is to avoid a slowdown in the middle two years of the Plan period to achieve this growth target."
Crisil Chief Economist Subir Gokarn agrees. "These projections are based on historical patterns assuming that certain parameters will not change. However, in a Plan, the target is to change some of these parameters to achieve a higher growth rate. So the two are not necessarily inconsistent."
According to Crisil's projection, the country may grow at around 8.5 per cent in the current Plan period.
On overheating, the World Bank report says, "Rapid growth and the relatively expansionary stance of fiscal and monetary policies in the region have provoked a rise in inflation. Successive hikes in policy rates in India have led to higher interest rates across the spectrum, but higher inflation means that real rates remain low."
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