Tight monetary policy may slow growth: OECD

The Organisation for Economic Co-Operation and Development (OECD) today said India's economy was likely to see slower GDP growth rate of 8 per cent in 2008 due to tighter monetary policy.

While this is a reiteration of an earlier OECD forecast, the International Monetary Fund has forecast 8.4 per cent GDP growth in India for the same year.

"The Reserve Bank has been progressively increasing its interest rates and this is likely to slow growth to 8 per cent in 2008," the OECD said in its first economic survey on India released today.

However, the report said the government's target of attaining 10 per cent GDP growth rate by 2011 is achievable, provided crucial reforms are carried out. The OECD represents 30 developed countries.

Speaking at the same event, Finance Secretary D Subbarao said India's growth potential continues. "We can achieve 9 per cent GDP growth rate, as the Eleventh Plan document states. The challenge is to step up agriculture growth, expand employment opportunities, bridge infrastructure deficit, improve public services delivery and manage globalisation and its effects," he said.

Subbarao also said India was on track to reduce its fiscal deficit to 3 per cent by the end of 2008-09 and eliminate revenue deficit. "We are on track to reduce the fiscal deficit to 3 per cent next year and hopefully eliminate the revenue deficit."

The Fiscal Responsibility and Budget Management (FRBM) Act mandates the Centre to wipe out revenue deficit and bring down fiscal deficit to 3 per cent by 2008-09.

In his remarks, OECD Secretary General Angel Gurria called on India to extend the legislation by five more years. "Long term growth prospects should be bolstered by continuing the current fiscal consolidation and by extending the FRBM Act by five more years. This will free up resources for growth in private investment. It will also show resolve and provide a very visible sign of fiscal discipline to the markets," he added.

The comment comes at a time when there is a debate in some sections of the Indian policy establishment regarding the feasibility of stepping back a little from adhering to the targets set out by the Act, in order to increase the public expenditure on the social sector and further inclusiveness of growth.

Gurria added that real income of India can now rise by at least 7 per cent annually on a sustainable basis, enough to double real income in a decade.

"Today, foreign exchange is no longer a constraint and India's exports of services exceed all but 8 OECD member countries, while imports were larger than all 12 OECD member countries in 2006," he added.