The global slowdown will affect India too, but with a projected growth rate coming down to a "still strong" seven per cent in 2009, the International Monetary Fund (IMF) sees the Indian economy continuing to perform well.
"There is some impact from tighter global liquidity conditions, but again we don't see major drag from this impact on India," a senior IMF official said on Wednesday. "So overall, we see the Indian economy continuing to perform well."
"Like all other countries, India will be affected by the global slowdown," said Charles Collyns, deputy director of the IMF's Research Department, at a press conference on its World Economic Outlook (WEO) released ahead of the annual meetings of the IMF and the World Bank here.
Noting that IMF was projecting the growth in India will come down from 8 per cent in 2008 to 7 per cent in 2009 he said: "But 7 per cent is still a strong rate of growth.
"That reflects the fact that India is still largely a closed economy, has strong internal growth dynamics, from rapid productivity growth, from its process of integration into the global economy that is still continuing," Collyns said.
Asked if the IMF has considered pushing countries like China and India to stop subsidising fuel prices to lessen demand, Olivier Blanchard, economic counsellor and director, said: "We're not in favour of long-lasting subsidies. However, we understand the desirability of having domestic prices adjust to world prices over time."
The WEO projects India's Gross Domestic Product (GDP) is likely to slowdown to 7.9 per cent in 2008 and slide further to 6.9 per cent in the next year. India recorded a GDP growth of 9.8 per cent in 2006 and 9.3 per cent in 2007.
"In India, growth in the second quarter came down to about 8 per cent, on the back of weakening investment," the report said, adding private consumption and export, however, continued to do well.
For Asia as a whole, the report said, economic growth rate was likely to slip to 7.7 per cent in 2008 and 7.1 per cent the next year in 2009.
The financial markets have weakened in recent months, driven by increasing concerns about the global outlook and declining investor risk appetite, particularly in the context of the September market turbulence.
Having experienced the largest run-up in prices during 2005-07 when prices more than quadrupled in China and tripled in India, the equity markets in Asia have declined, the report noted.
Underlying inflation pressures rose across emerging Asia in recent quarters. Wage increases, despite productivity improvements, have contributed to a buildup in inflation in some cases. In part owing to a rapid expansion of bank loans, house prices have continued to trend upward, it said.
In India, CPI inflation jumped to 9 per cent in August. Underlying inflation pressures have increased, as high resource utilisation and robust credit growth have created fertile ground for second-round effects. Insufficient policy tightening has also contributed.
Although increases in food and fuel prices may continue to subside in the coming months and growth will moderate, inflation is expected to remain at elevated rates over the near term, the WEO said.
The IMF said a major policy dilemma for Asia is how to respond to the weakening growth outlook and global financial turbulence, without losing sight of inflation risks.
Although there is considerable divergence in country circumstances, downside risks to growth in emerging Asia have risen in recent months, while inflation risks have moderated as food and oil prices came down from the peaks observed earlier in the year, it said.