India's economy will slow down in the next few years, hit by a rising rupee and slackening demand, and needs more reforms to stay on a sustainably strong growth path, the OECD said on Thursday.
India's economy, which grew by 9.4 per cent last year, will expand by 8.8 per cent in 2007, 8.6 per cent in 2008 and 8.4 per cent in 2009, according to the Paris-based Organisation of Economic Cooperation and Development.
"Economic growth is projected to slacken from the second half of calendar 2007" despite improvements in farm output, the organisation said.
The impact of an appreciating rupee "coupled with relatively high domestic inflation, is likely to result in some easing" of export growth and a rise in imports, the OECD, which makes policy recommendations to member governments, added in its latest outlook report.
Domestic demand could suffer from a wave of aggressive interest rate hikes while investment, a vital driver of India's scorching expansion in the past four years, may slow in the face of lower sales growth.
India can only achieve "strong and sustainable economic growth" if it pursues a "significant package of economic reforms," the report added.
To spur expension, India must further cut fiscal deficits and tariffs and lower the burden of bureaucratic red tape on businesses, the OECD advised.
The report came after India's Finance Minister P. Chidambaram admitted last weekend that reforms were "lagging behind" in the face of vociferous opposition from the coalition Congress government's communist allies.
Strict job protection rules making it hard to fire workers in downturns should be loosened to encourage hiring and reduce poverty, the OECD said.
It also encouraged the government to invest in public services delivery to raise the quality of education for its massive young population as well as to improve its dilapidated infrastructure, a bottleneck to growth.
Growth has been partly driven by a "change in attitude of foreign investors" with surveys suggesting India is now one of the top investment destinations, the report said.
Inflows of foreign direct investment in telecommunications more than doubled in the first quarter of calendar 2007.
But looming risks stem from ongoing increases in food and oil prices.
"An inflationary environment might eventually put some downard pressure on the exchange rate and further strengthen inflation expectations" which could in turn discourage foreign capital inflows, the OECD said.