India will grow 8.2 per cent in 2010 and 8.7 per cent in 2011 but rising inflation will bog the country's policy makers, the Asian Development Bank (ADB) said on Tuesday.
An improving global environment, rising private consumption and investment are likely to underpin growth over the next two years, said the multilateral lending agency in its annual report.
However, a surge in food prices following a poor monsoon and floods in some parts of the country as well as chances of fuel prices increasing in 2010 and 2011 will continue to challenge policy makers, it said.
The ADB predicted that annual inflation would be 5 per cent in 2010 and rise to 5.5 per cent in 2011.
"In addition, a weak agriculture sector and infrastructure bottlenecks remain obstacles to longer-term growth," it said.
ADB chief economist Jong-Wha Lee said: "The outlook is for a return of high growth, although this will require continued apt handling of macroeconomic policies, and to sustain long-term growth it will be essential to address infrastructure bottlenecks and to reform agriculture".
The Manila-based ADB, which provides financial assistance for projects in the Asia Pacific region, said more government spending on infrastructure was needed.
This might require a tightening of subsidies as part of fiscal consolidation and more public-private investment partnerships.
After running substantial budget deficits over the past two years, the government has committed to consolidating its fiscal position, with the projected deficit targeted at 5.5 per cent of gross domestic product in 2010, down 1.2 percentage points from 2009.
It is seen falling further to 4 per cent in 2011, supported by the introduction of a new direct tax code and the national goods and services tax.
The report cautioned against withdrawing stimulus measures provided by the government at the height of the economic slowdown and said the timing of fiscal and monetary adjustments was crucial to avoid stoking inflation or choking off growth.
"Too slow a removal of the fiscal and monetary stimulus support may lead to a quick uptake of inflation, while too rapid a removal may derail the recovery," said Jong-Wha.
The ADB said urban consumption would remain strong in 2010.
Exports would rise 16 per cent this year and 12 per cent in 2011. Imports would go up 20 per cent in 2010 and 18 per cent in 2011.
"Fears of job cuts will dissipate amidst substantial new recruitment, and salaries will be on an upward trend," it said.