India's fast-growing economy should expand by 8.3 per cent this year instead of 7.3 per cent as previously projected, the International Monetary Fund (IMF) said on Thursday.
Interest rates may have to be raised further to check inflation, the IMF said in its twice-yearly World Economic Outlook, predicting India and China would be twin engines driving the roaring economies of emerging Asia.
In 2007, India's growth is forecast to slow to 7.3 per cent, still higher than the 7.0 per cent projection made by the IMF in April, after growth of 8.5 per cent in 2005.
"On the upside, there is the possibility of even faster-than-projected growth in China ... And in India," the IMF said.
At the same time, higher inflation due to rising oil prices could pose a risk for India and monetary authorities there may need to raise interest rates further to check an increase in consumer prices.
"In India, inflation has picked up with rising oil prices and strong domestic demand," the IMF said, projecting inflation of 5.6 per cent this year and 5.3 per cent in 2007.
"While the Reserve Bank of India has raised interest rates in recent months, further tightening may be needed to resist inflationary pressures."
India's central bank raised its key interest rate by a quarter point to a four-year high of 6.
With pressure on the government to spend more, the IMF urged India to take measures to broaden its tax base and reduce state subsidies.
"In India, strong spending pressures have emerged, limiting fiscal adjustment in financial year 2006/07," the IMF said.
"With the general government deficit and debt still high, further consolidation is clearly warranted at both the central and state government levels, including through measures aimed at broadening the tax base and reducing subsidies.