Acknowledging severe inflation threats, the Reserve Bank of India in its annual policy review on Tuesday pegged the real GDP growth rate for 2011-12 at 8% - down from the estimated 8.6% growth in 2010-11. This is almost 1 percentage point lower than the government estimate of 9%.
Finance minister Pranab Mukherjee said energy prices and a normal monsoon will be critical for the economy to expand at the desired 9%.
"We projected GDP growth of around 9% plus-minus 0.25%. When I projected this growth I also mentioned that it would depend on the energy prices and on the behaviour of the good monsoon," Mukherjee said.
RBI said most business confidence surveys conducted by various agencies show a decline in business confidence.
"The pace of industrial activity has been slowing mainly due to the impact of past monetary policy actions and high input prices. External demand too may slow if global recovery slackens," it said.
India's factory output rose 3.6% in February, lower than the revised 3.7% in January.
"Industry is already reeling under the impact of rising raw material costs and an increase in interest costs will be an added burden", said B Muthuraman, president, Confederation of Indian Industry.