The surge in investment in manufacturing seems to have prompted the International Monetary Fund to increase the gross domestic product growth forecast to 8.4 per cent for 2007.
The forecast, in its latest World Economic Outlook, has come despite the recent monetary tightening by the Reserve Bank of India and declining demand for Asian exports.
The last Outlook in September 2006 had projected a growth rate of 7.3 per cent.
For 2008 too, the IMF has revised upwards its GDP growth forecast, to 7.8 per cent, 0.7 percentage points higher than its September estimate.
The revised forecast for 2007 is a shade lower than the Planning Commission's anticipated 8.5 per cent growth for fiscal 2007-08.
The fund has projected an inflation rate at 6.2 per cent and 4.3 per cent for 2007 and 2008, respectively, and added that "with inflationary pressures still strong, some further tightening is likely to be needed".
The report said that the country's current account balance (the difference between a country's total exports of goods, services and transfers and its total imports as a percentage of GDP), would stand at -2.4 per cent in 2007 and -2.3 per cent in 2008, against -2.2 per cent in 2006, principally on account of higher oil prices.
The IMF's growth outlook for India is in line with its forecast for world economic growth. Despite the recent nervousness in the financial markets, the global economy remains on track for robust growth in 2007 and 2008, although at a somewhat more moderate pace than in 2006.
Global growth would moderate to 4.9 per cent in 2007, around half a percentage point less than in 2006, which is in line with the September forecast.
China's growth is expected to slow to 10 per cent in 2007 and further to 9.5 per cent in 2008. In 2005 and 2006, China's GDP grew at 10.4 per cent and 10.7 per cent, respectively.
On the fiscal front, the IMF has said that while the rising revenues are expected to reduce the fiscal deficit, further consolidation remains a priority.
"Comprehensive spending and revenue reforms, including the removal of tax exemptions and non-essential subsidies, could help achieve goals while creating space for priority spending," the report adds.
It predicts that India's manufacturing sector and investment could gather added momentum in the near-term, nullifying the negative impact of monetary tightening and helping achieve higher than anticipated growth.
On the downside, it has cautioned that a sharper-than-anticipated slowdown in the demand for Asian exports in general and electronic goods in particular could undercut growth.
Explaining the country's robust economic growth in the past few years, the fund said, "In India, real GDP growth of 9.2 per cent was supported by the strength of consumption, investment and exports."
Without naming India, the IMF said financial markets in Asia, especially those that appear richly valued, remained vulnerable to any unanticipated rise in global risk aversion.
On the impact of US slowdown on the Asian economies, including India, the report suggests that while the demand for Asian exports will be affected, the overall impact is likely to be contained.