The World Bank in a report noted that low real interest rates combined with an improved business climate and rising household savings have enabled higher investment rates in India, helping to sustain stronger growth.
Consequently, India has emerged as the largest economy in the South Asia region with GDP expanding by an estimated 8.7 per cent in 2006, said the report titled 'Global Economic Prospects: Growth Prospects for South Asia'.
However, investment rate is likely to slow down in 2008 due to tighter financial policy, the report said.
"Slower investment growth in response to tighter financial conditions and weaker consumer and government consumption are expected to contribute to a moderation of GDP growth to about 7.2 per cent over the forecast horizon 2008," the report said.
Rising inflation has forced the Reserve Bank to tighten monetary conditions. It recently announced 0.50 per cent hike in Cash Reserve Ratio to suck out Rs 13,500 crore (Rs 135 billion) of liquidity to curb inflation, which reached 5.30 per cent during the week ended November 25.
RBI deputy governor Rakesh Mohan earlier in the day said any pause on monetary tightening depends on inflation, liquidity and credit growth. Bank credit has been expanding by over 31 per cent for the three consecutive years.
Congress MPs also asked Finance Minister P Chidambaram to take measures to arrest rising prices of essential commodities.
On the South Asia region, the World Bank report said, the region is expected to witness GDP growth of 7.5 per cent next year and 7 per cent in 2008.
Factors contributing to the expected slowdown are weaker external demand, reflecting slower growth of the US next year and tighter fiscal and monetary policies in the region, it said.
Talking about other risks, it said, higher than anticipated international oil prices due to a significant interruption of supply also are an import risk for the region.
High oil prices would have a direct impact on inflation, the current account deficit and the government balance of payment because of increased government spending on fuel subsidies, it added.
Giving projection of the current year, the report said, in 2006, GDP in the region is estimated to have expanded at a very rapid pace of 8.2 per cent. Despite rapidly rising tax revenue, the report said, fiscal deficit remains elevated at 7.1 per cent of GDP in the region.