India will grow at around 8 per cent this year and next, but the principal risk to this projection stems from the demand-led inflation that "would occur if the total Pay Commission award for government employees were to be paid out immediately," the Paris-based Organisation for Economic Cooperation has warned.
Besides, "quick action to write off small farmers' debt would also add substantially to demand," the OECD indicated in its latest Economic Outlook.
"In such circumstances, inflationary expectations might deteriorate and the current account deficit widen," the Paris body warned.
India, which is currently having enhanced engagement with the OECD, needs to be cautious about its restrictive monetary policy. "With a more restrictive monetary policy stance and a more normal harvest, output growth is projected to gradually slow to below 8 per cent in 2008 and then recover slightly in 2009," the OECD indicated.
With world food prices stabilising, the rise in the consumer price index is expected to ease back to 5.5 per cent in 2009, the global think tank said.