The Indian economy will likely grow 9 percent this fiscal year ending in March 2008, down slightly from a year earlier, the prime minister's economic advisory body said Monday.
But infrastructure hurdles and a sluggish farm sector threaten longer-term prospects, the group said in an economic outlook report to Prime Minister Manmohan Singh.
It also warned that a surge in foreign capital into India posed a serious challenge, as it endangered the stability of the country's exchange rate system.
The projected economic growth rate for this fiscal year is slightly below the 9.4 percent expansion in the year ended this past March.
The report predicted that industrial output would grow 10.6 percent, while the services sector expands 10.4 percent. But the farm sector, which remains a drag on the broader economy, is expected to grow just 2.5 percent, the report said.
The panel asked the government to expedite work on infrastructure projects, especially in the power sector.
"The Indian economy is on an unprecedented strong trajectory of economic growth. Policy must work to preserve and strengthen these conditions, while maintaining monetary and exchange rate stability," the report said.
Excess supply of dollars, aided by a surge of foreign investment in stocks and factories, and huge overseas borrowing by Indian companies, has triggered a sharp appreciation of the Indian rupee in recent months and hurt exporters and import-dependent industries.
"While some rupee appreciation was inevitable, there are limits to how much the rupee should rise," said C.R. Rangarajan, who heads the advisory panel.
Unusual currency appreciation often forces central banks and governments to intervene in ways that may have an adverse impact on inflation and fiscal balance. The rupee is likely to remain strong in the coming months.