New Delhi: India's economic growth is likely to slow down to 6.5 per cent this fiscal and to 6 per cent in the subsequent year mainly due to high oil prices, which reactivated inflation, the Asian Development Bank (ADB) said today (Sep 22, 2004).

In its update on forecast, the Manila-based bank also said the Government's "ad hoc" measures (cut in excise and customs duties on petroleum goods and incentives introduced in trade policy) to rein in inflation may lead to overshooting of the budgeted fiscal deficit target of 4.4 per cent of GDP (Gross Domestic Product) this year.

The ADB said growth, which reached 8.2 per cent in 2003-04, was expected to fall despite assumptions of 3.1 per cent growth in agriculture and normal monsoon this year.

"This (decline in growth) is mainly on account of lower projected growth in industry and services as a consequence of the expected downturn in the country's business cycle," it said.

Highlighting that price of crude oil was "most critical" for India because of imports, it said past experience showed that a "steep rise in oil prices triggers inflation, adversely impacts balance of trade and lowers growth."

The rising inflation was likely to prevail through this fiscal and next year mainly due to soaring prices of oil and agricultural commodities and expected escalation in price of manufactured products, it said.

Manufacturers who are currently absorbing the increase in costs and will eventually pass this on to consumers, leading to lagged increase in industrial prices in 2005-06 as a consequence of the price escalation this year, it said.