By 13 August, 2009

India's economy is expected to report positive growth in 2009 and 2010 mainly because of domestic demand despite the global downturn and financial turmoil, rating agency Standard & Poor's said on Thursday.

"We anticipate that India will remain in positive growth territory throughout this global recession and financial turmoil," said S&P's Asia-Pacific chief economist Subir Gokarn.

"Domestic policy responses, both monetary and fiscal, appear to have played a significant role in shoring up domestic demand in an environment of drastically reduced exports," he added.

Gokarn said India's gross domestic product (GDP) growth is forecast in the range of 5.8-6.3 percent in 2009 and 6.8-7.3 percent in 2010.

"GDP will be driven by the Indian economy's very strong domestic consumption, which has been held up by stable rural demand and the recent hike in public sector salaries," he said.

"Some of the potential threats that could slow down or even derail the recovery include revival of inflation, high interest rates and persistent global sluggishness," he added.

Gokarn said that though the wholesale price index continues to drop, fiscal stimulus and liquidity are cautioning the central bank against further rate cuts, which prefers to wait for fiscal policy to play out.

"The recent rebound in food and commodity prices does pose a potential risk. But the greater challenge for central banks would be to time rate hikes to absorb excess liquidity and prevent a re-ignition of demand-led inflation," he said.

"Beyond this, fiscal pressures will continue to weigh on India's credit quality," Gokarn added.

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