Indian economy to grow by 8 percent till 2008: U.N. Report

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According to the report, India's inflation rate was likely to remain at about 4 percent in this period due to the government's commitment to reform, including strict fiscal prudence.

Industrial and services sectors were expected to sustain the growth momentum, helped by cyclical factors, rising rural incomes and increased public spending on physical and social infrastructure.

However, with high oil prices remaining a concern, rising inflation may erode away the country's balance of payments.

"If oil prices rise further by $ 10 a barrel, GDP growth of a developing country such as India can drop by 0.5 percent, inflation can rise up to 1 percent and current account deficit can widen up to 0.3 percent of GDP," the report explained.

On March 30, oil prices stayed above $66 a barrel after a steeper-than-expected fall in gasoline stocks in the United States ahead of peak summer demand.

In fact, oil prices have stayed above $ 60 a barrel for more than a month on worries that geopolitical risks in oil exporters such as Nigeria, Iran and Iraq would keep supplies tight.

ESCAP has also called for greater public and private spending for upgrading critical areas of India's infrastructure, a key driver of the economy, and said a bulk of these investment need to be generated internally.

Increased public investment in infrastructure coupled with rise in rural income would help sustain the growth of industrial and services sector, it said.

"Higher growth over the medium term would be feasible with sustained fiscal reforms by both central and state governments," it said, adding that enhancing public and private spendings would boost the investment rate and provide the resources for upgrading critical areas of infrastructure.