New Delhi, Jan. 17: A slowdown in western economies led by the US may not hit the Indian economy too hard. However, a fuel-price led inflationary spiral may take its toll, a report on the economy has said. Economic growth may be tempered to 8.5 per cent in 2008-09, down from 9.4 per cent last year and an expected 8.9 per cent this year, it added.

C. Rangarajan, chairman of the Prime Minister’s economic advisory council, today said, “The Indian economy is much less dependent on external markets compared with the Chinese.”

“While some compression in demand is likely to put an additional burden on our exports of goods and services, it is unlikely to be large enough to significantly depress growth,” he said. The country’s economy is largely driven by domestic demand with exports contributing a small fraction to GDP figures.

Finance minister P. Chidambaram said, “Our exports to the US are significant, but not so significant that we will be gravely affected.” The minister, who was speaking at a function in Gurgaon, added, “However, if the US, as a response to the slowdown, cuts interest rates drastically, that will widen the difference between the rates in the two countries. That may affect capital flow and lead to a faster appreciation of the rupee.”

Since October 2006, the Indian currency had risen over 15 per cent against the dollar. To stem liquidity in the system and curb prices, the central bank has raised the benchmark rates several times over the last 12 months, besides increasing the amount of cash that banks have to keep with it.

The government’s reluctance to pass on the global increase in crude prices to consumers has so far helped to keep inflation at 3-3.5 per cent. However, the report warns, “If automotive fuel prices are revised soon, the headline inflation rate should go to a little over 4 per cent.”

“The flip side to this is that the pressure on prices of oil, food and other raw materials is likely to continue, making inflation management in 2008-09 quite challenging,” the report added.