The India growth story may hit a slower patch in 2008, going by different outlooks for the new year which say the country may witness slower GDP growth and even flight of foreign capital to markets like Korea and Indonesia.

In its 2008 Economic Outlook for Asia, Switzerland-based banking giant UBS said that Asian growth will slow next year, reflecting the impact of a slowdown in the US and Europe.

Besides, there could be a strong investment switch away from markets with a strong domestic focus such as China and India towards export-oriented Korea and Indonesia, UBS said.

In a separate report, another banking major, US-based Citigroup said in its 2008 Asian Economic Outlook that infrastructure bottlenecks and talent crunch pose long-term hurdles to India’s economic growth, while worsening global outlook and political scenarios pose short-term risks.

“India has the potential to further lift its growth level from 8 per cent to more than 10 per cent. Infrastructure development and talent crunch would, however, pose long-term hurdles and worsening global outlook and politics could pose short-term risks.”

Earlier last week, Citigroup had said that China and India had become the two most expensive stock markets in Asia-Pacific, following a sharp rally in 2007, mostly driven by their strong economic growth rates. It named Thailand and Hong Kong as markets with best growth potential in the region.

Citigroup had forecast India’s GDP growth for FY07-08 at 9.4 per cent and 9.8 per cent in the next fiscal, against 9.3 per cent in fiscal ended March 2007.

However, Paris-based Organisation for Economic Cooperation and Development (OECD), a lobby group of the world’s industrialised nations, said in its half-yearly global economic outlook that India’s economic growth was set to slow down in the current and next fiscal years.

“India’s economic growth will slow down to 8.4 per cent by 2009 on the back of higher interest rates and rupee appreciation and the country will need further reforms for a sustainable growth,” OECD said. It has forecast 8.6 per cent GDP growth rate for the current fiscal 2007-08.

While OECD has named higher interest rates and an appreciating rupee as the major hurdles for India’s economic growth, UBS expects the impact of economic slump in the US and Europe as major factors behind the expected slowdown in Asia.

The US weakness is already being felt across Asia and an expected weakness in the region’s exports to Europe could play further spoilsport, the economists at UBS believe.

However, the impact of US slowdown would have less of an impact on the Asian market than the one experienced in 2001, as the debt levels in most economies in the region are relatively low and there are no obvious credit bubbles in the region and property prices are not in long-term decline mode.

“For the first time since 2000, Asia will enter the new year facing over-valuation,” UBS’ Investment Research Strategist Sakthi Siva said, adding he was looking for single digit returns in 2008, with higher gains in export-focused markets and negative returns in markets
perceived to be domestically driven.

“Investors need to be aware of the region’s four key investment themes — over-valuation, the Shanghai bubble, switching from domestic defensives to exporters and the exposure of the materials sector,” Siva added.