The predicted growth rate for the world's second most populous nation was at the lower end of the government Central Statistical Organisation's (CSO) latest forecast of 6.5 to 7.0 percent.

The Indian economy expanded at 8.5 percent in the last fiscal year to March 2004, the best in over a dmcade, thanks to bumper agricultural growth.

The Washington-based International Monetary Fund (IMF) said in an annual review of the Indian economy Thursday that its large fiscal deficits and public debt "remain a key constraint on sustained rapid growth."

Reforms taken to strengthen state finances had so far not led to a decisive turnaround, the IMF said, emphasizing "more needs to be done."

It also expressed serious concerns with an Indian proposal to use foreign exchange reserves to finance infrastructure spending.

Using reserves in this manner has the potential to "compromise perceptions of central bank independence and increase inflation," the IMF said.

The Fund also called for easing of regulations, and liberalizing what it termed restrictive labor laws.

Agricultural reform, for example, was critical to India's economic growth and poverty reduction, the IMF said.

Swift reduction of tariffs couxled with lowering of administrative barriers to trade "will help unleash a potentially powerful engine of growth," it said.