India’s Economic Picture Brighter, but Investment, Structural Reforms Key

Growth forecast to rise to 7.2 percent in this fiscal year

Firm policy actions, lower global oil prices helping to improve economic outlook

Reform of agriculture, mining, power sector, labor markets can enhance growth

To continue on this trend, India needs to revitalize the investment cycle and accelerate structural reforms, says the report.

The Indian economy is the bright spot in the global landscape, becoming one of the fastest-growing big emerging market economies in the world.

“Growth numbers are now much higher and the current account deficit is comfortable, in part due to the fall in gold imports and lower oil prices,” said Paul Cashin, IMF Mission Chief for India. “New investment project announcements have started to pick up, particularly in the power and transport sectors.”

He also noted that bolstering financial sector health and further financial inclusion would support growth going forward.

While the country is well placed to cope with external shocks, there are possible risks on the horizon, both external and domestic. “Spillovers from weak global growth and potential global financial market volatility could be disruptive, including from any unexpected developments as the United States begins to raise its interest rates,” says Cashin.

On the domestic front, the weaknesses in corporate balance sheets—especially in light of the increase in corporate leverage of the past few years—and worsening bank asset quality bear watching, as they could weigh on growth.

Growth forecasts higher

India’s economic profile recently got a lift as the country improved the way it measures economic output. (The IMF staff report, however, was prepared before the release of these new growth numbers.) The revised national accounts series incorporates numerous conceptual and methodological improvements that make them more consistent with international best practices.

Based on this revised GDP, the IMF forecasts growth will strengthen to 7.2 percent in 2014/15 and rise to 7.5 percent in 2015/16, driven by stronger investment following improvements to the business climate.

“The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed,” Cashin says. “These GDP revisions portray a more resilient performance of the services and manufacturing sectors of the economy.”

But while public and private consumption look stronger, he added, investment...