India is projected to clock an economic growth of 7.5 per cent in the 2019-2020 fiscal year on strengthening of investment and robust private consumption, the International Monetary Fund or IMF said in its latest report.
The International Monetary Fund (IMF), in the report published on Tuesday, said the near-term macroeconomic outlook for India is "broadly favourable."
Growth is forecast to rise to 7.3 per cent in fiscal year 2018/19 and 7.5 per cent in 2019/20 on strengthening investment and robust private consumption, the report said.
Headline inflation is projected to rise to 5.2 per cent in fiscal year 2018/19, as demand conditions tighten, along with the recent depreciation of the rupee and higher oil prices, housing rent allowances and agricultural minimum support prices, it said.
The current account deficit is projected to widen further to 2.6 per cent of the GDP on rising oil prices and strong demand for imports, offset by a slight increase in remittances, the report said.
It said that financial sector reforms have been undertaken to address the twin balance sheet problems, as well as to revive bank credit and enhance the efficiency of credit provision by accelerating the cleanup of bank and corporate balance sheets.
"Stability-oriented macro-economic policies and progress on structural reforms continue to bear fruit" in the country, the report said.
It said following disruptions related to the November 2016 currency exchange initiative and the July 2017 Goods and Services Tax (GST) rollout, growth slowed to 6.7 per cent in fiscal year 2017/18, but a recovery is underway led by an investment pickup.
Headline inflation averaged 3.6 per cent in fiscal year 2017/18, a 17-year low, reflecting low food prices on a return to normal monsoon rainfall, agriculture sector reforms, subdued domestic demand and currency appreciation.
The report recommended that continued fiscal consolidation is needed to lower elevated public debt levels, supported by simplifying and streamlining the GST structure.
Further, while important steps have been taken to improve the recognition of Non-Performing Assets (NPAs) and recapitalise Public Sector Banks (PSBs), more needs to be done.
"A recent large fraud at a PSB highlights financial sector weaknesses and underscores the need for the government to take further steps to improve the PSBs' governance and operations, including by considering more aggressive disinvestment," it said.
With demand recovering and rising oil prices, medium-term headline inflation has risen to 4.9 per cent in May 2018, above the mid-point of the Reserve Bank of India (RBI)'s headline inflation target band of about four per cent.
However persistently-high household inflation expectations and large general government fiscal deficits and debt remain key macroeconomic challenges.
"Systemic macro-financial risks persist, as the weak credit cycle could impair growth and the sovereign-bank nexus has created vulnerabilities," the report said.
Economic risks are tilted to the downside, the report said, adding that on the external side, risks include a further increase in international oil prices, tighter global financial conditions, a retreat from cross-border integration including spillover risks from a global trade conflict, and rising regional geopolitical tensions.
"Domestic risks pertain to tax revenue shortfalls related to continued GST implementation issues and delays in addressing the twin balance sheet problems and other structural reforms," it said.
IMF Executive Board Directors welcomed the strong economic growth and commended the Indian authorities for the important and wide-ranging reforms.
While noting the broadly positive outlook, the directors observed that risks are tilted to the downside from external factors, such as higher global oil prices and tighter global financial conditions, as well as domestic financial vulnerabilities.
Against this background, they underscored the need for continued prudent macroeconomic policies and renewed emphasis on macro-financial and structural reforms.