The Reserve Bank of India (RBI) expects the country's gross domestic product (GDP) to increase by 5.5 per cent in the fiscal year ending 31 March 2015, on the back of an improvement in the investment climate.
In its annual report, released today, the central bank kept the forecast unchanged from its prediction earlier this year and in line with most economists but below the government's projection of a 5.8 per cent GDOP growth this fiscal.
While an improvement in the investment climate through better governance, transparent, effective and efficient regulatory and legal regimes, gains in technical efficiency, institutional improvements, improved labour mobility and other reforms could help investment growth, RBI said a monetary tightening in the US could still destabilise global financial markets and hurt emerging economies, including India.
India's real GDP growth improved marginally to 4.7 per cent in 2013-14 from 4.5 per cent in 2012- 13, recording a sub-5 per cent growth for the second consecutive year. This was due mainly to the absence of a clear legal and regulatory framework in key areas such as natural resources, especially mining activity, environmental clearances and land acquisition that drove down investment in the core sector, RBI noted.
However, growth may increase from here, with a moderate-paced recovery likely in 2014-15. A 5.5 per cent, however, the current year's forecast is a big improvement over last year GDP growth of 4.7 per cent.
''Recovery in growth would essentially come from an improvement in the investment climate through better governance, transparent, effective and efficient regulatory and legal regimes, gains in technical efficiency, institutional improvements, improved labour mobility and other reforms,'' . Better business sentiment, anticipating such improvements following the elections, is a welcome development
Even as excess liquidity that an easy-money policies in the US generated created instability around the world, RBI said, a wind down of the easy money policy could imperil recovery as well.
"An increase in interest rates in the US may trigger a reversal in carry-trade flows to emerging-market economies, leading to higher volatility in the forex, equity and bond markets," the RBI report said.
India's economy has started to show signs that it is emerging from a rocky stretch that started when then-Fed Chairman Ben Bernanke said in May 2013 that the US may start reducing the size of its bond-buying programme.
Incidentally, India has been steadily increasing its holdings of US bonds, which have now reached levels over $70 billion.
After a gradual return to normalcy, India's economy is in a position to accelerate, the RBI said, adding that a steady decline in real fixed investment has been a drag on the country's economic growth.
Real fixed investment growth decelerated for the second consecutive year and turned negative in 2013-14. The trend growth in GFCF declined significantly from 14.5 per cent in H2 of 2005-06 to below 5 per cent in 2013-14.
"The economy is poised to make a shift to a higher growth trajectory," the RBI said in its report.
RBI said a fall in retail price inflation rate and a pick-up in manufacturing and services activity offer some hope of a revival in growth.
Sustained efforts to reform the economy in several areas, including labour laws and financial-market regulations could "deliver a sustainable growth of at least 7 per cent in a noninflationary manner, once global growth normalises," the RBI report said.