The International Monetary Fund (IMF) said on Wednesday that reforms will facilitate infrastructure investment and lowering costs to do business as keys to restoring high growth.
It also said that it is likely to witness a larger-than-expected fall in its economic growth rate at 5.4 per cent in 2012-13 but it should pick up to six per cent in next fiscal.
Although India's growth remains one of the highest in the world, it has slowed markedly and inflation remains elevated, IMF economists said on Wednesday after their annual health check of India's economy, technically known as article IV consultations.
Since recovering rapidly from the global financial crisis, India's economy has slowed substantially, and its growth rate is expected to decline further in the coming year for a range of domestic reasons, the global financial watchdog said.
In 2011-12, India's growth rate was 6.5 per cent. That figure is expected to drop to 5.4 per cent in 2012-13. Despite the poor outlook for the global economy, this is a far larger drop than might be expected, IMF said.
In recent months, the authorities have taken steps to reverse the slowdown, which have led to improved market sentiment, it noted, expecting India's growth to pick up to 6 per cent in 2013-14.
Continued implementation of measures to facilitate investment and slightly stronger global growth should deliver a modest rebound in the near term, IMF said.
Inflation is forecast to remain above the Reserve Bank of India's comfort zone, given that supply constraints are likely to ease only gradually.
On the domestic front, insufficient follow-through on recent reforms, in particular those intended to relieve supply constraints, or resorting to expansionary fiscal policy are key downside risks, IMF said.
On the upside, going beyond announced reforms or legislative progress would lead to higher growth and lower vulnerabilities, IMF said.
Between 2004-11 - a period that includes the global financial crisis - India's growth averaged 8.3 percent a year. High growth and higher incomes added to demand, especially for food, electricity, and transportation, it said.
This growth outpaced new investment in power plants, roads, and coal production. As concern about corruption scandals slowed approvals for new projects, supply bottlenecks became evident, culminating in the July 2012 blackout across much of India, when a tenth of the world's population lost power for up to two days, IMF said.
The IMF economists also warned about threats posed by the financial sector. The number of non-performing loans has risen recently, and the current slowdown raises the prospect that this trend will continue for some time.
In the long run, ensuring India's financial system is able to underwrite strong growth will require pushing forward with financial reforms, such as developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt, IMF said.
With IANS inputs