India's GDP will grow marginally to 7.7 per cent in the next fiscal from an estimated 7.5 per cent in FY 2016 as the economy is going through a "painfully gradual cyclical recovery" process, even as the external headwinds are also posing challenges, says a Citigroup report.
According to the global financial services major, the structural drivers of growth are likely to benefit from the reform process, but external headwinds may remain strong in 2016.
"We expect real GDP growth to inch up to 7.7 per cent in FY17 from 7.5 per cent in FY16," Citigroup said in a research note.
Citigroup said that 2016 is likely to be a year of consolidating a cyclical recovery amid a challenging global environment.
Some of the "risks" to the Indian economy could stem from a protracted global slowdown, competitive devaluation, super El Nino and stalling of reforms process among others.
"We believe this is going to be a painfully slow cyclical investment recovery, as the 'animal spirits' are yet to return," the report said.
Meanwhile, the government recently lowered its economic growth forecast for 2015-16 to 7-7.5 per cent from 8.1-8.5 per cent.
Interestingly, notwithstanding the headwinds, India is likely to remain an attractive destination for investors given its relative macro outperformance, according to Citigroup.
The government, however, should give renewed focus on macro stability because of temporary shocks to inflation and fiscal deficit, it said.
For the current financial year, deficit is likely to slip to 4.1 per cent of GDP on lower nominal economic growth.
While, the implementation of the 7th Pay Commission will increase the fiscal burden in FY 2017, it said.
On reforms, the report said the focus of the government is likely to be on executive decision led reforms. The important reforms for fiscal year 2017 include GST and bankruptcy code among others.
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