India's economy will grow by 6.5% in 2013 and gather pace over the next two years spurred by domestic structural reforms and a possible turnaround in external demand, Goldman Sachs said in a report on Thursday cheering stock markets that hit a 19-month high.
"We forecast India's GDP growth to accelerate from 5.4% in 2012 to 7.2% in 2014, and remain high through 2015-2016. Three factors drive our relatively optimistic views: a decline in oil prices in real terms over the next few years, a more favourable external demand outlook and domestic structural reforms which can ease some supply-side constraints," the investment banking and research major said in a report titled 'India: An improving outlook'.
The big macro challenges that the economy has faced this year have hastened reforms by the government. Thus far, these have focused on increasing FDI, raising administered prices to reduce the fiscal deficit, restructure the power sector and increase inflows of foreign capital.
Allowing FDI in retail can lead to significant capital inflows of a 'sticky' nature, increase technology transfers, lead to greater supply-chain efficiencies and lead to deep linkages with the local economy. This would be particularly helpful in the agricultural sector, where supply-chain bottlenecks are large, it said.
On the proposed direct cash transfer of subsidies, by which the government transfers cash directly for scholarships, employment, pensions and insurance to the recipient's bank account linked to a Unique Identification number (UID) rather than through intermediaries, Goldman Sachs said, it "can reduce the substantial leakages and pilferage, lead to financial deepening through the opening of bank accounts, curtail bureaucratic interference and increase purchasing power at the bottom of the pyramid".
However, the near-term outlook remains "difficult" due to still weak growth, high inflation, and the twin deficits, Goldman Sachs said, adding quick upturn in the investment cycle is "unlikely".
India's GDP growth crashed to 5.5% during April to June and is expected to remain flat during the July-September, the data for which will be released on Friday.