The World Bank on Thursday forecast a 6.7% growth rate for India by next fiscal as exports and private investment are projected to strengthen and provide a boost to growth.
In its latest 'Global Economic Prospects' report, the IMF said South Asia's regional growth will be driven mainly by a projected pick up in India, whose GDP in factor cost terms is projected to grow 5.7% in the 2013 fiscal year (ending in March 2014), and then accelerate to 6.5% and 6.7% in FY 2013-14 and FY 2014-15, respectively.
Exports and private investment, which slowed sharply in 2012, are projected to strengthen during 2013-15 and provide a boost to growth. However, how robust that recovery will be, will depend on the pace of policy and fiscal reforms, and remains subject to significant uncertainty and downside risks.
Some upside risks to the outlook include a faster-than-projected pick up in global demand and a larger than expected decline in commodity prices, the report said.
According to the report, a greater dependence on foreign investment inflows to finance India's significantly larger current account deficit compared to the past has increased its vulnerability to a sudden reversal of investor sentiment.
"Several factors could result in a slowing or reversal of investment inflows -- an unanticipated monetary tightening in some high income countries; resurgence of debt tensions; escalation of geopolitical conflict; and even disenchantment with the pace or nature of domestic reforms," it said.
Moreover, the sharply relaxed monetary policy in Japan could result in strong and disruptive private capital flows, it added.
Noting that the business sentiment in the manufacturing sector in India weakened to a four-year low in May, the report said if business sentiment were to remain weak in coming months, this could adversely impact investment and growth.
The report said the sharp economic slowdown experienced in the post-financial crisis period exposed structural vulnerabilities and has made the task of reviving growth in a sustainable manner even more urgent.
"But with India's positive output gap mostly closed after its steep growth deceleration, and given capacity constraints in most South Asian countries, policymakers need to remain vigilant against relying on short-term demand stimulus in order to avoid overheating (inflation and current account) pressures.
"South Asian countries should continue to rebuild their fiscal buffers to be able to deal with future crises," it said.