Indian economy is likely to clock 8.1 percent growth in the current financial year, spurred by strong consumer spending amid low inflation, infrastructure projects and government's reform measures, says a UN report.
Investment is also expected to rebound, although unevenly, given the still low capacity-utilisation rate at about 70 percent, it said.
"Growth is forecast to accelerate to 8.1 percent in 2015 and 8.2 percent in 2016, benefiting from the acceleration of infrastructure projects, strong consumer spending due to lower inflation and monetary easing and gradual improvements in market sentiments," said the UN ESCAP report titled, 'Economic and Social Survey of Asia and the Pacific 2015.
It said however that volatile capital flows that may follow monetary policy normalisation in the US remain the downside risk.
The growth projection is in line with the estimates of the Finance Ministry.
The International Monetary Fund (IMF) and the World Bank have projected India's growth at 7.5 percent for the current fiscal. However, the Reserve Bank of India (RBI) has forecast a growth rate of 7.8 percent.
The report said, decline in inflation benefits from lower global energy prices, but structural factors that keep food prices remain high.
These include post-harvest food waste that is up to 40 percent, lack of market competition, higher agricultural input prices and wages and an increase in minimum support prices. More than half of India's farming is rain-fed, so food prices are subject to weather conditions, it added.
Talking about structural reforms, the report said these are gaining momentum since the new administration took office in May 2014.
These include opening up of 120 million new bank accounts to promote access to finance and easing FDI restrictions in such sectors as defence equipment, railways and construction.
That apart, it said: "The 'Make in India' initiative was launched in September 2014 to promote India as a global manufacturing hub. The success of this scheme would require broad-based policy actions in enhancing human capital, access to inputs and finance, and better connectivity."
In this regard, the report said, the government introduced online services for environmental and forest-related clearances and launched an online system to replace cumbersome labour-related forms.
On impediments to growth, it said, one of the key remaining challenges is to address labour market rigidities and generate enough jobs for 8 million new job-market entrants per year.
According to the 2013 economic census, annual job growth was 4.3 percent on average during the period 2005-2013, up from 2.5 percent in the 2005 census.
However, the UN ESCAP report said, as half of India's workers still work in agriculture, the country needs to raise its productivity by engaging more in higher value added production.
This would help the country realise its potential for growth, which is supported by a high savings rate and emerging middle-class population, and further cut poverty, which remained high at 22 percent of the total population in 2012, it said.
The report further said that weakness in infrastructure is one of the key factors holding back the India's economic growth potential.
Significant investment in infrastructure is required, not least to meet the increasing demand due to growing incomes and populations together with the requirements of rapid urbanisation, it added.
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