India to grow at 7.6% in FY17 on urban spending: UN report

India's economy is expected to grow by 7.6 per cent in 2016-17, largely on the back of urban household spending amid steady employment growth and low inflation, according to the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).

Growth is expected to edge upwards to 7.8 per cent in 2017-18. But a good monsoon could provide a fillip to growth, pushing gross domestic product (GDP) growth to 7.8 per cent in FY17 itself, said Nagesh Kumar, who heads ESCAP South and South West Asia.

Downside risks to growth remain. Principal among them are a slowdown in China and exchange rate volatility due to a possible interest rates hikes by the US Federal Reserve, says Kumar. The US Fed, which has kept its benchmark interest rates between 0.25 per cent and 0.5 per cent since December last year, is expected to increase rates later this year as the economy strengthens and the job market firms up.

With rural demand continuing to be weak after two years of back-to-back droughts, urban demand is expected to do the heavy lifting. Urban consumption is expected to get a boost with the government accepting the Seventh Pay Commission recommendations.

Exports, however, continue to be a major cause of concern. With global demand continuing to remain anaemic, exports are unlikely to provide the much needed stimulus to growth. India's exports contracted for 16 consecutive months in March. A big reason is the slowdown in China. According to UNESCAP, exports from all major Asian economies have collapsed.

"The overall strength of domestic demand will depend on progress made in implementing structural reforms and how rapidly large scale stalled infrastructure projects are unlocked" said UNESCAP.

"Some progress has been made in reforming fiscal policy such as rationalisation of fuel price subsidies, but the implementation of the goods and services tax remains an important reform that is being held up due to political deadlock" it added.

Speaking at the launch of UNESCAP's Economic and Social Survey of Asia and The Pacific 2016, Rathin Roy, director at the National Institute of Public Finance Policy said, while macroeconomic indicators suggest India is in a sweet spot, there are huge concerns on the project execution side and supply-side constraints continue to pose a challenge.

On the issue of monetary policy, while many are arguing for a 25-basis point cut, Roy says at the margin a cut of that size is unlikely to change the situation fundamentally. What is more important is to look at quantity restrictions on credit. The case for greater interest rate cuts largely rests on a benign inflation environment.

With the India Meteorological Department projecting that monsoon is likely to be "above normal" this year, expectations are it will push agricultural growth, easing supply side constraints. But UNESCAP projects inflation to average 5.2 per cent in 2016-17, edging up to 5.6 per cent in 2016-17, leaving little room for the Reserve Bank of India to cut policy rates.