"The growth is forecast to pick up modestly to 7.2 per cent in FY 2019 on revived rural consumption, continued growth in private investment in response to improved bank and corporate balance sheets, more competitive domestic firms and products under the Goods and Services Tax, and less drag from net exports," it said.
The Asian Development Outlook 2019 said growth slowed slightly in fiscal 2018 as expansion in agriculture and services slipped even though industry and investment strengthened. The current account deficit widened but remained modest while inflation continued to be benign.
"Even with global headwinds, the outlook is for growth to edge up on strengthened domestic demand and bank and corporate fundamentals. Inflation and the current account deficit should remain tame. Enhancing export performance remains a key objective, which can be achieved by improving conditions for India's participation in global value chains," said the report.
"Domestic demand is expected to remain the main driver of growth. Steps to alleviate agriculture distress such as income support to farmers and strong hikes to procurement prices for food grains are expected to bolster rural demand," it said adding the implementation of farmer income support will face some start-up challenges because it demands accurately linking land records with farmers' bank accounts.
In urban areas, consumption demand is expected to receive a boost from interest rate cuts, continued low prices for food, and declining fuel prices. The central bank's index of consumer confidence reached in December 2018 its highest reading in nearly two years.
"Growth is expected to inch up further to 7.3 per cent in FY 2020 on dividends reaped from recent reforms to improve the business climate, strengthen banks, and alleviate agricultural distress," said ADB Chief Economist Yasuyuki Sawada in the report.
However, exports could suffer if there is moderation in global demand as financial conditions tighten and uncertainty lingers over global trade tensions. On the domestic front, growth could suffer if tax revenue falls short or any disruption affects the ongoing resolution of the twin problems of bank and corporate balance sheets.