Growing faster than other major emerging market economies, India's growth is expected to strengthen from 7.3 percent this year and last year to 7.5 percent next year, according to the International Monetary Fund (IMF).
"Growth will benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices," the IMF said in latest World Economic Outlook (WEO) released Tuesday ahead of the World Bank-IMF annual meetings in Lima (Peru).
The WEO foresees lower global growth compared to last year, with modest pickup in advanced economies and a slowing in emerging markets, primarily reflecting weakness in some large emerging economies and oil exporting countries.
Global real GDP grew at 3.4 percent last year, and is forecast to grow at only 3.1 percent this year. Growth is expected to rebound to 3.6 percent next year and increase beyond 2016.
One of the key factors in this is the gradual increase in the global weight of fast-growing countries such as China and India, which further increases their importance as drivers of global growth, the WEO said.
In India, near-term growth prospects remain favourable, and the decrease in the current account deficit has lowered external vulnerabilities, it said.
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Inflation is expected to decline further in 2015, reflecting the fall in global oil and agricultural commodity prices.
The faster-than expected decline in inflation has created space for considering modest cuts in the nominal policy rate, IMF said.
But the real policy rate needs to remain tight for inflation to decline to the inflation target in the medium term, given upside risks to inflation, it said.
Continued fiscal consolidation is also essential, but it should be more growth friendly, WEO said suggesting tax reform and reduction in subsidies.
With balance sheet strains in the corporate and banking sectors, financial sector regulation should be enhanced, provisioning increased, and debt recovery strengthened, it suggested.
Structural reforms should focus on relaxing long-standing supply constraints in the energy, mining, and power sectors, WEO said.
Priorities include market-based pricing of natural resources to boost investment, addressing delays in the implementation of infrastructure projects, and improving policy frameworks in the power and mining sectors.
In advanced economies, growth is expected to remain robust and above trend through 2016 and contribute to narrowing the output gap.
The growth recovery in the euro area is projected to be broad-based. Growth prospects in emerging markets and developing economies vary across countries and regions.
But the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6 percent in 2014 to 4 percent in 2015.
The WEO underscores that raising actual and potential output must remain the policy priority. This will require a combination of demand support and structural reforms, it said.
(Arun Kumar can be contacted at arun.kumar@ians.in)