India's GDP growth is likely to pick up pace and expand by 7.8 per cent during this fiscal and higher next year on the back of improved urban consumption, says a HSBC report.
"We expect actual GDP growth to pick-up pace gradually from 7.4 per cent in FY15 to 7.8 per cent and 8.3 per cent over the next two years on the back of improved urban consumption as lower inflation improves purchasing power, and higher public investment, which we hope will crowd in the private sector over time," the report said.
Using a new series of national accounts, the Central Statistical Office (CSO) has estimated the 2014-15 economic growth at 7.4 per cent, it added.
The report said that potential growth is an "elusive concept" and every technique to measure it has its share of problems.
"This time around it has got trickier given new GDP data, which is proving hard to discern. Amongst the problems is a rather short history of only four years of data, which makes it impossible to get a read on cycles and trends, concepts critical for policy making," it said.
Using overlapping data, the report said "we have spliced" the new GDP series with the old one, for each sector individually, and then aggregated it to get a back-casted GDP series.
"This technique gives us a continuous GDP series starting from 1951," it said.
On inflation, the report said the recent softening in food prices could continue into 2015 and "forms the basis for our June rate cut call."
"But, don't be fooled," it said, adding that structural food price disinflation is not yet entrenched.
When domestic demand recovers or global commodity prices rise, the cost of food could quickly rebound. Ultimately, sustained disinflation hinges upon food reforms in production and distribution, and a much improved investment climate.
"The quantum of RBI rate cuts beyond 2015 and in the run up to the 4 per cent CPI target of 2018 will depend largely on structural reforms.
"If they are coming, there could be space to cut. But if not, the RBI may just have to sit tight," the report added.
