5.6% growth likely next year, stable govt is vital: Citi

Indian economy is likely to grow by 5.6% in the next financial year but a stable government after elections, a pick-up in investment and good monsoon are vital factors, Citigroup said in a report.

An occurrence of El Nino could lead to deficient rainfall in India and consequently pose a downward risk to agricultural output, the report said. El Nino is a series of climatic changes across Pacific Ocean due to warm ocean water temperatures.

An improvement in investment would spur economic growth. Companies would, however, wait for elections before commencing operations, it said.

"A stable government post elections remains key to a capex revival," the report said, adding that the key to moving to a higher growth trajectory would be reviving investments to pre-crisis levels, especially the private sector through continued efforts to 'unlock' stalled investments.

According to advanced estimates by the Central Statistics Office, India's GDP in the current fiscal would improve to 4.9% from 4.5% a year ago, mainly on account of the good performance of the farm sector.

"With an improving global backdrop in 2014, we maintain our estimates of modest upturn in GDP growth from 4.8% in FY 2014 to 5.6% in FY 2015 and believe a pick-up in private sector investments will be key," the report said.

For FY 2015 "we maintain our estimate of 5.6% led by agriculture returning to its trend growth of 3%, industry growth rising to 3.9% on mining clearances and improved electricity production, and services remaining flat at 6.9%," the Citigroup report said.

On interest rate cut, it said despite growth falling to decade low levels, inflation has remained in double digits and this indicates that interest rates are likely to remain "higher for longer".

"We maintain our view of an extended pause in rates through 2014," it said.

Reserve Bank Governor Raghuram Rajan raised key policy rate by 0.25% to 8% in the third quarter review of monetary policy, in a bid to curb inflation.

Retail or CPI inflation in December moderated to a three -month low of 9.87%, while the wholesale or WPI was at 5-month low of 6.16% during the month.