Indian economy to grow 7.5 percent in 2015-16: World Bank

With decline in oil and commodity prices, the Indian economy is expected to grow by 7.5 percent in 2015-16, 7.9 percent the next fiscal and 8 percent in 2017-18, the World Bank said in its India Development Update report on Tuesday.

"Aided by a supportive external environment, in particular the sharp decline in oil and commodity prices, the Indian economy has taken strong strides towards higher growth and enhanced stability. Growth has accelerated, inflation has declined, the current account deficit has narrowed, and external reserves have increased," the report said.

The update is published twice a year.

According to the report, the growth acceleration is conditional on the growth of investment picking up to 11 percent during FY2016 - FY 2018, the report adds.

"The government has made progress in several policy areas and long-term prospects for growth remain bright for India," Onno Ruhl, World Bank Country Director in India was quoted as saying in a statement.

"The current situation offers an opportunity to further strengthen the business environment and enhance the quality of public spending. Continuous strong momentum in these reforms will further unleash the productivity that Indian firms need in order to create jobs and become globally competitive," he added.

To achieve higher investment growth, the Update calls for fiscal reforms that protect public capital spending; financial sector reforms; and reforms in the business environment - all of which can help unlock private investments.

Specifically the update calls for the timely implementation of the Goods and Services Tax (GST); rationalizing current expenditures, especially on subsidies; delivering on divestment plans, ensuring greater tax buoyancy than has been realized lately; encouraging PPP projects; and addressing balance sheet issues of public sector banks.

According to World Bank the recent economic turnaround and the outlook also rest crucially on oil and commodity prices remaining low.

Reiterating the need for the government to further insulate the economy from the global price of oil, the Update suggests weaning the fiscal outcomes more fully from oil prices; by encouraging alternative sources of energy; creating additional fiscal buffers by using petroleum taxation more actively, as well as rationalising subsidies.

The Update sounds a word of caution on the risks from potential tightening of the US monetary policy.

"While the Reserve Bank of India has taken preventive measures to reduce external vulnerability, and has built international buffers as a "first line of defense", the risk remains, warranting vigilance," said Poonam Gupta, senior economist, World Bank.

On the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the report said the scheme has the potential to drastically cut poverty.

However an, analysis of household survey data from Bihar shows the programme's actual impact on rural poverty is only about one percentage point against its potential of reducing poverty by at least 14 percentage points.

According to the study, the full potential of MGNREGS may not be realised due to the supply side being too slow to respond to the demand for work on the scheme; workers not being paid the full scheme wage; delays in wage payment; and awareness of how to demand work being limited.