IMF Says India Economy Recovered, to Grow 5.6% This Year

New Delhi: India's economy has recovered from a slump, the International Monetary Fund (IMF) said on Tuesday as it hiked its 2014-15 growth forecast to 5.6 per cent, citing better exports and investment prospects under the new Narendra Modi government.

The International Monetary Fund's year-on-year forecast for India's financial year to March 2015 represents a 0.2-percentage-point uptick from its April projection.

The Washington-based fund said in its World Economic Outlook update that the following year would see Asia's third-biggest economy expand 6.4 per cent, unchanged from its previous prediction.

"India has recovered from its relative slump, and, thanks in part to policy and a renewal of (economic) confidence, growth is expected to exceed five percent again," IMF chief economist Olivier Blanchard said in a statement.

The report will come as a boost to the Prime Minister, who took office in May following a landslide election win, promising to revive an economy that grew 4.7 per cent last year, compared with near double-digit expansion a few years ago.

Mr Modi has been seeking to slash red tape, attract global firms to "make in India" and spur a manufacturing sector long eclipsed by that of neighbouring China. The government has also relaxed some foreign investment entry rules.

(Read: 'Make in India' reflects ambition to move ahead in manufacturing: India Inc)

India's economy posted two years of sub-five-per cent growth, the longest slowdown in a quarter century, as the central bank kept interest rates steep to combat stubborn inflation.

But growth rallied to 5.7 per cent year on year in the first quarter from April to June - the best quarterly performance in over two years. (Read more)

"In India, growth is expected to increase in the rest of 2014 and 2015 as exports and investments continue to pick up and more than offset the effect of an unfavourable monsoon on agriculture," the IMF said.

Economists say India with three quarters of a billion people under the age of 35 needs to return to at least eight-to-nine percent growth to create jobs for millions of young people entering the workforce annually.

India's projected growth is still far slower than that of rival China, the region's largest economy, which is projected to grow by 7.4 per cent this year.

The IMF report is the latest positive news for India after ratings agency Standard & Poor's last month raised its credit outlook to "stable" from "negative" thanks to greater hope of economic reforms under Mr Modi.

(Also read: S&P upgrades India's credit outlook to 'stable')