Healthy growth in tax revenue, along with higher than usual asset sales, allowed the government to increase growth enhancing capital expenditure by a robust 39.0%. While net foreign direct investment inflows touched $10.2 billion in the first quarter of FY2015, a year-on-year rise of more than 29%, net portfolio inflows turned negative.

Slow growth in industrial economies and the weakening of currencies of some of India's major trading partners will continue to weigh on exports with the current account deficit for FY2015 now seen at 1.1% of GDP, well below the highs of recent years.

Moving forward, a pick-up in the pace of investment is vital for further growth. While investment conditions have improved, significant challenges still remain. Debottlenecking stalled investment projects is likely to increase investment activity. In addition, moving forward on domestic reforms involving taxes, land acquisition, and labor laws are necessary to improve the investment climate, the report said.

Continued soft consumer prices will give the central bank scope for further reduction in interest rates in the second half of FY2015. The positive impact of monetary easing on the real economy would be strengthened with further headway on economic reforms. The report projects inflation to average 5% in FY2015, rising to 5.5% in FY2016, on improved growth and an uptick in commodity prices.

In FY2016, a recovery in oil prices and improved industry and investment demand should see both imports and exports pick up, with the current account deficit seen increasing slightly to 1.5% of GDP.
END