NEW DELHI - India's economy has recovered from a slump, the IMF said Tuesday as it hiked its 2014-15 growth forecast to 5.6 per cent, citing better exports and investment prospects under a new right-wing 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 per cent again," IMF chief economist Olivier Blanchard said in a statement.
The report will come as a boost to Prime Minister Narendra Modi, 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.
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.
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.
India still lags China
"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.
India's central bank last month forecast 5.5 per cent growth for the year and said the economy was poised to make a "shift to a higher growth trajectory".
Economists say India with three quarters of a billion people under the age of 35 needs to return to at least eight-to-nine per cent growth to create jobs for millions of young people entering the workforce annually.
The central bank, focused on taming inflation, is counting on growth being lifted through government action to ease supply bottlenecks caused by dilapidated infrastructure and bureaucratic delays.
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.
But Chinese growth is slowing and some analysts project India's growth will overtake it in coming years.
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 Modi.
The Asian Development Bank also has voiced expectations of a "turnaround" thanks to India's more business-welcoming stance while local surveys show business confidence has shot up under the new government.