PARIS India's economic growth is likely to rise to more than 7.5 percent in calendar year 2013 but continued government policy uncertainty could erode the country's longer-term growth prospects, the OECD said on Tuesday.
A cyclical upturn in investment, stronger external demand and the effects of recent monetary easing will boost growth, the report said, although it warned that high inflation would dampen the investment climate.
The prediction of higher growth in the Organisation for Economic Cooperation and Development's outlook report should cheer Prime Minister Manmohan Singh's government - which has faced an avalanche of criticism over how it has run Asia's third-largest economy and its scant progress making key reforms.
The upbeat OECD forecast stood in stark contrast to the pessimistic view offered on Monday by Morgan Stanley, which cut its growth forecasts for India, citing a high budget deficit and slowing private investment. It said it now expected the economy to grow by 6.8 percent, instead of 7.5 percent, in 2013.
Standard & Poor's rating agency cut its outlook for India's credit rating to negative from stable in April, reflecting worries about high deficits and political paralysis that has stalled progress on major economic reforms.
India's economic growth slowed to 6.1 percent in the three months to December, the weakest annual pace in almost three years, while the rupee slumped to record lows against the dollar on Tuesday.
"A moderate cyclical pick-up in investment is projected in the near term," the OECD said. "Later this year and into the next, growth is set to pick up to around trend rates, supported by the delayed effects of the recent monetary policy easing."
"However, still high inflation will limit the room for significant further relaxation," it added.
India has had rapid economic growth after opening up its economy in 1991. But investors fret that Singh's government is now squandering a chance to tap the country's potential.
The current account deficit is the highest since 1980. Reforms such as opening India's supermarket sector to foreign chains like Wal-Mart stuttered as the government failed to convince powerful coalition allies. Inflation is the highest among the so-called BRICS group of major developing nations.
Costly subsidies have pushed the fiscal deficit to 5.9 percent from a target of 4.6 percent of GDP in the fiscal year that ended in March 2012. The government must push consolidation to help reduce inflation and the current account deficit, the report said, warning that an expected rise in global oil prices could again force New Delhi to overshoot its spending target.
Continued policy uncertainty and more fiscal slippage "would weaken investment sentiment and result in softer near-term growth and an erosion of longer-run prospects," the OECD said, though adding that India's pace of growth could overtake China's by 2020.
(Reporting by Matthias Williams in NEW DELHI; Editing by Richard Borsuk)