Indian economy is projected to expand by 7.6 per cent in 2016-17 and accelerate to 7.8 per cent in 2017-18, mainly on the back of domestic consumption demand aided by steady employment and a relatively low inflation, a UN report for the Asia-Pacific said on Thursday.

"The near-term growth outlook is positive, with the projected growth being 7.6 per cent in 2016 and 7.8 per cent in 2017," said the United Nations Economic and Social Survey for Asia and the Pacific-2016 report, which was released here.

The urban household spending is expected to drive the momentum amid steady employment growth and relatively low inflation, the report stated.

Fixed investment conditions are seen to be improving because of lower borrowing costs and a more enabling business environment brought about by a better World Bank ranking on ease of doing business.

However, the UNESCAP report pointed to challenges such as high levels of stressed assets in the banking sector and a fragile business confidence that could constrain investment growth.

It linked the overall strength of domestic demand to progress made in implementing structural reforms and how rapidly large-scale stalled infrastructure projects are unlocked.

"Some progress has been made in reforming the fiscal policy such as the rationalisation of fuel price subsidies, but implementation of the Goods and Services Tax remains an important reform that is being held up due to political deadlock," said the report.

According to Rathin Roy, Director, National Institute of Public Finance and Policy under the Finance Ministry, who was present, democratic and social deficit are preventing India from looking beyond 7.5-7.8 per cent.

"Democratic deficit and social deficit are preventing India from looking beyond 7.5-7.8 per cent. I will be happy with 7.4 per cent. When we all know that we are not going down to 6 per cent, that is a good news, but we are not going to go up to 9 per cent," Roy said.

"Our supply side is short, we have huge challenges on the infrastructure side and project execution."

On the export front, he felt that socio-economic conflicts are proving to be a big drag.

According to Nagesh Kumar, Head, ESCAP South and South-West Asia, India can grow at a much better rate if issues related to gender inequality are addressed and women have equal participation in the economy.