India is expected to clock 7.1 per cent growth this year before edging up to 7.5 per cent in 2018, according to a UN report, which warned that the country faces heightened risks related to the concentration of bad loans in the public sector banks.

The UN Economic and Social Commission for Asia and the Pacific (ESCAP) said in its annual flagship report ‘The Economic and Social Survey of Asia and the Pacific 2017’ launched yesterday that the economic growth for India is projected to be stable at 7.1 per cent in 2017 before edging up to 7.5 per cent in 2018, underpinned by higher private and public consumption and increased infrastructure spending.

Growth in India is forecast at 7.1 per cent this year as “re-monetisation restores consumption, and infrastructure spending increases”, the report said.

Inflation is projected to reach 5.3-5.5 per cent in 2017 and 2018, which is somewhat above the official target of 4.5-5 per cent.

The report, however, noted that a key downside risk for India was heightened financial sector risks related to the concentration of bad loans in public sector banks.

The gross non-performing assets ratio in public sector banks reached almost 12 per cent in 2016, which points to the need for “bank recapitalisation”, it said.

Noting the impact of demonetisation, the report said the unexpected withdrawal of the two largest denomination currency notes in November 2016 and their subsequent replacement with new currency weighed down economic conditions in late 2016 and early 2017.

The resulting liquidity crunch led to delays in the payment of wages and purchase of inputs in the industrial sector, the report said. “While the impact of demonetisation on the economy is expected to be transient, a slower-than-expected recovery would particularly diminish the outlook for cash-intensive sectors and supply chains for agricultural products,” it said.

The recent budget called for various measures that seek to mitigate the large temporary adverse shocks on income and wealth, such as expanding a low-cost housing scheme and providing more relief to the agricultural sector and credit support for small enterprises.

Notwithstanding its short-term disruptions, the report said one of the medium-term benefits of demonetisation was to help expand banking sector liquidity. “The country’s medium-term economic development will also benefit from recent reforms that are aimed at easing domestic supply bottlenecks, such as the implementation of the goods and services tax, amendment of a bankruptcy law and opening up of the pharmaceuticals, defence and civil aviation sectors,” it said.

The rate of India’s economic growth moderated to 7.1 per cent in 2016 from 7.6 per cent in 2015, with the manufacturing sector more sluggish in 2016 relative to 2015 owing to weaker domestic demand, rising input costs and subdued bank credit.

Fixed investment continued to contract as stressed corporate balance sheets suppressed firms’ appetite for additional spending, the report said.

Overall, the still rapid output growth in 2016 benefited from a modest recovery in agriculture due to an improved monsoon season and robust growth in public administration following public sector salary increases, it said.

Despite the overall fiscal tightening, capital expenditure under the budget for fiscal year 2017/18 is about 25 per cent higher than that in the preceding budget.

The report highlighted that despite a broadly positive economic outlook for 2017, Asia-Pacific economies are vulnerable to rising global uncertainty and trade protectionism.

The region’s developing economies are projected to grow at 5 per cent and 5.1 per cent in 2017 and 2018 up from 4.9 per cent last year.

Economic conditions are broadly stable in China and higher value-added sectors are gradually replacing excess capacity sectors as drivers of output and employment, the report said.

The continued softening of economic growth in China, projected at 6.5 per cent in 2017 against 6.7 per cent in 2016, reflects ongoing deleveraging and restructuring efforts to boost output in the medium term, it said.

The projected moderate Asia-Pacific economic growth faces risks from rising protectionism and global uncertainty, it added.

The report estimates that a steeper-than-anticipated increase in these factors could reduce average regional growth in 2017 by up to 1.2 percentage points.

Launching the survey in Bangkok, UN Under-Secretary-General and ESCAP Executive Secretary Shamshad Akhtar emphasised that better governance for effective mobilisation and use of fiscal resources is critical to advancing the 2030 Agenda for Sustainable Development. “As we enter the second year of the 2030 Agenda, economic growth in Asia-Pacific economies is steady but modest amid prolonged weak external demand and rising trade protectionism. Future economic growth will need to rely more on productivity gains, compared to factor accumulation,” Akhtar said.