India may see slow, but sustainable economic recovery: Morgan Stanley

New Delhi: The Indian economy is likely to witness a "slow but sustainable" recovery and is expected to clock a GDP growth of 7.5 percent this fiscal, a Morgan Stanley report says.

According to the global financial services major, the revival will be driven by a pick-up in capex (more public than private), urban consumption and normalisation in exports.

"We expect GDP growth (new series, on market prices) to accelerate gradually to 7.5 percent in financial year 2016 and 8.1 per cent in fiscal year 2017," Morgan Stanley said in a research note.

On prices, the report said inflation is expected to remain below 5 percent over the two years.

The global brokerage firm said, "We expect a slightly slower pick-up in growth trajectory, given the trailing weakness from external demand and concerns about agriculture growth, with related impact on rural consumption."

According to Morgan Stanley, the government's policy actions and RBI's monetary policy response have led to improvement in macro stability - India is decidedly moving out of the macro adjustment phase and into the recovery phase.

However, this would be a "longer-duration expansion cycle for India with low risks of overheating in the next two years, considering the overall policy approach of the government and RBI".

The report noted that the upside and downside risks to the forecast will be influenced by two key variables -- pace of policy actions to revive productivity dynamics and improve the growth mix and strength of external demand recovery and trend in capital inflows into emerging markets.

"We currently see risks to our growth outlook as evenly balanced," it added.

Meanwhile, according to the government's mid-year review, India is expected to grow by 7-7.5 percent in 2015-16, slower than the previous estimate of 8.1-8.5 percent, as weak exports, a sluggish farm sector and subdued private investment weighed on faster expansion.