Having seen a "modest setback" due to demonetization last fiscal, the Indian economy will claw back to 7.2 per cent growth this financial year and rise further to 7.5 per cent in 2018-19, says a World Bank report.

In its report on South Asian Economy, the World Bank said that "significant risks" to economic growth could emanate from the fallout of demonetization on the small and informal economy, stress in the financial sector and uncertainty in the global environment.

Also, a rapid increase in oil and other commodity prices could have a negative implication for the economy, it added. The country's economic growth is expected to see an uptick at 7.2 per cent this fiscal and further accelerate to 7.5 per cent in 2018-19, the report said.

The growth slowed down to 6.8 per cent in 2016-17 due to a combination of weak investments and the impact of demonetization, the World Bank said, adding that timely and smooth implementation of the GST could prove to be a significant "upside risk" to economic activity in 2017-18.

As per the report, the economic growth is projected to increase gradually to 7.7 per cent by 2019-20, underpinned by a recovery in private investments, which are expected to be crowded in by the recent increase in public capex and an improvement in the investment climate.

"Indias economic momentum suffered a modest setback due to demonetization, while the poor and vulnerable likely witnessed a larger negative shock. The economy is expected to recover and growth will gradually accelerate to 7.7 per cent by 2019-20," it said. The demonetization, the World Bank said, caused an immediate cash crunch, and activity in cash reliant sectors was affected.

The GDP growth slowed to 7 per cent during the third quarter of 2016-17, from 7.3 per cent during the first half of the fiscal.

Indias fiscal, inflation and external conditions are expected to remain stable, the US-based multilateral lending agency said, adding that the center will continue to consolidate modestly while retaining the push towards infrastructure spending.

"Inflation will stabilize, supported by favourable weather and structural reforms. Normal monsoons have so far offset increases in petroleum prices," it said. Referring to the external factor, it said exchange rate has appreciated, partly reflecting expectations of a narrowing inflation gap between India and the US and limited external vulnerabilities as the current account deficit is expected to remain below 2 per cent of the GDP and fully financed by FDI inflows.

It said challenges to Indias favourable growth outlook could stem from continued uncertainties in the global environment, including rising global protectionism and a sharp slowdown in the Chinese economy, which could further delay a meaningful recovery of external demand.

It said there is a great uncertainty about the extent to which demonetisation caused small, informal firms to exit and shed jobs. Also, private investment continues to face several impediments in the form of corporate debt overhang, stress in the financial sector, excess capacity and regulatory and policy challenges.

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