The report, which has been released ahead of the annual meeting of the World Bank with the International Monetary Fund, noted India's economic growth decelerated for the second consecutive year.
In 2018-19, it stood at 6.8 per cent, down from 7.2 per cent in the 2017-18 financial year.
While industrial output growth increased to 6.9 per cent due to a pick-up in manufacturing and construction activities, the growth in agriculture and the services sector moderated to 2.9 and 7.5 per cent, respectively.
In the first quarter of 2019-20, the economy experienced a significant and broad-based growth deceleration with a sharp decline in private consumption on the demand side and the weakening of growth in both industry and services on the supply side, the report said.
Reflecting on the below-trend economic momentum and persistently low food prices, the headline inflation averaged 3.4 per cent in 2018-19 and remained well below the RBI's mid-range target of 4 per cent in the first half of 2019-2020. This allowed the RBI to ease monetary policy via a cumulative 135 basis point cut in the repo rate since January 2019 and shift the policy stance from "neutral" to "accommodative", it said.
The World Bank report also noted that the current account deficit had widened to 2.1 per cent of the GDP in 2018-19 from 1.8 per cent a year before, mostly reflecting a deteriorating trade balance.
On the financing side, significant capital outflows in the first half of the current year were followed by a sharp reversal from October 2018 onwards and a build-up of international reserves to USD 411.9 billion at the end of the fiscal year.
Likewise, while the rupee initially lost ground against the USD (12.1 per cent depreciation between March and October 2018), it appreciated by about seven per cent up to March 2019, the report said.
"The general government deficit is estimated to have widened by 0.2 percentage points to 5.9 per cent of the GDP in 2018-19. This is despite the central government improving its balance by 0.2 percentage points over the previous year. The general government debt remained stable and sustainable - being largely domestic and long term-at around 67 per cent of GDP," the report said.
According to the World Bank, poverty has continued to decline, albeit possibly at a slower pace than earlier. Between 2011-12 and 2015-16, the poverty rate declined from 21.6 to 13.4 per cent (USD 1.90 PPP/day).
The report, however, said disruptions brought about by the introduction of the GST and demonetisation, combined with the stress in the rural economy and a high youth unemployment rate in urban areas may have heightened the risks for the poorest households.
The significant slowdown in the first quarter of the fiscal year and high frequency indicators, thereafter, suggested that the output growth would not exceed 6 per cent for the full fiscal year, the bank said.
The report said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from non-banking financial companies (NBFCs).
However, the investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but also will continue to reflect financial sector weaknesses, the report said.
"Growth is expected to gradually recover to 6.9 per cent in 2020-21 and 7.2 per cent in 2021-22 as the cycle bottoms-out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. However, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand," the report said.
The main policy challenge for India is to address the sources of softening private consumption and the structural factors behind weak investment, the bank said.
"This will require restoring the health of the financial sector through reforms of public sector banks' governance and a gradual strengthening of the regulatory framework for NBFCs, while ensuring that solvent NBFCs retain access to adequate liquidity.
"It will also require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowd-out the private sector," it said.
According to the bank, the main sources of risk included external shocks that result in tighter global financing conditions, and new NBFC defaults triggering a fresh round of financial sector stress.
To mitigate these risks, the authorities would need to ensure that there was adequate liquidity in the financial system while strengthening the regulatory framework for the NBFCs, the bank added.