May 6 (Reuters) – India’s economy will likely make a gradual recovery this year, helped by a rebound in capital investments as well as a pick-up in private consumption, but rising bad loans at its banks threaten to choke the recovery, the OECD said on Tuesday.

In its latest economic outlook, the Paris-based think tank said growth in Asia’s third-largest economy was expected to edge up to 4.9 percent in calendar year 2014 from 4.5 percent a year earlier and accelerate further to 5.9 percent in 2015.

The estimates are predicated on hopes of an upturn in capital investments after an ongoing national election and a boost in consumption driven by slowing inflation.

India is facing the worst economic slowdown since the 1980s as investment growth has hit an 11-year low. Capital investment contributes nearly 35 percent to India’s economy, but it probably barely grew in the fiscal year that ended in March.

To break the investment logjam, a prime minister-headed panel, known as the Cabinet Committee on Investment, has cleared projects worth about 6 percent of gross domestic product.

“Investment is to rebound after the spring general elections and as large investment projects recently approved by the Cabinet Committee on Investment are gradually implemented,” the OECD report said.

The report urged New Delhi to rapidly carry out pending labour, fiscal and tax reforms for a faster economic revival. It also backed a Reserve Bank of India panel’s proposal for moving to an inflation target of 4 percent in three years while setting monetary policy, sharply below current levels.

“The proposed inflation targeting framework will help anchor price expectations and improve business sentiment and consumer confidence,” it said.

The report, however, flagged off rising bad banking assets at Indian lenders as a major risk to the country’s economic recovery.

The economic slowdown and higher interest rates are making it tougher for companies to repay loans, leading to a steady growth in non-performing assets, especially among state-run banks.

Stressed loans in India – those categorised as bad and restructured – total $100 billion, or about 10 percent of all loans. Fitch Ratings expects stressed assets to reach 14 percent of loans by March 2015.

This has made some lenders shift focus from corporate lending to consumer credit, which is mostly secured against borrowers’ assets, contributing to a slump in capital investment.

“On the negative side, failure to halt the rise in non-performing loans could derail the pick-up in investment,” the report said. (Reporting by Rajesh Kumar Singh; Editing by Jacqueline Wong)