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The pace of investment in India's manufacturing and infrastructure sectors could decrease due to slower policy implementation and bureaucracy despite the economy's strong potential, Moody's Investors Service said on Tuesday.

"India's higher bureaucracy in decision making will reduce its attractiveness as a destination for foreign direct investment, especially when competing with other developing economies in the region, such as Indonesia and Vietnam," according to the rating agency.

Further, lack of certainty around the amount of time needed for land acquisition approvals, regulatory clearances, obtaining licenses and setting up businesses can "materially prolong" project gestation, Moody's said.

Ongoing efforts by the government to reduce corruption, formalise economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts, the rating agency warned.

India is aiming to boost the manufacturing and infrastructure sectors and bring in domestic and foreign investments.

Some of the measures include increasing the flexibility of labour laws, raising agricultural sector efficiency and expanding investment in infrastructure.

If implemented effectively, these would lead to higher economic growth, Moody's said.

India's growth in the first quarter of 2023/24 is expected to be driven by private consumption, a revival in rural demand and renewed buoyancy in manufacturing on easing of input cost pressures, the Reserve Bank of India said in its monthly bulletin on Monday.

Since India has limited multilateral liberalisation with respect to regional trade agreements, it would weigh on foreign investments coming into the country, according to Moody's.

New investments in commercially viable projects will be mostly funded by banks and through the domestic bond market, the rating agency said.

Banks have capacity to grow their loans by around 15% over each of the next two years, with private sector lenders being especially well placed to expand, Moody's added.