The Asian Development Bank (ADB) today cut India’s growth forecast to 7.4% on concerns of delay in reforms, weak demand, external slowdown and weak monsoon.
ADB said stalled action on some key structural reforms will see India’s growth for the current fiscal year fall short of earlier estimates.
ADB, in an update of its flagship annual economic publication Asian Development Outlook 2015 now projects India’s GDP growth for the fiscal year ending March 2016 (FY2015) to come in at 7.4%, below its March estimate of 7.8%. For FY2016, growth is now seen at 7.8% below the earlier forecast of 8.2%.
The ADB report says a revival in investor confidence may be “months away”. “In addition to slower than anticipated global growth, the revisions reflect expectations that reforms and improved investor confidence needed to bolster the economy could be months away and could still be set back by potential global market turmoil,” said ADB chief economist Shang-Jin Wei.
The report said on the upside, inflation is trending down, crude oil import prices have fallen sharply, and tax revenue and net foreign direct investment inflows are up, which augurs well for a bounce back in the economy.
ADB said in its forecast that the slowdown in GDP growth in the first quarter was on the back of a slide in growth of consumption, manufacturing and services, with exports contracting significantly due to lower oil prices and lacklustre demand.
Moving forward, a pick-up in the pace of investment is vital for further growth. While investment conditions have improved, significant challenges still remain. Debottlenecking stalled investment projects is likely to increase investment activity. In addition, moving forward on domestic reforms involving taxes, land acquisition, and labour laws are necessary to improve the investment climate, the report said.
Slow growth in industrial economies and the weakening of currencies of some of India’s major trading partners will continue to weigh on exports with the current account deficit for FY2015 now seen at 1.1% of GDP, well below the highs of recent years.
Continued soft consumer prices will give the central bank scope for further reduction in interest rates in the second half of FY2015. The positive impact of monetary easing on the real economy would be strengthened with further headway on economic reforms. The report projects inflation to average 5% in FY2015, rising to 5.5% in FY2016, on improved growth and an uptick in commodity prices.
