India's economic growth will rise to 7.3 per cent this fiscal and further to 7.6 per cent in the next financial year, retaining the fastest-growing Asian economy tag, on back of GST and banking reforms.
In its Asian Development Outlook (ADO), 2018, Manila-based ADB said, "risks to trade are high" and retaliatory actions could dent growth in the Asian region going forward.
Indian economy grew 6.6 per cent in the last fiscal as it battled the lingering effects of demonetisation in 2016, businesses adjusting to goods and services tax (GST) in 2017, and a subdued agriculture. The country's economic growth was 7.1 per cent in 2016-17.
With 7.3 per cent growth projected for this fiscal, India would be reversing the two-year declining trend.
"Despite the short-term costs, the benefits of reform such as the recently implemented GST will propel India's future growth," ADB Chief Economist Yasuyuki Sawada said.
Robust foreign direct investment flows attracted by liberalised regulations and the government steps to improve the ease of doing business will further bolster growth, Sawada said.
The ADO said protectionist trade measures by the United States are yet to impact trade flows to and from Asia.
"However, further action and retaliation against it (US trade tariffs) could undermine the business and consumer optimism that underlies the regional outlook (for Asia)," it said.
With regard to China, it said the country will slow down from 6.9 per cent in 2017 to 6.6 per cent this year, and 6.4 per cent in 2019.
"India would remain the fastest-growing country across Asia," ADB India Country Director Kenichi Yokoyama said. However, there are issues regarding rising NPAs and risks from crude oil prices rising above USD 70 a barrel, he said.
He, further, said the impact of the US tariff hikes may not be much, but India "need to be cautious".
"The biggest risk factor could be the crude oil price," Yokoyama said.
ADB's growth projection of 7.3 per cent this fiscal is in line with that of rating agency Fitch, but a tad lower than RBI's forecast of 7.4 per cent.
The ADO projected developing Asia to grow 6 per cent in 2018 and 5.9 per cent in 2019.
It, however, said the risks for Asian region are mostly on the downside.
"The big risk, of course, would be worsening trade friction. Another would be rapid capital outflows that could materialise if the US Federal Reserve needed to raise interest rates faster than markets expect.
"Finally, the continued build up of private debt for some regional economies since the global financial crisis could undercut growth. Developing Asia is well positioned to respond to these shocks," it added.
India's growth is expected to pick up further to 7.6 per cent in 2019-20 as efforts to strengthen the banking system and continued corporate deleveraging are likely to bolster private investment, the ADO said.
ADB India Senior Economics Officer Abhijit Sen Gupta said "further reform to strengthen bank governance is needed".
ADB projects global crude oil prices to remain around USD 65 a barrel in 2018 and USD 62 a barrel in 2019.
Also, set to catalyse growth, are benefits from the GST as it mitigates geographic fragmentation and adds revenue to the exchequer, as well as further progress on fiscal consolidation and reform to promote FDI, the ADO said.
It said the prospects for policy stimulus remain limited and there is risk of tight interest rate regime.
"The deferment of fiscal consolidation, upside risks to inflation, and expected hikes in US interest rates in 2018 squeeze maneuvering room for policy rate cuts to stimulate growth. At the same time, the odds of a rate hike are low with the central bank indicating tolerance for slightly higher inflation and recognition of the need to nurture recovery. Consequently, the status quo is likely to hold in FY2018, albeit with some risk of monetary tightening," the ADO said.
It projected inflation to average 4.6 per cent in FY2018 (2018-19), rising to 5.0 per cent in FY2019 with further firming of global commodity prices and strengthening of domestic demand.