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| ADB raises India's GDP growth forecast to 8.5% |
| BS Reporters / New Delhi Sep 29, 2010, 00:55 IST |
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Warns high inflation, rising rupee could weaken future growth.
The Asian Development Bank (ADB) today raised the 2010 economic growth forecast for India to 8.5 per cent, from 8.2 per cent estimated in April. However, it warned that high inflation and an appreciating rupee could potentially weaken future robust expansion.
The Asian Development Outlook 2010 Update (ADO Update) has, however, retained the growth 2011 estimate at 8.7 per cent.
The projections are in line with those made by the central bank, the finance ministry and the Prime Minister’s Economic Advisory Council.
The report warned that global recovery remains shaky and downside risks lurk. It also did not rule out the possibility of a double-dip recession in major industrial economies and advocated that governments should refrain from tightening fiscal and monetary policies “too quickly” to sustain the expansion.(Click for graph)
ADB, however, said Asian economies have made a strong comeback. Asia, excluding Japan, is now projected to grow at 8.2 percent in 2010, faster than an April estimate of 7.5 per cent. For next year, the growth forecast is at 7.3 per cent.
“The Indian economy has made a strong recovery. The challenge now is to return growth to pre-crisis growth rates,” said Rana Hasan, principal economist at the multilateral agency.
The report listed vigorous investor enthusiasm and net capital inflows, an optimistic services sector and more robust industrial output, driven by increasing consumer demand as the reasons for the sustained economic growth.
At the same time, it pointed out that high food prices needed immediate attention from policy makers and forecast that inflation will rise to 7.5 per cent in 2010, compared to 5 per cent estimated earlier.
Besides, the outlook on the Indian currency was not too rosy in view of the 11 per cent currency appreciation in real terms during the 12 months ended August 2010.
“There are two interrelated threats to stability: continued appreciation of the rupee; as well as high actual inflation and inflation expectations. The former could jeopardise recoveries in many labour-intensive, export-oriented industries, and the latter could force the central bank to take a sharply tighter credit policy, stunting growth,” the report said.
It warned that if inflation did not moderate, the Reserve Bank of India could find it tough to intervene in the foreign exchange market to check steep appreciation, which is also likely to persist due to the possibility “excessive surplus” in the capital account.
“The authorities are keen to push growth to 9-10 per cent over time, and so may want to resist any appreciation in the exchange rate and to this end the expected reduction in inflation over the coming months will be beneficial,” the report said.
The other possible downside risk emanated from slow recovery in the developed markets. ADB said the goods and services tax is achieving fiscal consolidation and minimising distortions in the economy.
Despite the currency appreciation, ADB expects exports to grow by 18 per cent, while imports should increase by 20 per cent. With this predicted rise in trade flows, the current account deficit was readjusted to 2.7 per cent of GDP from 1.5 per cent for 2010.
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