ADB cuts India's FY17 growth forecast to 7.4%

Says tax, labour and FDI reforms would spur this, rules out aggressive rate cuts by RBI

India’s economic growth will be 7.4 per cent in 2016-17 from 7.6 per cent in the current financial year (it ends on Thurday), due to global headwinds. However, this will remain the world’s fastest growing economy, backed by domestic reforms, forecast the Asian Development Bank (ADB) on Wednesday.

Its earlier estimate was 7.8 per cent, lowered due to weak recovery in major industrial economies and softer growth prospects in China. “India is one of the fastest growing large economies in the world and will likely remain so in the near term,” said Shang-Jin Wei, chief economist, ADB. “The potential growth of the country can be raised further if it can successfully implement necessary reforms, including unifying the tax regime, improving labour market regulations and in opening further to foreign direct investment and trade.”

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The growth will, says ADB, pick up to 7.8 per cent in 2017-18. Led by the government’s strengthening of public sector banks’ capital and operations, private investment benefiting from corporate deleveraging, financing of stalled projects and uptick in bank credit. “The economy will again accelerate in 2017-18,  as the benefits of banking sector reforms and an expected pick-up in private investment begin to flow,” it said.

The Union finance ministry has estimated growth at between seven and 7.75 per cent in 2016-17.

After two years of decline, consumer inflation would accelerate to an average of 5.4 per cent in 2016-17 and 5.8 per cent in 2017-18 as global oil prices get firmer and domestic demand strengthens due to government employees' pay rise, says ADB.

It rules out aggressive rate cuts by the Reserve Bank of India.

And, says more of these will be contingent on the evolving inflation trajectory and implementation of planned budget consolidation.

It says external demand offsets a pick-up in domestic demand here. “More, the weak balance sheets of public sector banks will hamper lending and growth prospects.”

"The government is expected to maintain its ongoing fiscal consolidation efforts...supported by tax revenue growth and asset sales," it said.

ADB projects a recovery in exports in 2017-18 as large economies show a mild growth rebound and with an improved business environment, with government policy actions in place. "However, India still faces significant challenges to finance the infrastructure it needs to deliver sustainable growth, with funding requirements estimated at around $200 billion a year through FY2017."

Public sector banks' non-performing assets and an over-leveraged corporate sector leave limited scope for more private investment in infrastructure and highlight the need for policy actions, the report said.