ADB Revises India Forecast on Weak Demand, Reform Delays

An economic slowdown in industrial countries, a weak monsoon, and stalled action on some key structural reforms will see India's growth for the current fiscal year fall short of earlier estimates, but still remain robust, says a new Asian Development Bank (ADB) report.

ADB, in an update of its flagship annual economic publication, Asian Development Outlook 2015, now projects India's gross domestic (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%.

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. 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.

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 lackluster demand. Encouragingly, fixed investment growth picked up while agriculture witnessed an expansion - despite a weak monsoon which had led to contractions in the previous two quarters. Low global oil prices and tight monetary policy kept consumer price inflation at benign levels in the first 4 months of FY2015.

Healthy growth in tax revenue, along with higher than usual asset sales, allowed the government to increase growth enhancing capital expenditure by a robust 39.0%. While net foreign direct investment inflows touched $10.2 billion in the first quarter of FY2015, a year-on-year rise of more than 29%, net portfolio inflows turned negative.

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.

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 labor laws are necessary to improve the investment climate, the report said.

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.

In FY2016, a recovery in oil prices and improved industry and investment demand should see both imports and exports pick up, with the current account deficit seen increasing slightly to 1.5% of GDP.

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