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ADB cuts India's economic growth projection to 6.5% from 7% for FY20

Says a cut in corporation tax rate will boost private investments and global competitiveness

Indivjal Dhasmana  |  New Delhi 

Economists paint a grim picture, lower India's FY20 GDP growth forecast

The Asian Development Bank (ADB) on Wednesday cut India’s forecast to 6.5 per cent for the current financial year (FY20), from its earlier estimate of 7 per cent. The move comes even as it said the measures announced by Finance Minister Nirmala Sitharaman on corporation tax rate cuts would boost private investments, including foreign direct investment (FDI) and the country’s global competitiveness.

Saying that some industries would relocate to India because of tensions between the US and China, the Manila-based multilateral agency advised policymakers to improve investment climate and liberalise regulations in the country to attract these units.

It kept rate for the next financial year (FY21) intact at 7.2 per cent because of reform measures along with a pickup in investments and demand. In both these years, India will continue to be the fastest-growing major economy in the world.

ADB cuts India's economic growth projection to 6.5% from 7% for FY20

In an update to the Asian Development Outlook, 2019, released on Wednesday, the ADB attributed its decision on revising down projections for FY20 to GDP growth plunging to an over six-year low of 5 per cent in the first quarter of the year.

It also attributed the slow growth in India to global economic slowdown.

The report, however, said significant corporation tax rate cuts, announced by the government last week, will uplift private investment, including FDI, and enhance India’s global competitiveness.

Bank recapitalisation, support measures for non-banking financial companies, and reduction in monetary policy rates should improve the health of the financial sector, while increasing the credit flow to industry and infrastructure projects, the update said.

Other measures, such as a direct income support for small farmers, a tax relief for low-income taxpayers, and reduced loan interest rates are expected to boost rural and urban consumption across the country.

Fast-tracking of goods and services tax refunds should provide an important boost to small and medium-sized firms that have been constrained by a shortage of working capital. Implementation of these measures will brighten prospects for India’s economy in FY20, it said.

The ADB said proactive policy interventions along with a recovery in domestic demand and investments will likely see the economy pick up in FY21.

“India will remain one of the fastest-growing economies in the world this year and next year as the government continues to implement policy reforms and interventions to strengthen economic fundamentals,” said ADB Chief Economist Yasuyuki Sawada.

However, it said risks remain tilted to the downside given the weak global economy and, on the domestic front, the lag between growth-enhancing measures and the impact on demand.

The report said Indian exports are likely to be hit by subdued overseas demand and rising trade tensions, and the current account deficit will be 2.2 per cent in FY20 and 2.5 per cent in the next year.

Inflation will be benign for these years at 3.5 per cent and 4 per cent, respectively — both within the central bank target range, as food prices remain stable.

The ADB said economic growth in developing Asia remains robust but prospects have further dimmed and risks to the region’s economies are rising as trade and investment weaken.

The report forecast economic growth in the 45 countries of developing Asia at 5.4 per cent this year before nudging up to 5.5 per cent in 2020.

The newly lowered forecasts reflect gloomier prospects for international trade due in part to escalating trade tensions between China and the US, as well as slowing economic growth in China, India, South Korea and Thailand.

First Published: Wed, September 25 2019. 21:45 IST
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