The Asian Development Bank (ADB) on Wednesday noted that the Indian economy is set to expand by 7.3 percent in fiscal year (FY) 2018 and 7.6 percent in the next fiscal, aided by various growth-oriented policy measures.
The Bank, in its Asian Development Outlook (ADO) 2018 report, noted that the dip in growth to 6.6 percent in FY2017 was driven in part by lingering effects of demonetisation, which impacted the informal sector in the first half of the fiscal. Moreover, teething issues related to the implementation of the Goods and Services Tax (GST) hampered operations of small and medium-sized enterprises (SMEs) and exporters, which also contributed to growth moderation.
"Despite the short-term costs, the benefits of reform-such as the recently implemented GST-will propel India's future growth. Robust foreign direct investment flows attracted by liberalised regulations, and the government's steps to improve the ease of doing business will further bolster growth," said Yasuyuki Sawada, ADB's Chief Economist.
India's growth in FY2017 was driven primarily by services, which grew by 8.3 percent due to improved growth in finance and real estate, and in trade, transportation, and communication services. Industrial activity slowed down largely due to manufacturing growth's weakening to 5.1 percent in FY2017, compared to 7.9 percent a year earlier.
Agricultural performance was also modest, as food grain production marginally exceeded the good harvest a year earlier. Although consumption growth dropped to its lowest level in five years in FY2017, there was a sequential pickup in investment during the year, the report highlighted.
In the upcoming months, the ADO noted that growth would pick up, supported by various measures aimed to bolster farmers' purchasing power, including higher procurement prices, agriculture market reforms, and investments in irrigation and logistics. The Bank also noted that investment revival is expected to continue, albeit at a modest rate, as firms and banks strive to improve their balance sheets, and capacity utilisation levels pick up.
Furthermore, the ADB projected inflation to inch up to 4.6 percent in FY2018 and five percent in FY2019 driven by further firming of global commodity prices and strengthening of domestic demand. The uptick in inflation along with deferment of fiscal consolidation and expected hikes in the US Federal Reserve's interest rate has reduced the room for policy rate cuts to stimulate growth, the Bank said.
The report further highlighted that a pickup in growth in advanced economies will help exports to grow at a healthy rate. At the same time, imports are also expected to increase as a result of higher commodity prices and the uptick in domestic demand. With the rise in imports offsetting the increase in exports, the current account deficit is expected to widen to 2.2 percent of GDP in FY2018 and 2.4 percent of GDP in FY2019.
The Bank also stated that current account deficit is expected to be financed comfortably by capital flows, as India remains an attractive destination for foreign direct investment and portfolio flows.
On a related note, the World Bank earlier in March had projected India's Gross Domestic Product (GDP) growth at 7.3 percent for the next financial year, and an accelerated growth to 7.5 percent in 2019-20.
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