‘Economy may slow down to 6.3-6.5%’

While the Indian economy may be able to sail through the global financial crisis with a healthy 7.8% growth in this fiscal, the Asian Development Bank expects 2009-10 to be much gloomier when economic growth could slow down to 6.3% – 6.5%. ?The numbers are very fragile, and they may be brought down further,? managing director general of the Asian Development Bank (ADB) Rajat M Nag told FE.

The multilateral funding agency backs increased spending on infrastructure in the region, but it also stresses that projects taken up on public-private partnership basis may not be able to find adequate financial resources to back them, due to the global credit crunch. In such a scenario, the ADB is mooting an expansion in its infrastructure financing role instead of creating a separate Asian Investment Bank as proposed by India and China at the G-20 summit in Washington.

?ADB estimates that Asia needs $3 trillion in the next 10 years to fund its infrastructure development,? Nag pointed out. ?ADB is already working in the infrastructure sector and it can be provided more resources instead of setting up another institution,? he stressed.

The ADB expects Asia to weather the storm in the financial markets and avoid a full-fledged financial crisis? because of its well regulatedbanking sector.? It estimates the Asia Pacific region (excluding Japan) to grow at 7.3% in 2008-09 and at about 6% in 2009-10 as compared to an average growth of 7.9% between 2002 and 2007.

Economic growth in China too is expected to be hit by the international credit crisis. While the ADB expects the Chinese economy to grow at 9.5% to 9.7% in 2008-09, it would slow down to 8.5% next fiscal.

In April, ADB had projected the Indian economy would grow at 8% this fiscal. The lower growth estimate by the ADB for 2009-10 is in line with projections of 6.3% GDP growth by the International Monetary Fund and 5.8% growth by Goldman Sachs. ?India?s growth will not be anaemic, but will be lower and so definitely a cause for concern,? Nag stressed.

The Indian economy will slow down considerably next fiscal due to the turmoil in the financial markets abroad. The real economy has already begun to get impacted as can be seen by the slowdown in sectors like textiles and IT, Nag pointed out. ?Contraction in exports and lower domestic demand for goods would further affect growth next fiscal,? he added.

The Indian government should also ensure availability of credit, by taking suitable monetary and fiscal measures. The Reserve Bank of India is doing well in managing the monetary policy, Nag said although the Indian government may not have enough space to provide a fiscal stimulus, like the massive $ 586 billion spending package announced by China recently.

Fiscal deficit is a useful tool if it is used for productive investments such as increased spending on health and infrastructure, but it can be non productive if expenditure is on subsidies. ?The Indian authorities have to strike a difficult balance and don?t have much fiscal space,? Nag said. ?So the government should ensure that the programmes and projects that have already been approved are implemented properly,? he added.

India?s fiscal deficit is expected to surge to 7.5% this fiscal due to the government?s burgeoning off-budget liabilities?including hefty subsidies on food, fertiliser and fuel.