The Asian Development Bank (ADB) on Tuesday lowered India’s economic growth forecast to 7.4% for the current fiscal from its earlier estimate of 7.8%, citing weak demand and reform delays.
Economic slowdown in industrial countries, 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, ADB said in a report. In an update of its flagship annual economic publication Asian Development Outlook 2015, the multilateral agency also slashed FY17 GDP growth forecast to 7.8% from the March estimate 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.
The lower-than-expected GDP growth of 7% in Q1FY16 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.
ADB was of the view that moving forward on domestic reforms involving taxes (proposed GST), land acquisition, and labour laws are necessary to improve the investment climate.
“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,” Wei said. Continued soft consumer prices, averaging about 5% for the full year, would give the central bank scope for further reduction in interest rates in the second half of FY16, the report said. The positive impact of monetary easing on the real economy would be strengthened with further headway on economic reforms.
Even though slow growth in industrial economies and the weakening of currencies of some of India’s major trading partners would continue to weigh on exports, ADB expected the country’s current account deficit for FY16 to be 1.1% of GDP, well below the highs of recent years.