ADB cuts India's growth rate

Revising India’s economic growth projections to 4.7 per cent in FY14 from its earlier estimate of 6 per cent, Asian Development Bank (ADB) said that recent market turbulence is a “timely reminder” for structural and fiscal reforms. Warning that the Indian economy was under pressure, the ADB outlook for Asia said next financial year (2014-15) would be slightly better with 5.7 per cent growth but below its previous forecast of 6.5 per cent. In 2012-13, Indian economy expanded by 5 per cent.

It said that, elections and a new government in early 2014 may help give fresh impetus to resolving structural problems while softer currency and expected pick-up in economic activity across major markets should see exports grow at a faster clip than in 2012-13. Policy measures since July 2013 to entice foreign investors back to India to finance the current account deficit are expected to gain traction in the near future.

The recent depreciation of rupee and capital outflows clearly indicated that the economy was stressed adding to structural constraints which are weighing heavily on its prospects for returning to a high growth path. With GDP in first quarter expanding at its slowest pace since the global financial crisis, ADB revised down its growth forecast to 4.7 per cent from 6 per cent.

Nevertheless, Indian government has taken a number of measures to address financial market concerns and bolster growth prospects like raising the interest rates to support the currency, reduce impediments to FDI, control outward capital flows by Indian companies and citizens and introduce 10 per cent import duty on gold. In addition, RBI entered into an agreement with finance ministry of Japan in September 2013 to expand its swap agreement to $50 billion from an earlier $15 billion.

The government also indicated its intention to prop up the rupee’s stability by easing external financing constraints. Containing inflation pressure, consolidating fiscal position by reducing subsidies and managing well recently passed reform bills to keep fiscal pressures in check should receive high priority.

The authorities should allow exchange rate flexibility to ensure sufficient stock of foreign reserves while balancing its impact on inflation, ADB said. One bright spot is the recent effort at expediting regulatory clearance for several projects in key infrastructure sectors by forming the cabinet committee on investment. In its twice-yearly economic overview of developing Asia -which includes India, China, the Philippines and Vietnam, but not Japan -the bank said it now expected the region to grow 6 percent this year and 6.2 percent in 2014.

Those numbers were down from 6.6 percent this year and 6.7 percent in 2014, which the development bank had projected in its previous outlook report, in April. Last year, the region expanded 6.1 percent. Much of Asia enjoyed a sharp rebound in the years immediately after the global financial crisis, buoyed by an aggressive stimulus program in China and the cash that flowed in as investors and businesses looked for higher returns than those available in the languishing U.S. and European economies.

Those drivers have faded since last year. China's economy has cooled as policy makers in Beijing have sought to put growth on a stable footing. And the prospect of reduced monetary stimulus in the United States, whose economy is perking up, has prompted a big exodus of Western cash from emerging markets in Asia and elsewhere in recent months.