With the failure of the government to push through the Goods and Services Tax and the Land and Labour Reforms, the Asian Development Bank has lowered India’s growth forecast to 7.4 per cent from an earlier estimate of 7.6 per cent for the financial year ending March 31, 2017.
“The potential growth of the country can be raised further if it can successfully implement necessary reforms including unifying the tax regime, improving labour market regulations, and opening further to foreign direct investment and trade,” said ADB Chief Economist Shang-Jin Wei. India is one of the fastest growing large economies in the world and will likely remain so in the near-term, he said.
The South Asian nation’s gross domestic product is forecast to grow to 7.8 per cent for the fiscal year to March 2018, according to the latest Asian Development Outlook 2016 released on Wednesday.
During the fiscal year ended March 31, 2016, a pickup in manufacturing, private consumption, and capital expenditure by the government helped offset a double-digit decline in exports.
Imports contracted largely due to a sharply lower oil bill, while inflation remained broadly subdued on the back of lower global commodity prices, although there was a pickup in food prices in the second half. Measures to encourage more foreign direct investment resulted in a dramatic surge in investment, according to the report. Ongoing efforts to curb spending and increased tax revenues saw the government achieve its budget deficit reduction target.
After two years of decline, consumer inflation is likely to accelerate, fuelled by the salary hike for civil servants and a mild pickup in global oil prices, with inflation expected to average 5.4 per cent in the fiscal year ending March 31, 2017, rising to 5.8 per cent in next year.
During the subsequent financial year, a weak global economy will continue to weigh on exports, particularly India’s refined petroleum products, offsetting a further pickup in domestic consumption, due in part to an impending salary hike for government employees on the implementation of the seventh pay commission award. Public investment, though, will remain strong as the government taps savings from lower oil costs to boost spending, according to ADB.
Strengthened public banks and corporate deleveraging will result in an uptick in bank credit and boost private spending, including on infrastructure. As large economies show a mild growth rebound, ADB expects exports to recover. “With government policy actions in place, the business environment should improve.”
India still faces significant challenges to finance the infrastructure it needs to deliver sustainable growth, with funding requirements estimated at around $200 billion a year through 2017-18.
Public banks’ non-performing assets and an overleveraged corporate sector leave limited scope for more private investment in infrastructure and highlight the need for policy actions, according to ADB.
In 2017-18, strengthened public banks and corporate de-leveraging are expected to result in an uptick in bank credit and boost private spending, including on infrastructure.
