Cautions that its projections are subject to a number of downside risks

The Asian Development Bank (ADB), on Tuesday, maintained that the Indian economy could grow at an improved rate of 6 per cent during the current fiscal, provided reforms are put in place at a faster pace to sort out the structural bottlenecks and stem the deteriorating investment situation and a strong external demand is able to facilitate a turnaround in the worsening current account deficit (CAD).

In its report ‘Asian Development Outlook 2013’ released here, the Manila-based multilateral lending agency, however, cautioned that its India projections on improvement in the economy were subject to a number of downside risks such as another bad monsoon, a slow pace of reforms and fiscal consolidation and a continued sluggishness in the global economic environment.

According to ADB Country Director Narhari Rao, supply and policy obstacles have seen India’s economic growth decelerate and investment and industrial output slump, with the statistics compounded by weak global demand. “Policymakers need to remove structural hurdles to faster growth, and while there have been some encouraging recent reforms, more is needed,” he said.

Recent reforms

In this regard, the report pointed out that while recent reforms such as the creation of the Cabinet Committee on Investment (CCI) to speed up government clearances for large projects and cabinet approval for a land acquisition bill are steps in the right direction, much more is needed to be done if India is to go back to the 8 per cent plus growth trajectory. This would include an end to delays in environmental clearances, Parliamentary approval for the land acquisition bill, and improved infrastructure for fuel deliveries to power plants to end electricity shortages. While the economy is expected to grow at the decade’s slowest pace of 5 per cent during 2012-13, mainly owing to a slump in services and weak consumption demand coupled with a contraction in exports and lower farm sector growth on account of a late monsoon, the ADB report has forecast a further pick-up in growth at 6.5 per cent in 2014-15 following an improvement in the global economic outlook and a consequent increase in India’s exports.

The next two years, the report said, should see some improvement, with a normal monsoon likely to lift agriculture, and exports, industry and services expected to expand on stronger domestic and external demand.

Price spiral

On the price spiral, the ADB report viewed that while core inflation pressures were likely to recede in the wake of better weather conditions and easing of global commodity prices, wholesale prices would remain elevated. India’s inflation is seen at 7.2 per cent in 2013-14, easing back to 6.8 per cent the following year as government steps to raise diesel prices are completed.

The ADB also pointed out that reducing the fiscal deficit as targeted to 4.8 per cent of the GDP (gross domestic product) during 2013-14 from 5.2 per cent last fiscal would also help in raising domestic savings and encourage private investment. However, with the tax structure largely remaining the same, the cut in fiscal deficit would be heavily dependent on a pick-up in growth and continued revision in the prices of diesel, it said.

As for CAD concerns, the report said that reversing the rising trend would require removal of constraints which are deterring investment and undermining exports and domestic growth. As per its projections, CAD, which is estimated at 5 per cent of the GDP in 2012-13 on account of a deteriorating trade balance, is expected to moderate to 4.4 per cent in 2013-14 and to 3.7 per cent in the following fiscal year.

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