With the surge in global oil prices and high inflation remaining a threat, which will prompt the RBI to maintain a tight-money stance, the Asian Development Bank (ADB) on Wednesday scaled down India's economic growth to 8.2 per cent for the current fiscal from its earlier estimate of 8.7 per cent projected in September last year.
In its flagship annual economic publication ‘Asian Development Outlook 2011' (ADO 2011) released here, the ADB has estimated India's gross domestic product (GDP) to expand by 8.2 per cent in 2011-12, down from an estimated growth rate of 8.6 per cent for the previous fiscal. For 2012-13, the multilateral lending agency projected a bounce-back in growth to 8.8 per cent with a pick-up in investment and overall economic activity and as planned reforms move forward.
Briefing the media at the India launch of ADO 2011, ADB Principal Economist (India) Rana Hasan said: “Rising oil prices will bring down the growth rate to 8.2 per cent in the year ending March 2012. Also, aggregate demand will tend to get squeezed on the RBI's tight monetary policy stance.”
The report noted that while improved agricultural output, strong private consumption, robust investment, and a pick-up in exports supported growth in 2010-11, continued inflationary pressure, a pull-back in private investment and structural obstacles present challenges going forward.
Fiscal and monetary policies will also remain less accommodating than in the past as the government follows its fiscal consolidation roadmap and the RBI acts to anchor inflation expectations
The ADB pointed out that concerns over high food prices will now shift focus to oil and with soaring international oil prices putting pressure on inflation, the impact of rising prices will be on manufacturing items which will prompt the RBI to continue with its tight monetary policy stance.
It expects inflation to be around 7.8 per cent in the current fiscal and at about 6.5 per cent in 2012-13.
“Food inflation concerns will now shift to oil. The average crude oil price is likely to remain at $104 a barrel in the current fiscal and rise to $112 a barrel in fiscal 2012-13 …We expect another 50-basis point hike by the RBI in repo and reverse repo rates in the current fiscal,” Mr. Hasan said.
As for India's current account deficit (CAD) — representing net flow of income out of the country barring capital movements — the ADB expects it to be around 3.5 per cent this fiscal, higher than the 3 per cent pegged for the year ended March 31, 2010. The CAD has been sustained by capital inflows, but heavy reliance on portfolio capital, relative to FDI, raises vulnerability, it said.
According to ADB Chief Economist Changyong Rhee, India's foremost development challenge “is to achieve sustainable and inclusive growth.”
To achieve these goals, the government needs to tackle structural constraints, including the poor agriculture supply chain and farm productivity. A positive start has been made with programmes to remove production and distribution bottlenecks for farm products and these steps should continue, the report said.