ADB lowers India’s growth forecast on eve of RBI policy

The Asian Development Bank (ADB) has cut India’s growth forecast to 7.2% for 2019-20 because of a slower-than-expected pickup in investment demand.

ADB, which had estimated 7.6% economic growth in December, is the first multilateral lending agency to slash India’s growth estimate.

Despite this, India will remain the fastest growing economy, as China is projected to grow at 6.3% in 2019, according to ADB’s estimate. In February, India’s statistics office revised its earlier growth forecast of 7.2% for 2018-19 to 7%.

With ADB’s downgrade of India’s growth estimates, the attention shifts to the Reserve Bank of India (RBI) and the International Monetary Fund (IMF), which had earlier projected 7.4% and 7.5% growth, respectively.

The IMF will release its World Economic Outlook next week, which will contain India’s growth estimates as well.

“The recent pickup in investment growth is expected to continue, albeit at a slow pace. Growth in public investment is likely to be modest for lack of funds. Rural income and consumption will enjoy policy boosts from enhanced income support to farmers and hikes in procurement prices for foodgrain, while interest rate cuts and soft food and fuel prices will bolster consumption in urban areas,” ADB said in its annual Asian Development Outlook (ADO) released on Wednesday.

Since inflation is expected to remain below the central bank’s target in the first half of 2019-20, it has opened up scope for further policy rate cuts, ADB said, a day before RBI unveils its first bi-monthly monetary policy decision of the current fiscal year.

ADB expects inflation in India to climb from 3.5% in 2018-19 to 4.3% in 2019-20, as food inflation accelerates with the increase in procurement prices paid to farmers, higher wages to agricultural workers, and higher fertilizer prices.

ADB also cautioned that its projection could see further revision if downside risks materialize.

The Manila-based multi-lateral funding agency said recent policy measures by the government to improve the investment climate and boost private consumption will help India lift economic growth in the current fiscal year and the following.

Income support to farmers, hikes in procurement prices for food grains, and relief to tax payers earning less than ₹5 lakh will boost household income.

Declining fuel and food prices is also expected to provide an impetus for consumption. An increase in utilisation of production capacity by firms, along with falling levels of stressed assets held by banks and easing of credit restrictions on certain banks, is expected to help investment grow at a healthy rate.

ADB also said India’s imports are expected to rise mainly due to stronger domestic demand while a growth slowdown in key export destinations would dent export growth.

The current account deficit is expected to widen a bit to 2.4% of GDP in the current fiscal and 2.5% in next fiscal.

“The deficit is expected to be financed comfortably by capital flows, given that India has emerged as an attractive destination for foreign investment,” ADO said.

On South Asia, it said the region bucks the trend of slowing growth in Asia. Excluding Asia’s high-income newly industrialised economies, growth is expected to slip from 6.4% in 2018 to 6.2% in 2019 and 6.1% in 2020, it said.

In South Asia, growth is expected to edge up by 0.1 percentage point, from 6.7% in 2018 to 6.8% in 2019 and again to 6.9% in 2020, the ADO said.

“Sub-regional averages in South Asia reflect heavy weighting for India, where growth slipped from 7.2% in 2017-18 to 7% in 2018-19 as agriculture and government expenditure both experienced slower growth and as global oil prices rose,” it said.

Press Trust of India contributed to this story.

[ Apr 04, 2019]