After a scorching pace of 9.2% in 2006, the Indian economy will slow down in the current year, on the back of high food prices, stagnation in agriculture and measures to control credit growth, the Asian Development Bank said.
However, the bank still expects the country’s economy to grow faster than it had earlier expected.
In its Asian Development Outlook 2007, “Growth Amid Change”, released in Tokyo, the bank forecast only 8% growth for India in 2007 (its earlier estimate was 7.8%), which would pick up to 8.3% in 2008, with inflation falling to a moderate 5% in both years. Since construction growth has already tapered, interest rates are rising and the rupee is appreciating, “a soft landing is the likely outcome,” Ifzal Ali, chief economist of the bank, said.
Still, India’s growth will remain above the Asian average of 7.6% in 2007 and 7.7% in 2008, even as the People’s Republic of China remains the pace-setter for developing Asia. After a 10.7% growth rate in 2006, China will grow at 10% and 9.8% in the next two years with an average inflation of only 2%. China and India accounted for 70% of developing Asia’s growth last year.
“South Asia’s recent economic performance shows it has emerged as a new growth pole in Asia,” Ali said.
The bank said the landing would have been harder but for the government’s efforts to tighten money supply, manage the fiscal deficit, and fight inflation, ADB chief economist in India Narahari Rao told reporters in Delhi on Tuesday.
Despite slowing construction, the growth in domestic investments, currently at 33.8% of gross domestic product (GDP), will continue as industries look to increaseproduction capacities that are already close to peak levels. However, ADB says, with excess demand for real estate having led to overexposureby some banks to the sector, the Reserve Bank of India needs to exercise caution in curbing money supply tocheck inflation and ensure that credit supply to industry doesn’t dry up.
The bank forecasts that in 2007, constraints on credit growth will act as a check on domestic demand and the resultant appreciation of the rupee will hinder exports.
Export growth has already slowed to 20% in 2006, from 23.4% in 2005, and will dip further to 16% in 2007 and 15% in 2008. While import growth will continue at a higher rate, it is also expected to decelerate from last year’s 26.2% to 20% next year due to easing demand. The trade deficit, as a result, will zoom from $72 billion (Rs3.09 lakh crore) last year to $91.4 billion next year and over $115 billion the year after. But the current account deficit will hold steady at 2.2% of GDP over 2007-08.
“The corrections will not be sharp, in large measure because several drivers will continue to hold sway,” the bank said. These include tight industrial capacity, expanding consumption goods markets, and a healthy demand for exports. This will ensure a soft landing, despite the tight monetary situation.
Demand will grow again in 2008, with interest rates stabilized and perhaps slightly moderated, and with the Sixth Pay Commission interim payout (the commission will revise the salaries of government employees) boosting spending. However, the bank cautions that key structural reforms seem to be slowing, especially in agriculture, with the government naturally tempted to focus on industry and services sectors for growth.
The report suggests that support for diversification into cash crops, improving foodgrain yields in lagging states and scaling up agriculture will help. The report is also optimistic about India’s employment scenario. An analysis of National Sample Survey data by the bank finds that dynamics of employment have changed, with manufacturing beginning to absorb more than services.
Between 1993-94 and 2004, it found that 70% of the new industrial jobs went to workers without secondary education. It therefore maintains that as the less educated are squeezed out of agriculture, India must look at promoting such manufacturing sub-sectors where they can be absorbed.