New Delhi: The Asian Development Bank has pared its growth forecast for India to 8.2% for the current fiscal 2011-12 from its earlier projection of 8.7% holding that fiscal and monetary tightening and weak external demand along with high crude oil prices will rein in economic expansion.
Finance minister Pranab Mukherjee expects economic growth to increase close to 9% from the estimated 8.6% in 2010-11.
ADB, in its half-yearly Asian Development Outlook, said inflation remains the key challenge for the Indian economy and that the central bank may continue to tighten monetary policy in order to curb inflationary expectations. Wholesale price inflation stood at 8.31% in February this year.
“Weaker global trade growth and a necessary further tightening of fiscal and monetary policies will slow economic growth marginally in the new fiscal year,” ADB said. “However, progress on fiscal consolidation and success in easing supply-side constraints will pay off the following year.”
ADB has projected India’s economic growth to bounce back to 8.8% in 2012-13 as investment and overall economic activity pick up and as planned reforms move forward.
Graphic: Paras Jain/Mint
“The government’s intention of streamlining the regulatory burden on Indian firms, and the expectation that current restrictions on FDI in multi-brand retail will be relaxed, augur well for both industry and services, especially by 2012-13,” it said.
ADB has also projected China’s growth to slow down to 9.6% in 2011 from 10.3% a year ago due to the projected moderation in industrial production and fixed investment.
The ADB projections are based on the assumption that the current year will see a normal monsoon, that monetary tightening will continue in both 2011 and 2012 and government will “broadly adhere” to the rigorous fiscal consolidation road map as suggested by the 13th Finance Commission. ADB has factored in crude oil prices at $104 and $112 in 2011 and 2012, respectively.
A recent report released by Deloitte echoes the apprehensions expressed by ADB. In the Asia Pacific Economic Outlook released in March, Deloitte maintained that high inflation related to food and crude oil prices and poor industrial growth threaten to derail the government’s plan to achieve 9% growth in 2010-11.
ADB expects inflation to ease to 7.8% and 6.5% in 2011-12 and 2012-13, respectively, on account of a high base effect and further tightening of monetary policy by RBI. RBI has raised the repo rate (the rate at which banks borrow from it) eight times by 200 basis points in 2010-11.
The current account deficit is projected to widen to 3.5% of gross domestic product in 2011-12 from the expected level of 3% in 2010-11, driven by a deteriorating trade deficit and moderate growth in invisibles. ADB expects India’s exports to moderate to 26.7% and imports to grow at 24.2% in 2011-12 on account of lower external and domestic demand. India’s merchandise exports and imports grew at 31.4% and 18%, respectively, during April-February in fiscal 2010-11.