ADB boosts India’s growth data but warns of pricing pressures

ADB boosts India’s growth data but warns of pricing pressures

The Asian Development Bank raised its growth forecast for India to 8.5% and said the “economy is on a proper glide path."

The bank’s chief economist, Ifzal Ali, speaking from Manila, noted that “India has managed a soft landing" but added that pressure on prices will remain, primarily because the government had still not boosted subsidized domestic prices of petroleum products even though global crude oil prices are close to the $80 (Rs3,240) a barrel level.

Expressing confidence: Ifzal Ali, ADB chief economist

Ali said petroleum prices were likely to remain high, with oil demand remaining strong because most Asian countries, especially India, had seen neither significant investment nor a rise in efficiency of imports.

The delay in India raising oil prices, he said, “would have serious consequences for domestic inflation as well as the fiscal deficit."

Updating its March Asian Development Outlook, the bank cut the forecast of current account deficit of India’s balance of payments to 1.6% of gross domestic product, down from 2.2%, however it retained its inflation projection at 5%.

The main reasons for optimism on India, Ali said, were “the further tightening of the monetary policy at end-July and the moderation of overall inflation."

Still, Ali notes, food inflation remains high, monetary expansion is above target and the overall momentum of demand very strong, as a result of which annual growth will temper to 8.5% from 9.4% last year.

“Also, India is growing at its potential, or even higher than its potential rate of growth, so capacity constraints are bound to show up," he added.

The bank said it does not expect the US to go into a recession, although the update has cut growth forecast from 2.5% earlier to 1.9% this year and 2.6% in 2008. “With one out of four people predicting a recession, the probability of one has become the highest in the last five years," said Ali. Still, he argued, “in August, equity markets in the US fell only by 7%. Investors have retreated to safer havens and this has led to sovereign credit spreads widening in Asia."

Ali adde that “Asia is still a good play" as its economies have enough reserves and the financial institutions as well as banks are strong enough to absorb some volatility.

But “India was an outlier in this respect," as its reserves are mainly built from capital flows, with the current account being in moderate deficit compared with most other Asian economies, which are in surplus, he said.

This makes the country vulnerable to outflows in the event of a crisis, though chances of that are still remote, he added.

India expects to meet its fiscal deficit or gross borrowings target of 3.3% of GDP in 2007-08 but increasing off-budget expenditures, such as the oil and fertilizer bonds issued to importing companies in lieu of a price hike, have prompted chairman of the Prime Minister’s economic advisory council C. Rangarajan to suggest that the deficit is understated.

The five policy challenges before India, the update says, are: managing the persistent inflation risk; fostering a credit and interest rate environment to support exports and investment demand; have market-based reforms to ensure inclusive growth; easing infrastructure bottlenecks; and raising agricultural productivity.

However, like most other analysts, even Ali finds the strong pickup in India’s investment rate “very positive."

This, as well as strong investments in China, forecast for which has been raised to 11.2% from 10%, will lead growth in Asia, as the two countries account for over 55.3% of the region’s economy, the update says.

Saumitra Chaudhuri, economic adviser, domestic rating agency Icra, said “because of a history of higher structural inflation than east and south east Asia, India has faced additional problems of higher pressure of higher capital inflows resulting in appreciation of its currency. Global economic conditions that are good for growth are also hospitable to inflationary pressures."