ADB slashes growth estimates for India, China
3 min read 03 Oct 2012, 08:14 AM ISTThe bank cuts India’s GDP growth forecast to 5.6% for 2012, while keeping it at 7.7% for China
Premium(Cheryl Ravelo/Reuters)
New Delhi: Weakening growth momentum in China and India is proving to be a drag on the rest of Asia as the two giants have emerged as important sources of export demand for other economies in the region, the Asian Development Bank said in an update to its Asian Development Outlook.
ADB on Wednesday lowered its growth projections for India and China to 5.6% and 7.7%, respectively, for 2012-13, from its earlier projection of 7% and 9.3%. In 2013-14, growth is expected to recover to 6.7% in India and 8.1% in China, it said.
ADB said China and India produce growing shares of world gross domestic product (GDP) and have become more integrated into international trade. “As this trend continues, economic activity in the two Asian giants will shape regional and international business cycles," the report said.
India’s imports from the Association of Southeast Asian Nations (Asean) region grew 39% in 2011-12 and exports gained 43%. Total exports grew 21.8% and imports 32% that year.
Biswajit Dhar, director general at Research and Information System for Developing Countries, however, said that “while a slowdown in China has a larger impact on Asean region, India is yet to have any significant impact on their growth momentum".
Though India’s exports to Asia constitute more than half of its total exports, it needs to integrate more with Asean economies to benefit from their production network, Dhar said.
ADB said that although external shocks had some bearing on GDP volatility in India, domestic shocks accounted for 75% of the variation in output. In China, internal shocks were less dominant but still accounted for more than 40% of such variation.
Though India is hardly affected by external events, its growth prospects affect other countries, ADB said. The three major industrial economies or groupings in the region—Japan, Asean and China—all suffer GDP declines roughly one-fourth the size of the original decline in India’s GDP. A 1% decline in China’s GDP leads to nearly a 1% decline in growth in the Asean region, it said.
ADB noted that the degree to which domestic factors drive GDP fluctuations in the two giant economies “hints at the need for economic reform".
The report blamed subdued investments, waning consumer confidence and a deficient monsoon for lowering its outlook of India’s growth prospects. “Tepid consumption has been insufficient to make up for declining investment and export demand. A large fiscal deficit and persistently high inflation have limited the scope for fiscal and monetary policy to stimulate the economy," it said.
India can start reversing the slowdown trend by improving its investment climate and expediting reforms, ADB’s chief economist Changyong Rhee said in a statement. “Tight monetary policy to counter persistently high inflation and a high deficit leave little room for policy to stimulate growth. However, restoring investor confidence can help jump-start critical infrastructure projects that could get the economy moving," Rhee said.
The report acknowledged some of the recent economic measures taken to revive growth and investor sentiment in India. “A controversial proposal to review tax avoidance on foreign investments has been deferred by three years and a new plan for fiscal consolidation is expected. In September 2012, diesel prices were hiked by about 12% and the use of subsidized liquefied petroleum gas was capped to contain the fiscal deficit," it noted.
ADB further said a “long needed but politically controversial decision" to permit foreign direct investment (FDI) in multi-brand retail chains and other liberalizing steps have boosted business sentiment and raised hopes for further policy actions. “FDI in retail will result in substantial investment in a modern agricultural supply chain that will reduce huge food losses from farm to market, helping farmers and consumers," it said.
