Proactive policy interventions and a recovery in domestic demand and investments will likely see the economy pick up to 7.2% in FY21
Corporate tax cuts set to boost private investment, including FDI, and enhance India’s global competitiveness
New Delhi: The Asian Development Bank on Wednesday slashed its growth forecast for India for fiscal 2019-20 to 6.5% from 7% projected in July, following weaker growth in the first quarter due to a slowdown in consumption and investment activities that hit manufacturing and service sectors.
In an update to its flagship Asian Development Outlook, 2019, ADB said proactive policy interventions along with a recovery in domestic demand and investments will likely see the economy pick up to 7.2% in 2020-21.
Indian businesses have been battling demand slowdown and liquidity crunch, which resulted in economic growth rate cooling to a six-year-low of 5% in the June quarter, while private consumption expenditure was at an 18-quarter-low of 3.1%.
“India will remain as one of the fastest-growing economies in the world this year and next year as the government continues to implement policy reforms and interventions to strengthen economic fundamentals," said ADB chief economist Yasuyuki Sawada.
ADB said significant corporate tax cuts, announced by the government on 20 September, will boost private investment, including foreign direct investments, and enhance India’s global competitiveness. “Bank recapitalization, support measures for nonbanking financial companies, and cuts in monetary policy rates should improve the health of the financial sector, while increasing the credit flow to industry and infrastructure projects," it added.
The multilateral lending agency said other measures, such as a direct income support for small farmers, a tax relief for low-income taxpayers, and reduced loan interest rates are expected to boost rural and urban consumption across the country. “Fast-tracking of goods and services tax refunds should provide an important boost to small and medium-sized firms that have been constrained by a shortage of working capital. Implementation of these measures will brighten prospects for India’s economy in FY2020," it added.
However, ADB cautioned that risks remain tilted to the downside given the weak global economy and, on the domestic front, the lag between growth-enhancing measures and the impact on demand.
“Indian exports are likely to be hit by subdued overseas demand and rising trade tensions, and the current account deficit will be 2.2% in 2019-20 and 2.5% in FY2020. Foreign direct investment could get a boost in 2019-20 and 2020-21 as the trade tensions between the United States and the People’s Republic of China may push some businesses to move part of their operations to India. To capitalize on this, the government would do well to improve investment climate and further liberalize investment regulations," the report said.