ADB cuts India's GDP growth forecast

Revising India’s economic growth projections to 4.7 per cent in FY14 from its earlier estimate of 6 per cent, Asian Development Bank (ADB) said that recent market turbulence is a “timely reminder” for structural and fiscal reforms.
Warning that the Indian economy was under pressure, the ADB outlook for Asia said next financial year (2014-15) would be slightly better with 5.7 per cent growth but below its previous forecast of 6.5 per cent.
In 2012-13, Indian economy expanded by 5 per cent.
Elections and a new government in early 2014 may help give fresh impetus to resolving structural problems while softer currency and expected pick-up in economic activity across major markets should see exports grow at a faster clip than in 2012-13.
Policy measures since July 2013 to entice foreign investors back to India to finance the current account deficit are expected to gain traction in the near future, it said.
The recent depreciation of rupee and capital outflows clearly indicated that the economy was stressed adding to structural constraints which are weighing heavily on its prospects for returning to a high growth path, the report said.
With GDP in first quarter expanding at its slowest pace since the global financial crisis, ADB revised down its growth forecast to 4.7 per cent from 6 per cent.
Nevertheless, Indian government has taken a number of measures to address financial market concerns and bolster growth prospects like raising the interest rates to support the currency, reduce impediments to FDI, control outward capital flows by Indian companies and citizens and introduce 10 per cent import duty on gold.
In addition, RBI entered into an agreement with finance ministry of Japan in September 2013 to expand its swap agreement to $50 billion from an earlier $15 billion.
The government also indicated its intention to prop up the rupee’s stability by easing external financing constraints, the report said.
Containing inflation pressure, consolidating fiscal position by reducing subsidies and managing well recently passed reform bills to keep fiscal pressures in check should receive high priority.
The authorities should allow exchange rate flexibility to ensure sufficient stock of foreign reserves while balancing its impact on inflation, ADB said. One bright spot is the recent effort at expediting regulatory clearance for several projects in key infrastructure sectors by forming the cabinet committee on investment, the bank said.
In its twice-yearly economic overview of developing Asia -which includes India, China, the Philippines and Vietnam, but not Japan -the bank said it now expected the region to grow 6 percent this year and 6.2 percent in 2014.
Those numbers were down from 6.6 percent this year and 6.7 percent in 2014, which the development bank had projected in its previous outlook report, in April. Last year, the region expanded 6.1 percent.
Much of Asia enjoyed a sharp rebound in the years immediately after the global financial crisis, buoyed by an aggressive stimulus program in China and the cash that flowed in as investors and businesses looked for higher returns than those available in the languishing U.S. and European economies.
Those drivers have faded since last year. China's economy has cooled as policy makers in Beijing have sought to put growth on a stable footing. And the prospect of reduced monetary stimulus in the United States, whose economy is perking up, has prompted a big exodus of Western cash from emerging markets in Asia and elsewhere in recent months.
``Developing Asia is challenged to sustain its growth momentum as the pace in its two largest economies moderates,'' the Asian Development Bank said, referring to China and India. The ``prospective tapering of quantitative easing in the United States destabilized emerging economy financial markets, including in developing Asia.'' At the same time, the bank said, the upturn in the U.S. economy and signs that the euro zone and Japan are turning the corner have ``yet to translate in to revived orders for exports from developing Asia.'' India -where poor infrastructure, crippling bureaucracy and policy squabbles have long presented huge barriers to doing business -has been hit especially hard by the souring investor sentiment toward emerging markets. A sharp drop in the rupee since May has made some of the challenges facing the economy worse, many analysts have warned, and the biggest downward revision the Asian Development Bank made in its update was to the India forecast. The bank now expects the Indian economy to grow 4.7 percent this year, down from its previous estimate of 6 percent. For 2014, India is forecast grow 5.7 percent, down from 6.5 percent.
For China, the bank lowered its fore casts to 7.6 percent growth this year and 7.4 percent next year, down from 8.2 percent and 8 percent.
But unlike the situation in India, China's slowdown, from an average of 10.5 percent growth a year over the past decade, is a ``healthy'' and ``intention al'' adjustment as the authorities work to rebalance the economy, Changyong Rhee, chief economist at the bank, said at a news conference in Hong Kong. He added that he expected growth in China to average about 7 percent over the next decade.
He stressed that, despite the murkier outlook, Asia remained in a stronger position than it held during the 1997 financial crisis, thanks to larger reserves of foreign exchange and the current-account surpluses that many countries now run. Slower growth in China and India, he said, hampers but does not hobble growth across Asia.