ADB cuts India’s growth forecast

New Delhi: The Asian Development Bank (ADB) on Tuesday slashed its forecast for India’s growth for the current fiscal by a 0.4 percentage to 7 per cent due to weakness in private consumption, manufacturing output and business investment. 

ADB also said that it now expects India to grow by 7.4 per cent in the next fiscal year against its earlier projection of 7.6 per cent. 

The bank expects RBI to go for another round of rate cut in the latter part of 2017-18 in view of sluggish economic activities but does not see possibility of any major fiscal stimulus.

India had grown by 7.1 per cent in 2016-17. “Indian growth moderated in the first quarter of fiscal year (FY) 2017 due to lingering effects from demonetisation and transitory challenges related to the new GST regime,” the bank said.  

“Despite the short-term hiccups as firms adapt to the national GST, we believe that continued reform progress will help India remain one of the world’s most dynamic emerging economies. India’s ambitious reform agenda will lead to higher long-run growth for its economy,” said Yasuyuki Sawada, chief economist, ADB.

ADB said that the growth in the first quarter of FY2017 slowed down to 5.7 per cent, as growth in private consumption and industry declined compared to previous quarters.

ADB said fiscal stimulus “is less likely with the government having exhausted 92.4 per cent of the full fiscal year deficit to cover slippage in non-tax revenue due to slow progress in achieving disinvestment targets”. 

“Meanwhile, the scope for cutting back expenditure is limited,” the report. Moving forward, the bank said that the rest of FY2017 will be more bullish as private consumption is expected to pick up on the back of low inflation and anticipated wage hikes. 

“Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime, while services will remain robust as trade and transport services revive with the easing of cash constraints. Investment growth, however, is likely to remain muted in FY17 as budgetary constraints limit government expenditure,” it said.  

Growth will further pickup in FY18 as the new tax regime improves domestic competitiveness and government efforts to improve the health of the banking sector aid private investment yield results, said the bank.

ADB said that tax collections are likely to pick up as firms adjust to the new tax regime. It said strong global growth and an improved business climate will help India’s exports grow at a faster pace in FY17 and FY18.