Indian Economy to Grow 7% as Investment Stays Subdued, ADB Says

By Sunil Jagtiani - Apr 10, 2012

India’s economy may grow at near the slowest pace since 2009 this year as investment remains subdued, the Asian Development Bank said.

Gross domestic product will expand 7 percent in the year through March, the Manila-based lender said in its Asian Development Outlook 2012 report today, lower than a September forecast of 8.3 percent. Investment is set to stay “lackluster for some time” after new project announcements fell, it said.

“The global environment remains fragile and a worsening of the situation in the euro zone would have a significant adverse impact,” the ADB said. “A poor monsoon, fiscal slippage, or a continued policy logjam to resolve some of the longstanding issues would also prove detrimental to growth.”

The Reserve Bank of India has signaled readiness to lower interest rates from the highest level since 2008 to bolster expansion, while flagging inflation risks from government spending, energy prices and a weaker rupee. Policy gridlock and tax changes in the annual budget last month have clouded the outlook for investment flows into Asia’s third-largest economy.

India’s GDP rose 6.9 percent in the 12 months through March 2012, the least in three years, as costlier credit hurt expansion, government estimates show.

Cuts in borrowing costs, reviving demand for Indian exports, some progress on “stalled reforms” and fewer bottlenecks should boost industrial activity in the second half of the current fiscal year and into the 2013-2014 period, the ADB said.

“But their effect is likely to be limited until the government eliminates the policy issues,” the lender said.
Inflation Prediction

Indian inflation was 6.95 percent in February, near a 26- month low. Price increases have eased after the Reserve Bank raised rates by a record 3.75 percentage points from March 2010 to October last year, to 8.5 percent.

Still, India’s inflation remains the fastest in the so- called BRIC group of major emerging economies that also includes Brazil, Russia and China. The ADB predicted prices will rise 7 percent in the current financial year, and 6.5 percent in the 12 months through March 2014 partly on easing oil costs.

India will grow 7.5 percent in the next fiscal year as the global economy recovers, the lender said. The targets for expenditure growth and reductions in subsidies set out in the March 16 annual budget “seem optimistic,” the ADB also said.

Prime Minister Manmohan Singh’s government is facing one of the most challenging periods since taking office in 2004. Allegations of graft against officials, inflation and policy reversals have hindered Singh’s economic agenda.

Among the setbacks was the suspension in December of plans to open India’s retail industry to foreign companies such as Wal-Mart Stores Inc. Trade organizations have also said that companies around the world are re-evaluating investments in India because of uncertainty over the nation’s tax laws.

Data on planned capital spending from the Centre for Monitoring Indian Economy signal a “sharp” increase in the number of stalled projects, reflecting “structural bottlenecks related to fuel and power shortages, delays in environmental clearance, and other policy hurdles,” the ADB said.

To contact the reporter on this story: Sunil Jagtiani in New Delhi at sjagtiani@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.