India’s economy will remain on a strong growth path this fiscal year (FY) and next, aided by implementation of key structural reforms, robust consumer demand, and higher agricultural output driven by a good Summer monsoon, says a new Asian Development Bank (ADB) study.
In an update of its flagship annual economic publication, Asian Development Outlook 2016, ADB forecasts FY2016 (year to March 2017) gross domestic product (GDP) growth of 7.4%, unchanged from its March projection. FY2017 growth is also seen unchanged at a faster clip of 7.8%.
“With increasing investment over the coming year, India will remain the fastest growing major economy in the world,” said Juzhong Zhuang, Deputy Chief Economist. “Legislation to allow a national value-added tax is a milestone reform for India, while ongoing efforts to restructure bank balance sheets will help underpin faster growth moving forward.”
Overall growth in the first quarter of FY2016 fell to 7.1% year-on-year as private consumption, investment, and construction moderated. Weak rains slowed agricultural output and credit growth remained subdued.
At the same time, services grew by over 9% year-on-year, aided by a sharp rise in government spending, with government consumption posting its highest level of growth in almost 2 years.
Benefit from ongoing reforms
Moving forward, the Update expects the economy to benefit from the flow through impacts of ongoing reforms, including the approval in August 2016 of legislation to allow the introduction of a long-awaited uniform goods and services tax. This landmark legislation is expected to boost GDP growth and revenue for the government.
The effects of a healthier monsoon season, after 2 years of weak rains, will spur growth and government approval of a pay hike for public servants last August will continue to fuel buoyant consumption, which will remain a key growth driver.
Construction, meanwhile, will benefit from the government announcement of measures to ease rules for quicker settlement of housing disputes, and to clear the way for fresh liquidity injections into stalled projects.
An uptick in demand from advanced economies, including oil producers supported by higher commodity prices, will boost exports, which after 2 years of contraction are seen expanding 4% in FY2016 and 7% in FY2017.
A revival in public investment and some modest improvement in private investment will also underpin the economy in FY2017. Growth in foreign direct investment (FDI) inflows, though not as strong as in FY2015, will nevertheless remain at solid levels with the government liberalizing caps on FDI in some sectors and taking steps to improve the ease of doing business.
Inflation, meanwhile, is expected to average 5.4% in FY2016 with food prices benefiting from a stronger monsoon. Inflationary pressures, though, will move up in FY2017, with the rate seen at 5.8%, against a backdrop of higher global commodity prices and an expected rise in the prices of some services following the introduction of GST.
The updated assessment notes some risks of slippage in the government’s target to reduce the fiscal deficit to 3.5% of GDP for FY2016 due to subdued non-tax revenue and higher current expenditure. However, measures to improve the targeting of subsidies and tax revenue growth should reduce the extent of slippage.
A healthy external balance and strong capital inflows have helped the Indian rupee remain relatively stable against the US dollar in 2016, says the ADB report.