India’s economy will see a slight dip in growth in FY2016 (fiscal year to 31 March 2017) following FY2015’s growth expansion. The economy will again accelerate in FY2017 as the benefits of banking sector reforms and an expected pickup in private investment begin to flow, says a new Asian Development Bank (ADB) report.
In its latest Asian Development Outlook (ADO) 2016, ADB projects India’s gross domestic product (GDP) to grow 7.4% in FY2016, slightly below the FY2015 estimate of 7.6%. In FY2017 growth is forecast to reach 7.8%. ADO is ADB’s flagship annual economic publication.
“India is one of the fastest growing large economies in the world and will likely remain so in the near term,” said Shang-Jin Wei, ADB’s Chief Economist. “The potential growth of the country can be raised further if it can successfully implement necessary reforms including unifying the tax regime, improving labor market regulations, as as opening further to foreign direct investment and trade.”
In FY2015, a pickup in manufacturing, private consumption, and capital expenditure by the government helped offset a double-digit decline in exports. Imports contracted largely due to a sharply lower oil bill, while inflation remained broadly subdued on the back of lower global commodity prices, although there was a pickup in food prices in the second half.
Measures to encourage more foreign direct investment resulted in a dramatic surge in investment. Ongoing efforts to curb spending and increased tax revenues saw the government achieve its budget deficit reduction target.
For FY2016, the still weak global economy will continue to weigh on exports, particularly India’s refined petroleum products, offsetting a further pickup in domestic consumption, due in part to an impending salary hike for government employees.
Public investment, though, will remain strong as the government taps savings from lower oil costs to boost spending. In FY2017, strengthened public banks and corporate deleveraging will result in an uptick in bank credit and boost private spending, including on infrastructure.
After 2 years of decline, consumer inflation is likely to accelerate, fueled by the salary hike for civil servants and a mild pickup in global oil prices, with inflation expected to average 5.4% in FY2016, rising to 5.8% in FY2017.
The government is expected to maintain its ongoing fiscal consolidation efforts, with the deficit cut to 3.5% of GDP in FY2016, supported by tax revenue growth and asset sales.
At the same time, given stresses on the rural economy following two consecutive weak monsoons, the government will step up social sector spending in its FY2016 budget and increase allocations for road, power, and rail infrastructure.
In FY2017, as large economies show a mild growth rebound, exports are expected to recover, and with government policy actions in place, the business environment should improve.
However India still faces significant challenges to finance the infrastructure it needs to deliver sustainable growth, with funding requirements estimated at around $200 billion a year through FY2017.
Public banks’ non-performing assets and an overleveraged corporate sector leave limited scope for more private investment in infrastructure and highlight the need for policy actions, the report says.
To that end the government has taken a number of positive steps including putting in place a program to recapitalize public sector banks and to strengthen their governance, and introducing a bankruptcy bill in parliament that will result in improved quality and speed of debt restructuring.
To support the private sector, and unlock more investment, the government has set up a National Infrastructure Investment Fund, introduced tax-free infrastructure bonds, and put in place a mechanism to resolve problems in troubled public-private partnerships.