RISK MANAGEMENT

Steady Reform Progress Fueling India's Growth — ADB

India’s fast growth will resume with gross domestic product (GDP) expanding by 7.4% in fiscal year (FY) 2017 and 7.6% in FY2018 supported by reform measures, says a new Asian Development Bank (ADB) report.

In its new Asia Development Outlook (ADO) 2017 report, ADB notes that the deceleration to 7.1% registered last year was due in part to slower investment growth. Also contributing to the moderation was the impact of the government’s demonetization of high-value currency notes, though this effect is seen as largely temporary. ADO is ADB’s flagship annual economic publication.

“An array of important reforms has propelled India’s economic success in recent years,” said Yasuyuki Sawada, ADB’s Chief Economist. “A continued commitment to reform — especially in the banking sector — will help India maintain its status as the world’s fastest growing major economy.”

India’s growth in FY2016 was fueled by agriculture and government services. Industrial growth, however, slowed to 5.8% over the last 12 months from 8.2% in FY2015.

Growth in services moderated to 7.9% due to slowdowns in finance and real estate. Net foreign direct investment (FDI) in the country remained strong at $36.7 billion in FY2016 following the government’s efforts to simplify guidelines and allow FDI in key economic sectors.

Moving forward, the ADO expects growth to accelerate through increased consumption, as more new bank notes are put in circulation, and as planned salary and pension hike for state employees are implemented.

Main driver of investment

The public sector will remain the main driver of investment as banks continue to wind down balance sheets constrained by high levels of stressed assets. Exports are forecast to grow by 6% in the coming year.

Inflation, meanwhile, is expected to accelerate to 5.2% in FY2017 and 5.4% in FY2018 as the global economy recovers and commodity prices rebound.

The assessment notes risks from higher oil prices as India imports nearly 80% of its fossil fuel needs. A rapid increase in the price of oil could undermine the country’s fiscal position, stoke inflation, and swell the current account deficit.

The report estimates that a $1 increase in oil prices raises the import bill by nearly $2 billion. In FY2016, rising oil prices resulted in a 37.6% increase in India’s import bill.

To mitigate India’s vulnerability to oil price swings, the government has proposed reducing dependence on imported oil by 10% over the next 5 years through more efficient domestic production and increased private investment into the sector.

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