ADB lowers growth forecast to 8.2%

New Delhi: Asian Development Bank (ADB) on Wednesday lowered its growth forecast for India to 8.2% in 2011-12, down from its earlier projection of 8.7% and lower than 8.6% expansion in previous fiscal. While slower external demand and tighter fiscal and monetary policies weigh on economic expansion, high oil prices remain a threat, the bank said in its Asian Development Outlook 2011. The report assumes international oil prices will average about $80 per barrel in 2010 and $85 in 2011.

ADB projection is much lower than the 9% expansion predicted by the finance ministry and the Prime Minister's Economic Advisory Council.

“Fiscal and monetary policies will remain less accommodating than in the past as the government follows its fiscal consolidation road map and the Reserve Bank of India acts to anchor inflation expectations,” ADB said.

On the back of a tight monetary policy, average annual inflation rate, based on wholesale price index (WPI), is expected to fall to 7.8% in 2011-12 and to 6.5% in 2012-13 from 9.2% in 2010-11, the report said.

But growth is expected to bounce back to 8.8% in the next fiscal as investment and overall economic activity pick up and as planned reforms move forward.

“Rising oil prices will bring down the growth to 8.2% by March-end 2012. Aggregate demand will also tend to get squeezed on RBI's tight monetary policy stance,” said ADB Principal Economist (India) Rana Hasan.

China's economy is projected to grow at 9.6% in 2011 and 9.2% in 2012, down from 10.3% in 2010. Inflation in China is seen at 4.6% in 2011 and 4.2% in 2012. While India's growth projections are for the fiscal year ending March 31, China's and other countries predictions are on calendar year (January-December) basis.

ADB said concerns over high food prices will now shift to oil, as elevated international oil prices will put pressure on inflation. With inflation shifting to manufacturing items, RBI is expected to further tighten its policy rates. RBI has hiked its key policy rates eight times since March, 2010.

“We expect another 50 basis points hike by RBI in both repo and reverse repo rate in the current fiscal,” Hasan said. WPI inflation was 8.31% in February and RBI expects it to come down to 8% by March-end. The current account deficit (CAD) is likely to widen over the next two years, driven by a deteriorating trade deficit and moderate growth in invisibles, the bank said.

CAD, representing net flow of income out of the country barring capital movements, would be around 3.5% in the current fiscal, higher than 3% in the year ending March 31, 2010 — a level uncomfortable for the government.

CAD has been sustained by capital inflows, but heavy reliance on portfolio capital relative to FDI raises vulnerability, the ADB said. The bank has argued the need for increasing agricultural productivity and accelerating investment in infrastructure building.

“More specifically, one aim is to increase farmgate prices to trigger effective supply-side responses while containing retail prices. Since nearly half the food produced is lost from field to table, there is ample scope for solutions,” the report suggests.

Source: Financial Express