ADB retains India GDP growth forecast of 7.4%

India's economy will remain on a strong growth path this fiscal year and next, aided by implementation of key structural reforms, robust consumer demand, and higher agricultural output driven by a good monsoon, says the Asian Development Bank (ADB).

In an update to its Asian Development Outlook 2016, the ADB retained India's GDP growth forecast at 7.4 per cent, unchanged from its March projection. FY2017 growth is also seen unchanged at a faster clip of 7.8 per cent.

''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.''

India's overall growth in the first quarter of FY2016 fell to 7.1 per cent 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 output grew over 9 per cent year-on-year, aided by a sharp rise in government spending, with government consumption posting its highest level of growth in almost 2 years.

Moving forward, ADB expects India's 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 per cent in FY2016 and 7 per cent 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 liberalising caps on FDI in some sectors and taking steps to improve the ease of doing business.

Inflation, meanwhile, is expected to average 5.4 per cent 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 per cent, 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 per cent 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.

However, with the World Trade Organisation projecting world trade growing more slowly than expected in 2016, expanding by just 1.7 per cent, well below the April forecast of 2.8 per cent, the prospects of strong economic growth  are dim..

The International Monetary Fund's October 2016 World Economic Outlook also noted that slow trade is largely a symptom of the sluggish economic recovery.

The study added that trade volumes are likely to remain subdued unless growth and investment pick up.