ADB upgrades India’s growth to 6.3% for FY2016

29092014

ADB upgrades India’s growth to 6.3% for FY2016

ADB maintained its forecast of 5.5% growth in FY2015 for India while GDP growth in East Asia will remain at 6.7% in 2014 and 2015 and growth forecasts for Developing Asia are 6.2% in 2014 and 6.4% in 2015

ADB in its annual economic publication, Asian Development Outlook 2014, raised its forecast for growth of Indian gross domestic product (GDP) in the fiscal year ending 31 March 2016 (FY2016) to 6.3% from 6.0% anticipated in April.  ADB maintained its forecast of 5.5% growth in FY2015. The economy is set to benefit from a revival of investment and improved growth in advanced economies due to a strong mandate and a wide ranging reform agenda of the new government.

In the first quarter of FY2014, economic activity in India picked up to 5.7%, the highest pace in nine quarters. Growth was supported by an upturn in domestic demand led by investment—with fixed investment soaring by 7% and by government spending.

The industrial sector expanded by 4.2%, its fastest pace in more than two years. Strength in industry was led by manufacturing, which grew 3.5% after contracting in three of the previous four quarters. After declining for most of FY2013, capital goods production rebounded strongly in the first quarter of FY2014, which promises for future investments.

However, positive developments are offset by slow growth in agriculture following a delayed and uneven monsoon, with cumulative rainfall to August at 18% below normal. Summer crop sowing was down 6.3% from a year earlier. Weak agriculture growth in the second and third quarters of FY2015 will likely mean lower spending by rural consumers.

According to ADB, consistent expansion of investment is needed to jumpstart economic growth, and notes there have been few announcements of large new investment projects in the first half of 2014. Recent reforms such as easing environmental and forest clearances for mines, roads, power stations, and irrigation systems, and expanding the role of the government’s project monitoring group, will help speed the implementation of projects in the pipeline.

Proposed labor reform to improve the investment climate is awaiting parliamentary approval. These initiatives are expected to facilitate investments, mostly in the second half of FY2015 and in FY2016. The central bank’s business expectation index in the first quarter of FY2015 reached its highest level in six quarters, reflecting improved sentiment on production, order books, exports, capacity utilization, and profit margins.

The government at this juncture can spur private sector investment that could build strong growth momentum for the next few years by advancing its structural reform plans and proceeding with large infrastructure projects. Given its labor cost advantage and vast overseas diaspora networks, by putting the right policy package in place India could replicate or even exceed its best growth performance of the past.

Developing Asia remains the fastest growing region globally despite slower-than-expected growth in major industrial countries as the region grew 6.1% in 2013 and the Bank has kept its forecasts for growth of gross domestic product (GDP) for the region at 6.2% in 2014 and 6.4% in 2015. GDP growth in East Asia will remain at 6.7% in 2014 and 2015, as moderating growth in the PRC and Hong Kong , China and a slowdown in Mongolia are offset by export-driven upswings in the Republic of Korea and Taipei , China .

According to ADB, South Asia is performing better than expected. The subregional growth forecast for 2014 is raised slightly to 5.4%, reflecting strengthening in Bangladesh and Pakistan on higher exports and remittances and growth in the region will pick up to 6.1% in 2015, 0.3 percentage points higher than previously forecast.

Southeast Asia, on the other hand, will see stronger growth next year though growth this year is now projected at 4.6%, down from 5.0% forecast in ADO 2014 and actual growth of 5.0% in 2013.

Growth in Central Asia is hobbled by a slowdown in the Russian Federation . Underperforming ADO 2014 projections, growth in the subregion is now projected to decelerate to 5.6% in 2014 as activity slows in Armenia , Kazakhstan , the Kyrgyz Republic , Turkmenistan , and Uzbekistan .

Further, prospects in the Pacific have dimmed because of damage caused by torrential rains in Solomon Islands in early 2014, disappointing business activity in Timor-Leste, and a downturn in construction and tourism in Palau .