The finance ministry may be confident of 9 per cent economic growth this fiscal, but not Manila-based Asian Development Bank (ADB). Rather, the multi-lateral agency on Wednesday scaled down its projections for India’s economic growth to 8.2 per cent from earlier forecast of 8.7 per cent, expecting high global crude prices and RBI’s tight monetary policy to cast shadow on economic expansion.
At 8.2 per cent, economic growth would be lower by 0.4 percentage points over the expected economic growth rate last financial year. Advance estimates have put economic growth at 8.6 per cent during 2010-11. Blaming lack of reforms for decline in FDI last financial year, ADB, in its Asian Development Outlook Report, expects India to pursue industry-friendlier environment that would push economic growth to 8.8 per cent during 2012-13.
This means that Direct Taxes Code, Goods and Services Tax, expected by next financial year, as well as pension, banking reforms and likely FDI in multi-retail will fetch dividends for economic expansion, explained an ADB official. However, inclusive growth will continue to remain a challenge as buoyancy in services is yet to be spread to agriculture and manufacturing, that give higher employment than the tertiary sector. For making Indian manufacturing competitive, the official said India should not protect small sector, but promote it to tap economies of scale.
When asked what made ADB to think that growth would be so lower this financial year compared to finance ministry’s estimates, ADB Principal Economist Rana Hasan attributed it to elevated level of crude prices globally and expected monetary tightening by RBI this financial year.
| SCALING DOWN PROJECTIONS Economic growth in percentage terms | ||||
| Region/country | 2009 | 2010 | 2011 (Forecast) | 2012 (Forecast) |
| US | (-) 2.6 | 2.9 | 2.8 | 2.6 |
| Eurozone | (-) 4.1 | 1.7 | 1.6 | 1.6 |
| Japan | (-) 6.3 | 3.9 | 1.5 | 1.8 |
| Developing Asia | 5.9 | 9 | 7.8 | 7.7 |
| Within developing Asia | ||||
| India | 8 | 8.6 | 8.2 | 8.8 |
| China | 9.2 | 10.3 | 9.6 | 9.2 |
| Pakistan | 1.2 | 4.1 | 2.5 | 3.7 |
| Note: For India, 2009 means 2009-10 financial year and so on. Source: Asian Development Bank | ||||
Economic survey brought out by the finance ministry, pegged economic growth this financial year at 9 per cent, give or take 0.25 per cent. Nine per cent growth is psychologically important, since if India grows by this level it will revert to pre-global financial crisis rate of economic expansion.
“When economic survey was brought out, global prices were $90 a barrel. We believe crude to be $104 on an average this financial year and $112 next financial year,” Hasan said.
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He expects RBI to increase policy rates by further 50 basis points this financial year. The central bank has already raised these short-term borrowing and lending rates by eight times since early 2010 to tame inflationary expectations.
RBI is slated to come out with its monetary policy for 2011-12 on May 3.
High crude prices are also expected to fuel prices in India. But, wholesale price inflation is expected to fall to 7.8 per cent for this financial year on an average, from around 9 per cent during 2010-11 (March figures are yet to come) and further to 6.5 per cent in next financial year.
Inflation may shift gears from food items to fuel and manufactured products, Hasan said. RBI’s policy to tighten policy rates, besides quantitative easing in the United States, is expected to push portfolio investment this financial year, he said. He blamed land acquisition problems, and slow pace of economic reforms for decline in FDI last financial year.
During the 10-month period (April-January 2010-11), FDI declined 25 per cent to 17 billion dollars over the year-ago period when it was $22.9 billion.
However, at 8.2 per cent India’s growth is not dismal, said Hasan, as the country along with China will continue to drive global growth. China’s growth, according to ADB estimates, is also likely to fall to 9.6 per cent from 10.3 per cent a year ago and further to 9.2 per cent in 2012.
Earthquake is blamed for slowing down Japan’s growth, but that is not likely to affect India’s growth much and would have much greater repercussions on the southeast Asian economies, Hasan said.