India's growth to see-saw: ADB

Economic growth in India is likely to dip to 6.1 per cent in fiscal year 2006-07 and rise to 7 per cent in 2007-08, according to the Asian Development Bank (ADB).

In comparison, the Chinese economy would grow by 8.7 per cent and 8.9 per cent in 2006-07, respectively, the bank said in its Asian Development Outlook released today.

In 2004-05, the "best estimate for growth" was 6.5 per cent, against the government's advance estimates of 6.9 per cent, it added.

Agriculture was projected to grow at 4.4 per cent, industry at 6.7 per cent and services at 7.7 per cent in 2005-06.

According to the bank, the slowdown in industrial growth, from 2004, will be because of the "cost-smoothing" behaviour of firms to tide over anticipated cost escalation.

"Firms are upbeat about capacity utilisation but not very optimistic about demand conditions, suggesting the desire to hold larger inventories .... This explains the beginning of a downturn in industrial business cycle in fiscal 2005," it said.

In 2006-07, gross domestic product growth would decline further to 6.1 per cent, it said, adding this would be mainly on account of a further decline in industrial growth to 5.2 per cent and in services growth to 7.3 per cent. Revival in these sectors in 2007 would drive up overall expansion to 7 per cent, it said.

The Indian economy remained buoyant, but major challenges included the devastation caused by the tsunami, fluctuating agriculture growth, high inflation and re-emergence of a large current account deficit, the ADB report said, adding that medium-term challenges included meeting the fiscal consolidation targets, hiking infrastructure investments, managing rising forex reserves and reinforcing the economy's competitive advantage in textiles and garments in the post-MFA world.

Inflation was forecast to decline from 6 per cent in fiscal 2004 to 4.2 per cent in 2005, and to 3 per cent and 3.5 per cent in the next two years, it said. The ADB also said the moderation would be largely attributed to the expected stability in prices of fuels as well as of manufactured goods till 2007. Weak monsoon and a sharp rise in global oil prices would be a threat to inflation, it added.

On investments in infrastructure, it said the current rate of investment, at 3.5 per cent of the GDP, was way below the 8 per cent GDP target for fiscal 2005 made by the expert group on the commercialisation of infrastructure projects.

It said developing a domestic market for long-term securities was critical for infrastructure financing. A special purpose vehicle for infrastructure financing announced in the Budget for 2005-06 will aid in stepping up the overall investment rate to 27.5 per cent in 2007. The ADB also emphasised the need to create fiscal space to allow for investment in infrastructure.