Days after RBI lowered the GDP forecast by half a per cent to 7.1, multilateral funding agency ADB too lowered it to 7 per cent for the current fiscal due to the impact of demonetisation on economic activities.
ADB said however that the impact of demonetisation would be temporary and retained growth projection at 7.8 per cent for the next fiscal.
Reserve Bank of India last week cut the GDP growth forecast to 7.1 per cent, from 7.6 per cent earlier, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.
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"India's tempered growth projection to 7 per cent from the previously forecast 7.4 per cent in 2016 is due to weak investments, a slowdown in the country's agriculture sector, and the lack of available cash due to the government's decision to ban high-denomination banknotes," ADB said in a supplement to its Asian Development Outlook 2016 Update.
The Indian economy expanded by 7.1 per cent and 7.3 per cent in the first and second quarters of 2016-17.
Asian Development Bank (ADB) further said that this will likely affect largely cash-based sectors in the country including small-and medium-scale businesses.
"The effects of the transition are expected to be short-lived and the Indian economy is expected to grow at 7.8 per cent in 2017," it said.
According to RBI there could be travel through short-run disruptions in economic activity in cash-intensive sectors such as retail trade, hotels and in the unorganised sector and demand compression associated with adverse wealth effects.
"Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks," the RBI said.
Trimming of India's growth forecast has bearing on the Asian economy. Economic growth in developing Asia remains broadly stable, but a slight slowdown in India has trimmed the region's growth outlook for 2016.
ADB has downgraded 2016 growth to 5.6 per cent, below its previous projection of 5.7 per cent. However, growth remains unchanged at 5.7 per cent for 2017.
Asian economies continue their robust expansion in the face of global economic uncertainties, said ADB Deputy Chief Economist Juzhong Zhuang.
"Structural reforms to boost productivity, improve investment climate, and support domestic demand can help maintain growth momentum into the future," he said.
Combined growth for the major industrial economies
exceeded expectations in the ADB's update, ticking up 0.1 percentage point to 1.5 per cent in 2016.
Growth in 2017 is maintained at 1.8 per cent. Robust consumer spending supported the US economy, with supportive monetary policy and improved labour markets fuelling growth in the euro area. Japan's expansion, meanwhile, will be buoyed by strong exports, despite the stronger local currency.
ADB has downgraded the forecast in South Asia from 6.9 per cent to 6.6 per cent in 2016 but growth will bounce back in 2017, reaching 7.3 per cent.
With regard to East Asia, ADB has maintained its forecast for 2016 and 2017.
"Growth this year will reach 5.8 per cent, with a slight moderation to 5.6 per cent in 2017. Growth in the People's Republic of China (PRC) - the world's second largest economy - is expected to hit 6.6 per cent this year, driven by strong domestic consumption, solid wage growth, urban job creation, and public infrastructure investment," it said.
Forecast for China in 2017 is maintained at 6.4 per cent.
In Southeast Asia, it said, growth forecasts remain unchanged at 4.5 per cent in 2016 and 4.6 per cent in 2017, with Malaysia and the Philippines expecting stronger growth due to a surge in domestic consumption and public and private investment, compared to lower growth forecasts in Brunei Darussalam, Myanmar, and Singapore.
The outlook in Central Asia is maintained at 1.5 per cent in 2016 and 2.6 per cent in 2017, as the ongoing recession in the Russian and low global commodity prices for oil and natural gas continue to dampen growth in the subregion.
ADB, based in Manila, is owned by 67 members - 48 from the region. The bank assistance totalled USD 27.2 billion, including co-financing of USD 10.7 billion in 2015.
