The Asian Development Bank (ADB) Wednesday trimmed India’s economic growth forecast for the current fiscal from 7 per cent to 6.7 per cent, citing lingering effects of domonetisation, transitory challenges to GST and weather-related risks to agriculture. For 2018-19, it has projected the GDP of India to grow by 7.3 per cent, slower than the bank’s previous estimate of 7.4 per cent. The downgrade in projection comes weeks after Indian economy bounced to a 6.3 per cent expansion in July-September quarter after a five-quarter slide in GDP growth. Although the lender cited a couple of positives such as improved balance-sheets of PSU banks through bank recapitalisation and supportive global environment, tepid growth in the first half of 2017-18 threatened to blunt overall growth numbers. The bank saw transitory challenges to economic recovery such as GST and risks to agriculture stemming from a spotty monsoon.
More worrisome is the fact that inflation picked up since July 2017 on a price uptick for food, especially pulses and vegetables. Fuel prices have inched up in response to rising global crude prices. The prices are likely to increase further in the remaining months of the fiscal — a factor for subdued annual growth. The ADB reading is in sync with earlier prognoses by other global institutions. The World Bank reduced India’s GDP growth forecast to 7 per cent for 2017-18, from 7.2 per cent estimated earlier, blaming disruptions caused by demonetisation and the GST. The Organisation for Economic Cooperation and Development (OECD) also cut its growth projections for India to 6.7 per cent for 2017-18. Fitch Ratings lowered its forecast for India’s growth for the current fiscal to 6.7 per cent from the earlier projection of 6.9 per cent. It had also cut GDP growth forecast for 2018-19 to 7.3 per cent from 7.4 per cent predicted earlier. Moody’s last month projected India’s real GDP growth to moderate to 6.7 per cent in the current fiscal, from 7.1 per cent last year.
India continues to suffer from macroeconomic setbacks on various fronts. Retail inflation accelerated to a 15-month high of 4.88 per cent in November while the industrial production growth hit a three-month low of 2.2 per cent in October. The surge in retail inflation has brought RBI’s fears into reality. The bank had held on to rates in its fifth bi-monthly monetary review December 6 as it expected an upside in inflation numbers over the coming two quarters. The deceleration in factory output suggests the turnaround in investment and demand is yet to resume in earnest. Big talk by the government earlier this month in the wake of the improved GDP numbers seem to be fizzling out. It will still take the economy a while to go past GST problems. The inflation and the IIP numbers were disappointing and the price rise has vindicated the RBI’s decision to hold rates.
The inflation numbers are likely to worsen in the next few quarters. Crude oil prices have reached a 30-month high at $65 a barrel, indicating pressure on inflation. Prices of vegetables are likely to remain high over the next few quarters. Unseasonal rain in a few coastal states, including Orissa, has affected ripe kharif crop. It will hit farm production in most eastern and southern states. This may result in pressure on the prices of cereals. The government must work harder to spruce up investment by private companies. It must shun its long-held approach of looking to RBI for rate cuts to kick-start growth. Instead, it should multiply efforts to bringing in more structural reforms. The ADB prediction is expected to sober up the euphoric mood of the government ahead of the Union Budget February 1.
