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India Forecast To Maintain 6-7 Percent Growth In 2001-2002

MANILA, PHILPPINES (19 April 2001) - After being one of the best performing economies in Asia during 2000, India will maintain growth of between 6 and 7 percent in 2001 and 2002, according to the Asian Development Outlook (ADO), released today by the Asian Development Bank.

Despite several adverse external factors, the Indian economy has remained relatively untouched by contagion from the regional economic crisis and performed well, says ADO, an annual publication analyzing and forecasting economic trends. But there is less optimism over the prospects for economic expansion than at the start of 2000, as unfavorable weather conditions and sluggish industrial recovery have taken their toll.

Real gross domestic product (GDP) growth is estimated at 6 percent for 2000, supported by robust performance in services. Compared with 1999, the Reserve Bank of India (RBI) faced generally unfavorable conditions in 2000, including a sharp depreciation of the rupee and higher inflation.

Continued growth will also be conditional on there being no adverse internal or external disturbances, such as unfavorable weather or oil price hikes, the report says.

Measured year on year, inflation reached 7 percent in 2000, primarily the result of higher oil prices. This was a marked increase from 3.3 percent the previous year. ADO projects the annual inflation rate falling back to about 5 percent by 2002.

Exports continued to put in an impressive performance, rising by 17 percent in 2000 compared to 11.6 percent the previous year. Imports also grew strongly at 13 percent, partly because of a surging oil import bill. This resulted in a 4 percent increase in the trade deficit.

The economy's prospects seem favorable in the medium to long term, as reforms bring significant gains in supply-side efficiency, attract new foreign investment, and stimulate new industries based on information and communications technology.

There will be a steady growth in exports at 12-13 percent in 2001-2002. Meanwhile, the balance of payments is forecast to remain stable, with the current account deficit improving slightly to about 1 percent of GDP in 2002.

"Yet skepticism abounds because of India's past record of being slow to accommodate change," ADO says. "Thus, the Government must remain firmly committed to its reforms, which include improvements in fiscal management."

Constraining greater industrial activity in the long term is insufficient investment in the public and private physical infrastructure. "Although the country has performed well over the past few years, it is not fully utilizing its growth potential," ADO says.

"In particular, the deteriorating fiscal health of the central and state governments is significantly undermining the economy's long-term growth potential because of inadequate public investment."

The Government recently announced an economic growth target of 8-9 percent a year, which will require a substantial increase in public and private investment, ADO says. To achieve this, the Government will need to make India a favored destination for foreign investment.

The report warns that politically difficult decisions may be required to reduce expenditure, including downsizing of state bureaucracies and cuts in subsidies. Privatization should also be top of the Government's agenda. "The financial waste in public sector undertakings is substantial and must be addressed promptly," ADO comments.

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