Higher Industrial Output, Exports Boost Indian Growth, Says ADB

MANILA, PHILIPPINES – The Indian economy is expected to grow robustly, led by the services sector and an industrial expansion that continues to gather momentum, the ADB says in a major report released today.

Asian Development Outlook 2006 Update forecasts the economy will grow 7.8% in fiscal year 2006, which ends on 31 March 2007. The forecast represents a slight upward revision from 7.6% anticipated in April. Growth of 7.8% is also expected in FY2007. The forecasts assume normal monsoons and continuing delays in the pass-through of high international oil prices to consumers.

“We are witnessing a steadily-accelerating industrial expansion. Growth in manufacturing and in capital goods production has been robust, driving the economy forward,” said Mr. Ifzal Ali, ADB Chief Economist. “While the service sector is growing sharply, the rapid expansion in manufacturing and manufactured exports is a welcome sign of a more diversified growth path.”

ADO Update forecasts overall growth for the 43 countries of developing Asia of 7.7% in 2006, up from 7.2% forecast in April.

In India, ADO Update highlights four stories that drive the forecasts: new industrial figures that further confirm India’s accelerating industrial sector; an expanding gap between international oil costs and domestic fuel prices; challenging fiscal indicators; and inflationary pressures that are building even as interest rates rise.

Recent industrial results build on three years of acceleration and confirm that on the strength of India’s growing role in the international industrial supply chain and expanding domestic demand, the economy is shifting from a services-led model to a more balanced, services- and industry-led growth trajectory. Combining the findings of investor surveys with the industrial results, ADO Update predicts investment, industrial production, and exports will support the growth forecast.

Assuming the advance of global oil prices slows over the coming months, ADO Update forecasts current account deficits of 2.1% of GDP in FY2006 and 1.9% in FY2007.

The slow pace of domestic fuel price adjustment is a cause for concern, according to the report, as it is resulting in losses at the state-owned oil-marketing companies on the order of 2% of GDP and rising. These short-falls imply substantial fiscal and quasi-fiscal pressures at a time when fiscal resources are stretched to the maximum. Price hikes are inevitable, and delays fuel inflationary expectations and uncertainty, says ADO Update.

Fiscal indicators show government spending considerably above planned levels in the first few months of FY2006, implying that meeting the legally mandated fiscal deficit target of 3.8% of GDP will be difficult. With rapid industrial growth putting increasing pressure on inadequate physical infrastructure, and private investments in general infrastructure taking time to materialize, privately managed special economic zones can help soothe the infrastructure deficit, says ADO Update, while noting the importance of informed debate on the fiscal inducements required by special economic zones.

Rising food prices are adding further inflationary pressure. ADO Update attributes the price increases to the release of pent-up demand by agro-processors and other adjustments to a newly liberalized commodities sector, and to poor harvests prior to FY2005.

Meanwhile, robust demand for bank credit is driving up interest rates and complicating attempts to control money supply growth and inflation. Delays in fuel price adjustments counteract these added inflationary pressures, according to ADO Update. Inflation is forecast at 5.5% in FY2006 and 5% in FY2007.

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