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India's Growth Unaffected by Oil Prices, But Inflation Expected to Rise

9/8/2005NEW DELHI, INDIA (8 September 2005) - Despite high international oil prices, India's economy is expected to remain buoyant, underpinned primarily by growing investment and strong consumption, says the ADB's Asian Development Outlook 2005 Update (Update) issued today.

The report, an update of ADB's flagship publication Asian Development Outlook 2005 (ADO 2005) issued earlier in the year, upholds the original GDP growth forecast of 6.9% for the fiscal year ending 31 March 2006 (FY2005). This maintains the growth momentum of previous fiscal years and assumes a normal monsoon season.

Even if estimates show that India's GDP growth could be clipped by up to 1.1 percentage points if oil prices remain around $70 per barrel through end 2006, "this negative impact is expected to be offset by other positive effects, including the Government's initiatives on infrastructure investment," the Update says. Other underlying factors are: higher private investment and the positive outlook of entrepreneurs; the rise of consumerism among a rapidly-growing middle class; a more aggressive attitude by financial institutions in consumer lending as well as industrial and farm credit; the substantial business opportunities in exports; and expansion of market liberalization policies by the Government.

India has launched the "Bharat Nirman" (Building India) program, which entails investing over Rs1,740 billion ($40 billion, equivalent to 5% of FY2005 GDP) in six critical areas of rural infrastructure over four years starting 2005.

Consequently, the Update has upgraded India's economic growth forecast for FY2006 to 6.8%, up from 6.1% in the ADO 2005 issued in April. Nevertheless the Update indicated that rising oil prices are a major concern. Losses incurred by state-owned oil marketing companies at oil prices in the first quarter are likely to be about 1.1% of GDP in FY2005 without further price adjustment and the effects of price adjustments on producers and consumers are difficult to predict.

While overall economic growth is unaffected by high oil prices, the report raises its projection for inflation for FY2005 to 4.8% from 4.2%. The inflation outlook for FY2006 is also revised to 3.3% from 3%. India is heavily reliant on oil imports and is considered inefficient in energy consumption compared with industrialized countries.

Imports are now projected to grow by 24.4% and 21.6% in FY2005 and FY2006, respectively. The current account deficit is raised to 1.5% of GDP in FY2005, and 1.8% in FY2006, about 0.5 percentage point above the ADO 2005 forecast.

Exports are expected to expand at double digit rates despite slower growth in the world economy with services, especially financial services and IT-enabled services, leading the way.

"[However] despite the expected widening of the current account deficit, continued strong capital inflows are expected to keep the overall balance in surplus," the Update says.

Despite an increase in the gross fiscal deficit during the first two months of FY2005, the Government remains confident of keeping the deficit below its budgeted 4.5% of GDP this year. While revenue collection has been impressive so far, both tax and nontax revenues may come under pressure due to losses of state-owned oil marketing companies, which will affect dividends paid to the Government, the Update says.

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