India’s economy is expected to grow by 5.5% in Fiscal Year 2014 (ending 31 March 2015), unchanged from the Asian Development Outlook (ADO) 2014 forecast in April. The revival of investment, a possible easing of interest rates in mid-2015, and improved growth in the industrial economies should boost growth to 6.3% in FY2015, a bit higher than the ADO 2014 forecast. Recent measures such as easing environmental and forest clearances for mines, roads, power stations, and irrigation systems - and expanding the monitoring role of the project monitoring group - will help speed the implementation of projects in the pipeline.

Selected Economic Indicators (%) - India 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 5.5 5.5 6.0 6.3
Inflation 6.0 5.7 5.8 5.5
Current Account Balance (share of GDP) -2.5 -2.3 -2.8 -2.5

Source: ADB estimates.

Inflation continued to track lower in the first 4 months of FY2014, with year-on-year consumer inflation averaging 8.1%. This was well below the FY2013 average of 9.7%, as was wholesale inflation at 5.6% versus 6.0%. A base effect, subdued corporate pricing power, tight monetary policy, and sluggish consumer demand combined to temper inflation.

Monetary policy is likely to remain tight, given the central bank’s focus on reining in inflation. Consumer inflation is expected to average 8.1% in the whole of FY2014 and then moderate to 7.2% in FY2015. These forecasts assume continued measures to tame food inflation, modest hikes in support prices for farmers, and moderating growth in rural wages. Wholesale price inflation - which excludes services, has a smaller food component, and was earlier the target of monetary policy - is forecast to average 5.7% in FY2014 and 5.5% in FY2015, in both cases 0.3 percentage points lower than forecast in ADO 2014.

Since raising key policy rates by 25 basis points in January 2014, the central bank has maintained the status quo. It is reluctant to lower rates and risk missing its targets for lower inflation at 8.0% by January 2015 and 6.0% by a year later.

The new union budget presented in July 2014 aims to cut the fiscal deficit to 4.1% of gross domestic product (GDP) in FY2014. The ratio of tax (including the provincial share) to GDP is projected to come in at 10.6%, which assumes a 17.7% increase in gross tax collections, for tax buoyancy of 1.4. This is a much higher ratio of tax collection growth over GDP growth than has been experienced before. Without any major change in tax structure, achieving higher tax buoyancy will be a challenge.

The external sector improved in the first quarter of FY2014 as measures initiated in mid-2013 took hold. The trade deficit shrank to $34.6 billion from $50.5 billion in FY2013. Imports contracted by 6.5% as gold imports, which had caused very high trade deficits, fell by more than half from the year-earlier quarter to $7.8 billion as various import curbs were imposed. While oil imports increased marginally by 4.1% in this period, imports other than gold and oil remained flat.

The FY2014 current account deficit is likely to be 2.3% of GDP, a tad less than forecast in ADO 2014. In FY2015, the current account deficit is expected to widen slightly to 2.5% (again less than the earlier forecast) on account of imports growing by 10% as industry and investment revive, and with further relaxation of import curbs. Exports are also expected to pick up and grow by 10% as partner countries further consolidate their growth momentum.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.