Indian Growth to Pick Up in 2014 But Remain Below Potential

News Release | 1 April 2014

HONG KONG, CHINA – The recent deceleration of economic growth in India appears to have bottomed out, but the economy will not reach its potential until remaining structural bottlenecks are overcome, says a new Asian Development Bank (ADB) report.

“India’s capacity for more rapid growth over the long term is high, with a promising outlook for labor, worker skills, capital, infrastructure, and productivity,” said ADB Deputy Chief Economist Juzhong Zhuang. “But a serious effort on reforms is needed if the economy is to achieve and sustain higher rates of growth going forward.”

In its flagship annual economic publication, Asian Development Outlook 2014 (ADO), released today, ADB projects India’s GDP growth to accelerate to 5.5% in the fiscal year to end March 2015 (FY 2014) on improved performance in industry and services. Growth is seen rising further to 6.0% in FY2015, as a recovery in advanced economies bolsters external demand and government action opens some structural bottlenecks that have impeded industry and investment.

The government’s initial estimates peg FY2013 GDP growth at 4.9%. The economy remained constrained by slow industrial growth, contracting manufacturing output, weak investment, and a reduction in private consumption. The current account deficit is estimated to have narrowed sharply to 2.2% of GDP in FY2013, from 4.7% a year earlier, as the weakened currency improved competitiveness, export demand picked up, and restrictions were introduced on some import items.

Sustained economic recovery will have to be led by improved investment and consumption, ADO says. Progress by the Cabinet Committee on Investment in resolving delays in several large infrastructure projects is likely to provide traction in raising investment. Companies will be looking to see if actions are taken to improve the investment climate. Improved global growth prospects and competitiveness gains from currency depreciation will bolster external demand.

One of India’s most pressing policy challenges is to create significantly more productive and well-paying jobs, the report notes. Such jobs are vital to sustain high growth and ensure it is inclusive. Manufacturing will have to play a key role in job creation as the proportion of the workforce that depends on agriculture declines and 12 million people enter the workforce each year.

India’s manufacturing sector has so far performed below its high potential. The government’s recent National Manufacturing Policy identifies a number of constraints on the sector, and has proposed initiatives to relax these. The successful implementation of the various initiatives outlined in the National Manufacturing Policy will be necessary to ensure that India’s manufacturers perform at or close to potential.