HONG KONG, CHINA - India should see a moderate uptick in growth during FY2012 and FY2013 as global conditions stabilize, but a return to the very strong performance of recent years hinges on moving the reform agenda forward, especially addressing issues that are constraining investment, says a new Asian Development Bank (ADB) report. 

ADB’s flagship annual economic publication, Asian Development Outlook 2012 (ADO 2012), released today, says gross domestic product growth should edge up to 7.0% in FY2012 and 7.5% in FY2013, after falling to 6.9% in FY2011 from 8.4% the year before. The projection assumes that industrialized countries will post growth, India’s monetary policy eases, the budget deficit is cut, and headway is made on long-standing structural and regulatory issues over the next two years.

“An expected easing in monetary policy after a long period of persistent inflation and rate hikes might help stimulate investment over the coming year, but its impact is likely to be limited until obstacles like land purchase and environmental regulations, which are currently deterring both domestic and foreign investors, are addressed,” said Changyong Rhee, ADB’s Chief Economist.

The slide in FY2011 growth reflected falling exports, weaker consumer spending and a slump in investment. Industrial growth dropped to a decade low of 3.9%, although services remained robust, contributing nearly 80% of overall GDP growth for the year. Inflation eased late in the year, after 13 consecutive policy rate hikes by the Reserve Bank of India, but a sharp first-half pickup in exports was not sustained in the second, as global demand fell.

The dip in inflation is expected to continue on the expectation of normal monsoons and more stable global commodity prices, with the average rate expected to be 7% in FY2012 and 6.5% the following year. However the longer-term outlook for consumer prices will also depend on structural reforms to improve production and distribution of food, as India’s consumption patterns and incomes change. Moderation in the growth of non-oil imports in FY2012 and improved economic prospects in the advanced countries in FY2013 are expected to help the current account deficit to improve to 3.3% in FY2012 and further to 3.0% in FY2013.

A number of bills and measures to improve India’s investment environment have been introduced to the national Parliament, but they are making little progress amidst lack of sufficient consensus for immediate reforms. A recent rise in the pace of road construction and clearances for power projects is a positive signal, but ADO 2012 says more is needed to substantially increase levels of investment.