India's Growth to Accelerate in 2010; Inflation Pressures Loom, Says ADB

HONG KONG, CHINA - India’s rebound from the global crisis is set to accelerate in 2010, with estimated growth of 8.2%, although rising price pressures present a challenge to policy makers as they steer the economy’s recovery, the Asian Development Bank (ADB) says in a new major report.

The Asian Development Outlook 2010 (ADO 2010), ADB's flagship annual economic publication released today, says prompt fiscal and monetary stimulus measures, an improving global environment, a return of investor risk appetite, and large capital inflows, combined to help the economy grow a government-estimated 7.2% in 2009, from 6.7% in 2008.

Expansionary fiscal and monetary policies are now being wound back gradually as the rebound gains traction. While trade flows have yet to return to pre-crisis levels, rising private consumption and investment are likely to underpin growth over the next two years, the report says, with the economy estimated to expand 8.7% in 2011.

Clouding the outlook, however, is a surge in food prices following a poor summer monsoon and floods, as well as expectations for increased fuel prices this year and next. In addition, a weak agriculture sector and infrastructure bottlenecks remain obstacles to longer-term growth. Annual inflation in 2010 is seen at 5.0%, rising to 5.5% in 2011.

“The outlook is for a return of high growth, although this will require continued apt handling of macroeconomic policies, and to sustain long-term growth it will be essential to address infrastructure bottlenecks and to reform agriculture,” says ADB Chief Economist Jong-Wha Lee.

To counter the trend in rising food prices and to strengthen agricultural output, which fell an estimated 0.2% in 2009, the report says, will require a range of measures, including boosting farmgate prices, and addressing distribution, trade, research, and subsidy constraints. More government spending on infrastructure is also needed, which may require a tightening of subsidies as part of fiscal consolidation, as well as more public-private investment partnerships.

After running substantial budget deficits over the past two years, the government has committed to consolidating its fiscal position, with the projected deficit targeted at 5.5% of gross domestic product in 2010, down 1.2 percentage points from 2009. It is seen falling further to 4.0% in 2011, supported by the introduction of a new direct tax code, and national goods and services tax.

But policy makers will have to be careful about the timing of fiscal and monetary adjustments to avoid stoking inflation or choking off growth, ADO 2010 says.

“Too slow a removal of the fiscal and monetary stimulus support may lead to a quick uptake of inflation, while too rapid a removal may derail the recovery,” says Mr. Lee.

ADO 2010 says the normalization of financial market conditions will support a rebound in private investment in 2010, while urban consumption is set to remain strong, with fears of job cuts dissipating amidst substantial new recruitment, and salaries on an upward trend.

After bottoming out in late 2009, exports and imports are set to rebound further as the global economy recovers, with exports seen rising 16% this year and 12% in 2011, and imports seen up 20% in 2010 and 18% in 2011.

 

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*Broadcasters interested in obtaining video footage of an interview with ADB Chief Economist Jong-Wha Lee on the Asian Development Outlook 2010, please contact ADB Multimedia Team Leader Jason Rush: jrush@adb.org, tel: (632) 632-4096. Read the broadcast transcript of the interview.