India's Growth Forecast Down Following Delayed Monsoon, Weak Investment

HONG KONG, CHINA – Falling global demand and a delayed monsoon curtailing agricultural growth have exacerbated India’s recent economic slowdown, and have led to reduced growth forecasts by the Asian Development Bank (ADB) for fiscal years 2012 and 2013.

“India can start reversing this trend by improving its investment climate and expediting reforms,” said ADB Chief Economist Changyong Rhee. “Tight monetary policy to counter persistently high inflation and a high deficit leave little room for policy to stimulate growth. However, restoring investor confidence can help jumpstart critical infrastructure projects that could get the economy moving.”

Forecasts in ADB’s Asian Development Outlook 2012 Update predict India’s gross domestic product is expected to grow by 5.6% in FY2012 (which ends March 2013) and 6.7% in FY2013, a significant drop from ADB’s earlier projections of 7.0 % and 7.5%, respectively, for the two years. The report raises projected inflation to 8.2% in FY2012 (from 7.0%) on the back of higher domestic food and fuel prices. Inflation is then expected to trend downwards to 7.0% in FY2013.

The delayed monsoon, coupled with weaknesses in the agricultural supply chains and rising costs of fertilizers and irrigation, are likely to result in subdued agricultural growth and sustain pressure on food prices. Industrial output is expected to remain subdued in FY2012, with only a modest improvement in FY2013, while weak demand from industrialized countries continues to take its toll on exports. The slowdown in new infrastructure projects and the shelving of some approved projects points to continued weakness in investment.

The government has made some headway in addressing these challenges recently. A controversial proposal to review tax avoidance on foreign investments has been deferred by three years and a new plan for fiscal consolidation is expected. In September 2012, diesel prices were hiked by about 12% and the use of subsidized liquefied petroleum gas was capped to contain the fiscal deficit.

In addition, a long needed but politically controversial decision to permit foreign direct investment (FDI) in multi-brand retail stores and other liberalizing steps have boosted business sentiment and raised hopes for further policy actions. FDI in retail will result in substantial investment in a modern agricultural supply chain that will reduce huge food losses from farm to market, helping farmers and consumers.