India’s economy is set to grow at 7.4% in the current fiscal year 2017-18 against 7.1% in the previous year, on the back of pick-up in consumption demand and higher public investment, the Asian Development Bank (ADB) said on Thursday.
In its latest Asian Development Outlook (ADO) 2017 report, ADB said while the recent gross domestic product (GDP) data for 2016-17 did not fully capture the effects of demonetisation, the slowdown did reflect a continued slump in investment. “Dragging on growth were excess production capacity, problems that past overinvestment left on corporate balance sheets, and new bank lending inhibited by too many stressed assets. Moderately higher growth is projected as consumption picks up and government initiatives boost private investment,” it said.
“An array of important economic reforms has propelled India’s economic success in recent years. A continued commitment to reform—especially in the banking sector—will help India maintain its status as the world’s fastest growing major economy,” Yasuyuki Sawada, ADB’s chief economist, said.
The ADO expects consumption to pick up as more new bank notes are put in circulation after the shock withdrawal of high-value currencies on 8 November and as planned salary and pension hike for state employees are implemented. “The public sector will remain the main driver of investment as banks continue to wind down balance sheets constrained by high levels of stressed assets. Exports are forecast to grow by 6% in the coming year,” it said.
Among potential risks for the Indian economy, the assessment notes risks from higher oil prices as Indian imports nearly 80% of it fossil fuel needs. “A rapid increase in the price of oil could undermine the country’s fiscal position, stoke inflation and swell the current account deficit,” it warned.
ADB projected inflation to accelerate to 5.2% in 2017-18 and 5.4% in 2018-19 as the global economy recovers and commodity prices rebound.
The report estimates of a $1 increase in oil prices raises the import bill by nearly $2 billion. In 2016-17, rising oil prices resulted in a 37.6% increase in India’s import bill. To mitigate India’s vulnerability to oil price swings, the government has proposed reducing dependence on imported oil by 10% over the next five years through more efficient domestic production and increased private investment into the sector, the report noted.