India should see a moderate uptick in economic growth in 2012-13 and 2013-14 as global conditions stabilise.
But a return to the very strong performance of recent years hinges on moving the reform agenda forward, especially addressing issues that are constraining investments, says a new ADB report.
Asian Development Bank’s flagship annual economic publication — Asian Development Outlook 2012 — released today says India’s GDP growth should edge up to 7 per cent in 2012-13 and 7.5 per cent in 2013-14.
Indian economy recorded 6.9 per cent growth in 2011-12, according to the advance estimates put out by the Central Statistics Office. This is lower than the 8.4 per cent growth recorded in 2010-11.
Average inflation rate
The ADB report expects the average inflation rate to be 7 per cent in 2012-13 and 6.5 per cent the following year. Inflation has eased late in the year after 13 consecutive policy rate hikes by the Reserve Bank of India.
The dip in inflation is expected to continue on the expectation of a normal monsoon and more suitable global commodity price.
Export growth
The ADB report has noted that the moderation of growth in the advanced economies will adversely impact exports as well as receipts on account of software and business services.
Export growth is forecast to slip to 14 per cent in 2012-13. Remittances are expected to show strong growth as banks are now free to set rates in response to market forces.
The current account deficit is expected to improve marginally to 3.3 per cent of GDP in 2012-13, says the report.
Foreign direct investment
ADB sees foreign direct investment increasing only modestly. However, external commercial borrowings are set to remain healthy given the interest rate differential with advanced economies. The current account deficit is expected to be financed by capital flows.
The report has highlighted that certain elements of labour laws need to be revisited if India is to attract foreign direct investment in labour-intensive manufacturing.
Weak infrastructure, especially in the areas of transport, power, and education and training, has also reduced India’s attractiveness to FDI. Inconsistent policy making can also damp investors’ confidence by raising transaction costs and uncertainty about the business environment, the report has said.