ADB lifts growth forecast for India.

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An increase in public spending, a quicker than expected return of capital inflows, stronger industrial production, and signs of improved business confidence will lift economic growth to six per cent in India this year, up from an earlier estimate of five per cent, says the Asian Development Bank (ADB) in a major new report.

The Asian Development Outlook 2009 Update (ADO Update), says that while agricultural output for 2009 is expected to remain stunted and exports weak, adroit economic management in the form of fiscal stimulus packages and accommodative monetary policy has minimised damage from the global financial crisis and is supporting a relatively strong economic expansion again.

The report forecasts growth of seven per cent for 2010, also an upward revision from the 6.5 per cent projection in March when ADB launched the flagship annual economic publication ADO 2009.

"The Government's strong fiscal stimulus, complementing the Reserve Bank of India's aggressive monetary policy easing, has successfully brought last year's economic slowdown to an end," said ADB Chief Economist Jong-Wha Lee.

Growth in the first quarter of 2009 reached 6.1 per cent, a modest rise on the previous two quarters, with the upturn reflecting a recovery in industrial growth to five per cent from less than two per cent in the previous six months. Company net profits grew strongly and external commercial borrowing rose 19 per cent in June, the highest expansion since September 2008. Weak agricultural output in the second and third quarter is likely to weigh on growth, although the report says a rebound is expected in the final quarter.

The report notes that growth for 2009 will continue to be driven by government expenditure, with the combination of countercyclical fiscal policies and renewed investor confidence expected to sustain an expansion in private consumption and investment. The impact of difficult weather conditions on rural incomes and consumption will be partly offset by budgetary programs to aid households in the countryside and possible supplementary support.

In 2010, better rainfall, a rebound in exports as the recession ends in industrial economies, and stronger investor confidence will underpin a further improvement in the economic growth rate.

The ADO Update notes that while the public expenditure-led growth strategy remains appropriate given global economic weakness, the growing federal and state government deficits are not sustainable in the long run. The Government recognises the need to act and has announced plans to cut the federal deficit to 5.5 per cent of gross domestic product in 2010 and four per cent in 2011, supported by tax changes and expected improvements in the economy.

The report says one downside risk to the outlook for the economy is financial crowding out of private investment as a result of the Government's stimulus program. This risk is most likely to arise in 2010, and underscores the need for the Government to follow through on its plans to make fiscal adjustments.

Another potential threat is that domestic food price inflation may create a dilemma for monetary management in 2009 as the Reserve Bank of India seeks to keep inflation expectations in check, but not to choke off a recovery. Bad weather conditions are likely to put upward pressure on food prices in the coming months, although late monsoonal rains appear to be filling water reservoirs to an adequate level to insure a reasonable winter crop harvest which provides some relief.

High food prices have a heavy effect on the poor and the Government stands ready to cushion the impact by using its large foodgrain stocks and by importing essential commodities.

2009 CPI Financial. All rights reserved.

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