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Structural Reforms Key for India to Return to High Growth

Structural Reforms Key for India to Return to High Growth

Hong Kong, 9 April 2013 – Reforms are needed in India to facilitate the turnaround from growth deceleration due to structural bottlenecks, deteriorating investment and a worsening current account deficit, says a new Asian Development Bank (ADB) report.

“Supply and policy obstacles have seen growth decelerate and investment and industrial output slump, with the stasis compounded by weak global demand,” said ADB Chief Economist Changyong Rhee. “Policymakers need to remove structural hurdles to faster growth, and while there have been some encouraging recent reforms, more is needed.”

In its flagship annual economic publication, Asian Development Outlook 2013 (ADO 2013), released today, ADB projects India’s GDP growth to edge up to 6% in the fiscal year to end March 2014 (FY 2013), picking up slightly to 6.5% the following year, on the back of stronger external demand and progress on reforms. The forecasts are subject to risks like another bad monsoon, slow headway on fiscal consolidation and reforms, and continued sluggishness in the global economy.

In FY2012, growth decelerated to 5%, its lowest level in a decade, exacerbated by a slump in services, weak consumption and contracting exports, while the late onset of the monsoon cut agricultural growth in half. Supply bottlenecks affecting key commodities, contentious tax policies, and procedural delays stifled investment, with manufacturing registering one of its weakest periods of expansion in the post-1991 reform era. The current account deficit expanded sharply from the record level it touched the year earlier, reflecting a contraction of exports and moderation in service and remittance receipts.

The next two years should see some improvement, ADO 2013 says, with a normal monsoon likely to lift agriculture, and exports, industry and services expected to expand on stronger domestic and external demand. Core inflation pressures are likely to recede, aided by more regular weather conditions and easing global commodity prices, although wholesale prices will remain elevated. Inflation in FY2013 is seen at 7.2%, easing back to 6.8% the following year as government steps to raise diesel prices are completed.

Recent reforms, like the creation of the Cabinet Committee on Investment to expedite government clearances for large projects, and cabinet approval of a land acquisition bill, are steps in the right direction, but the report says much more is needed if India is to go back to 8% plus growth. This includes ending delays in environmental clearances, obtaining parliamentary approval of the complex land acquisition bill, and improving infrastructure for fuel deliveries to power plants to end electricity shortages.

The central government aims to cut its budget deficit in FY2013 through enhanced revenue collection and reduced subsidies. With the tax structure remaining largely the same, the reduction in deficit would be heavily dependent on a pickup in growth and continued revisions of diesel prices. The rising current account deficit is also a concern, given a deepening dependence on external debt and foreign portfolio inflows to finance the shortfall. Reversing this trend will require removing constraints which are deterring investment and undermining exports and domestic growth.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. In 2012, ADB assistance totaled $21.6 billion, including cofinancing of $8.3 billion.

ENDS

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