The Asian Development Bank (ADB) on Tuesday lowered India's growth forecast to 7 per cent owing to weakness in private consumption, manufacturing output and business investment.
Growth in the first quarter of the current fiscal slowed down to 5.7 per cent, as growth in private consumption and industry declined compared to previous quarters. Fixed capital formation grew by a sluggish 1.6 per cent, indicating a sharp slowdown in private investment. Government consumption and services, however, continued to buoy economic activity.
"ADB forecasts growth to reach 7 per cent for 2017-18, a 0.4 percentage point decline from the April estimates, while the outlook for 2018-19 is now at 7.4 per cent from the previous 7.6 per cent projection," the multilateral funding agency said in an update to its flagship annual economic publication -- Asian Development Outlook (ADO) 2017.
The ADB report noted that Indian growth moderated in the first quarter of the current fiscal year due to lingering effects from demonetisation and transitory challenges related to the new Goods and Services Tax (GST) regime. It added that weakness in private consumption, manufacturing output, and business investment has resulted in lowering the short-term growth outlook for the country for 2017-18 and 2018-19.
However, Yasuyuki Sawada, ADB Chief Economist, said, "Despite the short-term hiccups as firms adapt to the national GST, we believe that continued reform progress will help India remain one of the world's most dynamic emerging economies. India's ambitious reform agenda will lead to higher long-run growth for its economy."
Moving forward, the forecasts will be more bullish as private consumption is expected to pick up on the back of low inflation and anticipated wage hikes, the report said.
"Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime, while services will remain robust as trade and transport services revive with the easing of cash constraints. Investment growth, however, is likely to remain muted in 2017-18 as budgetary constraints limit government expenditure. Growth will further pickup in 2018-19 as the new tax regime improves domestic competitiveness and government efforts to improve the health of the banking sector aid private investment yield results," it said.
ADB said that inflation, however, is expected to average 4 per cent in the current year and 4.6 per cent in 2018-19, significantly lower than the previous estimates of 5.2 per cent and 5.4 per cent, respectively.
The report underlines the commitment by Indian policymakers to meet the fiscal deficit target in 2017-18, despite the presence of some risks in the form of lower non-tax revenue and a slow start to the disinvestment of public sector enterprises.
"Tax collections are likely to pick up as firms adjust to the new tax regime," it said.
Strong global growth and an improved business climate will help India's exports grow at a faster pace this year and the next, it said.
"Efforts to improve domestic demand will also spur import growth as private investment picks up, thereby widening the current account deficit compared to the past couple of years. Government efforts to liberalise foreign ownership caps across sectors and to foster a friendly investment climate will help attract stable foreign direct investment flows and comfortably finance the current account deficit," the report noted.