India’s growth moderated in the first quarter of fiscal year (FY) 2017 due to lingering effects from demonetisation and transitory challenges related to the new goods and services tax (GST) regime, the Asian Development Bank (ADB) said, adding that weakness in private consumption, manufacturing output, and business investment had resulted in lowering the short-term growth outlook for the country for FY2017 and FY2018.
In a report on the Asian economy, ADB forecast growth to reach 7% for FY2017, a 0.4 percentage point decline from the April estimates, while the outlook for FY2018 was now at 7.4% from the previous 7.6% projection. India’s fiscal year ends in March.
“India’s ambitious reform agenda will lead to higher long-run growth for its economy,” said Yasuyuki Sawada, ADB Chief Economist. “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.”
Growth in the first quarter of FY2017 slowed down to 5.7%, as growth in private consumption and industry declined compared to previous quarters. Fixed capital formation grew by a sluggish 1.6%, indicating a sharp slowdown in private investment. Government consumption and services, however, continued to buoy economic activity.
Bullish on private consumption
Moving forward, the ADB said that forecasts for the rest of FY2017 will be more bullish as private consumption is expected to pick up on the back of low inflation and anticipated wage hikes.
“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,” it pointed out.
Investment growth, however, is likely to remain muted in FY2017 as budgetary constraints limit government expenditure. Growth will further pickup in FY2018 as the new tax regime improves domestic competitiveness and government efforts to improve the health of the banking sector aid private investment yield results, the ADB said.
Inflation, on the other hand, is expected to average 4% in FY2017 and 4.6% in FY2018, significantly lower than the previous estimates of 5.2% and 5.4%, respectively.
According to the report, strong global growth and an improved business climate will help India’s exports grow at a faster pace in FY2017 and FY2018.
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 liberalize 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 ADB added.