Structural Reforms Key for India to Return to High Growth: ADB

ADB’s (Asian Development Bank) report on ‘Asian Development Outlook 2013’ projects India’s GDP growth to edge up to 6% in 2013, picking up slightly to 6.5% in 2014, 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.

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  ADB report.

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

In FY2012, Indian growth decelerated to 5%, 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. The current account deficit expanded sharply reflecting a contraction of exports and moderation in service and remittance receipts.

However, according to the report next two years should see some improvement, 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.

Even as the US , Europe and Japan continue with their sluggish growth, developing Asian economies are bolstering their resilience. The Asian Development Outlook 2013 estimates that regional growth of developing Asia will pick up to 6.6% in 2013 and reach 6.7% in 2014. Although this is a distinct improvement on 2012, when growth stood at just over 6%, it is far from the heady double-digit pace before the global financial crisis. Moreover, the growth remains uneven as the region recovers at different speeds.

Looking ahead, the report says that Asia is moving along a dangerously unsustainable energy path that will result in environmental disaster and a gaping divide in energy access between rich and poor unless the region dramatically changes course and secures sufficient energy to drive economic expansion in the decades to come. The region already consumes roughly a third of global energy, and of by 2035 Asia merely expands energy access without fundamentally changing the way it consumes, the report predicts the region’s oil consumption will double, natural gas consumption will triple, and coal consumption will rise a whopping 81%, with costly and devastating environmental impacts. Asia still remains home to two-thirds of the world’s poor, and many of its mega-cities are mired in polluted air and water. Therefore, securing adequate physical energy supplies must be achieved while preserving the environment and extending the benefits of electricity to the millions who still live without it. Asia must find the political will and innovation to scrap outdated policies and recalibrate its energy mix. Carefully designed support for renewable energy technologies must be stepped up.  Asia must accelerate cross-border interconnection of power and gas grids to improve efficiency, cut costs, and take advantage of surplus power. With increased cooperation, a pan-Asia energy market is achievable by 2030, the report says.

Warm regards,

Dr. S P Sharma

Chief Economist

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