ADB cuts India growth forecast to 10%; inflation at 5.5%


ADB cuts India growth forecast to 10%; inflation at 5.5%

The Asian Development Bank has cut its forecast for India’s GDP growth in 2021-22 to 10%, from 11% projected earlier, with downside risks dominating the economic outlook. The ADB also sees rising input costs fuelling inflation to a faster 5.5% pace, than the 5.2% previously estimated.

While the COVID-19 second wave has disrupted the economic recovery since the ADB’s April forecast for 11% growth, the Bank expects the economy to ‘rebound strongly in the remaining three quarters and grow by 10% in the full fiscal year before moderating to 7.5%’ in 2022-23.

Still, the risks to the outlook tilt to the downside and depend mainly on the evolution of the pandemic, according to ADB’s director of macroeconomic research Abdul Abiad. “The primary risks are centred around the pandemic.”

Conceding that the ADB’s outlook was a ‘bit optimistic’ compared to the Reserve Bank of India, which now expects 9.5% growth this year, Dr. Abiad said: “We didn’t change it much from our earlier forecast, because we have only had one quarter of the fiscal year yet and with the wide uncertainty, we wanted to stick to that and see how things evolve.”

That the second wave accelerated very rapidly but also declined very rapidly, allowing the economy to reopen was another key factor behind ADB’s assessment, and was backed by the Purchasing Managers’ Index (PMI) readings that had ‘switched to highly positive for India’, he pointed out.

“Because consumption will recover only gradually, government spending and exports will contribute more to this year’s growth than they did in the previous fiscal year,” the ADB said in an update to its Asian Development Outlook for 2021, emphasising that the healthy trend in export orders suggested that ‘strong external demand’ had helped cushion the impact of the second wave on the economy.

Blaming the uptick in India’s inflation on rising global oil prices and higher duties on gasoline and diesel fuel, along with double-digit consumer price inflation for pulses and vegetable oil, the ADB said a deficient monsoon could augur further inflationary pressure.

“Rising prices for oil and other commodities will further increase input and transportation costs for producers, which they will pass on to consumers. These push factors and the second-round effects of persistently high headline inflation from last year will keep core inflation elevated,” the Bank warned.

The high 20.1% growth recorded in the April to June quarter notwithstanding, ADB pointed out that India’s economy was yet to recover to its value ‘just before the pandemic hit’ and the adverse impact of the second wave was reflected in the 12.4% quarter-on-quarter contraction recorded in the first three months of 2021-22, in seasonally adjusted terms.

“Although there is a risk of resurgent waves from new variants, policy makers must go beyond containment and vaccination in the months ahead,” said Joseph Zveglich Jr., ADB’s acting chief economist. “Support for businesses and households will continue to be important during the recovery, as well as planning for a new normal once the pandemic subsides,” he added.

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