New Delhi: Multilateral funding agency ADB on Tuesday said India's growth rate will improve to 6 per cent in the current fiscal on the back of stronger external demand and progress on reforms.
Reforms are needed in India to facilitate the turnaround from growth deceleration due to structural bottlenecks, deteriorating investment and a worsening current account deficit, said 'Asian Development Outlook 2013' report.
The Manila-based funding agency said, however, the forecasts are subject to risks like another bad monsoon, slow headway on fiscal consolidation and reforms, and continued sluggishness in the global economy.
During 2012-13, India is expected to grow at 5 per cent, the slowest in the decade exacerbated by a slump in services, weak consumption, contracting exports and also reduced agricultural growth due to the late onset of the monsoon.
However, the growth will pick up to 6.5 per cent in 2014-15 on the back of expected improvement in global outlook and increase in exports, the report of Asian Development Bank (ADB) said.
"Supply and policy obstacles have seen growth decelerate and investment and industrial output slump, with the statistics compounded by weak global demand," said ADB Deputy Country Director Narhari Rao.
"Policymakers need to remove structural hurdles to faster growth, and while there have been some encouraging recent reforms, more is needed," he said.
The report said the 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.
On the rate of price rise, the ADB report said, core inflation pressures are likely to recede, aided by more regular weather conditions and easing global commodity prices, although wholesale prices will remain elevated.
India's inflation is seen at 7.2 percent in 2013-14, easing back to 6.8 percent 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 for a land acquisition bill, are steps in the right direction, it said.
However, the report said, much more is needed if India is to go back to 8 percent plus growth trajectory.
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, it said.
The report further said the central government aims to cut its budget deficit in 2013-14 through enhanced revenue collections and reduced subsidies.
The government has targeted a fiscal deficit of 4.8 percent of the GDP for the current fiscal against 5.2 percent in 2012-13.
Cutting the fiscal deficit will help raise domestic savings and encourage private investment, the ADB said.
With the tax structure remaining largely the same, it said, the reduction in deficit would be heavily dependent on a pickup in growth and continued revisions of diesel prices.
Terming rising current account deficit (CAD) a concern, the report said reversing this trend will require removing constraints which are deterring investment and undermining exports and domestic growth.
The current account deficit (CAD) for 2012-13 is estimated at 5 percent of GDP, significantly higher than last year's record, driven by a deteriorating trade balance, the report said.
However, it is likely to moderate to 4.4 percent in the current fiscal and 3.7 percent in the following year.
High CAD is likely to persist in the near future, it added.
Despite economic growth picking up marginally in 2013-14, import demand will continue to be strong at 6 percent given India's growing dependence on imports of crude oil, coal, metals, and fertiliser, it said.
With no major improvement expected in net services and remittances, rising income payments will continue to limit the invisibles surplus, it added.
The report said that there is room for further monetary policy easing as there would be moderation in the twin deficit -- fiscal deficit and CAD.
With some progress in deficit interest rate could be eased by by 25-50 basis points during the current fiscal, Rao said.
"While monetary policy is likely to be eased further in 2013-14 and beyond, as progress is made on bringing down inflation, the extent of easing will be conditioned on progress in reducing the current account and budget deficits," it said.