ADB cuts India's growth forecast to 7.4% for 2016-17

New Delhi: Global headwinds will pull down India's growth rate to 7.4 percent in the next fiscal from 7.6 percent this year but more reforms will help the country remain one of the fastest growing economies in the world, the Asian Development Bank said on Wednesday.

The Asian Development Bank's (ADB) growth forecast of 7.4 percent for 2016-17 is substantially lower than its earlier projection of 7.8 per cent.

ADB's flagship publication Asian Development Outlook (ADO) also projected rise in consumer inflation, mainly on account of the impact of salary hike of government employees and a likely mild pick up in global oil prices.

"India's economy will see a slight dip in growth in FY (fiscal year) 2016 (From April 1, 2016, to March 31, 2017). The economy will again accelerate in FY 2017 as the benefits of banking sector reforms and an expected pickup in private investment begin to flow," the ADB said.

ADB projects India's gross domestic product (GDP) to grow 7.4 percent in FY 2016, slightly below the FY 2015 estimate of 7.6 percent. In FY 2017 growth is forecast to reach 7.8 percent, it said.

As per India's Finance Ministry's estimates, growth is likely to be between 7-7.75 percent next fiscal year.

"India is one of the fastest growing large economies in the world and will likely remain so in the near term," ADB's Chief Economist Shang-Jin Wei said.

"The potential growth of the country can be raised further if it can successfully implement necessary reforms including unifying the tax regime, improving labour market regulations as opening further to foreign direct investment and trade," Wei said.

In the next fiscal, ADB said weak global economy will continue to weigh on exports, offsetting a further pickup in domestic consumption, due in part to an impending salary hike for government employees.

It said public investment would remain strong next fiscal and strong PSU banks will help bring in an uptick in bank credit and boost private spending in 2017-18 fiscal.

With regard to inflation, ADB said after two years of decline, consumer inflation is likely to accelerate, fuelled by the salary hike for civil servants and a mild pick-up in global oil prices.

Inflation is expected to average 5.4 percent in next fiscal, rising to 5.8 percent in 2017-18.

"The government is expected to maintain its ongoing fiscal consolidation efforts, with the deficit cut to 3.5 percent of GDP in FY2016, supported by tax revenue growth and asset sales," it said.

ADB projected recovery in exports in 2017-18 fiscal as large economies show a mild growth rebound, and improved business environment with government policy actions in place.

"However, India still faces significant challenges to finance the infrastructure it needs to deliver sustainable growth, with funding requirements estimated at around USD 200 billion a year through FY2017," it added.

Public banks' non-performing assets and an over-leveraged corporate sector leave limited scope for more private investment in infrastructure and highlight the need for policy actions, the report said.