ADB downgrades India's growth forecast to 6.5 percent

Wednesday, 22 September 2004, 07:00 Hrs
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NEW DELHI: Hit by high crude oil prices and poor monsoon, India's economic growth is expected to slow down to 6.5 percent in 2004-05 fiscal, an Asian Development Bank (ADB) said Wednesday.

In April, the multilateral funding body had forecast a 7.4 percent growth.

"Affected by higher oil prices and unfavourable weather for agriculture, India's economic growth is expected to slow to 6.5 percent in fiscal 2004-05 and 6.0 percent in 2005-06 after 8.2 percent growth in 2003-04," a major ADB report said.

The Asian Development Outlook 2004 Update (ADO Update) revises downward the earlier gross domestic product (GDP) growth forecast for India from 7.4 percent in 2004-05 and 7.6 percent in 2005-06.

"The high price of oil is most critical for India, which imports the bulk (70 percent) of its oil requirements," the report says.

"Past experience shows that sharp spikes in oil prices trigger inflation, and adversely impact the balance of trade and dampens growth."

The other associated risks include increasing global interest rates and inadequate progress in fiscal consolidation.

ADB projects that India's inflation, which slipped last week to 7.81 percent from a four-year high of 8.33 percent, will be 5.7 percent in 2004-05 and 6.8 percent in 2005-06 due largely to the rising prices of oil and agricultural commodities.

"Oil prices are seen stabilising by 2005, but manufacturers who are currently absorbing the increase in production costs will eventually pass the costs to consumers, leading to an increase in industrial prices and inflation in 2005-06," states the report.

It expects India's consolidated fiscal deficit to remain at about 10 percent of GDP in 2004-05 and decline to 9.5 percent in 2005-06.

"The slight improvement in 2005-06 position will result from strong fiscal reform measures expected to be initiated in that year," ADB states.

On the export front, ADB is optimistic of India registering a 20.9 percent growth in 2004-05, higher than last year. For 2005-06, it expects a lower export growth of 17.9 percent.

"The expansion in exports is likely to be concentrated in textiles, following the end of Multi-Fibre Arrangement quotas at end-2004, pharmaceuticals and automotive-related industries," the report states.

Primarily because of the increase in the cost of importing oil, India's imports are projected to grow at 19.9 percent this year and 19.3 percent in 2005-06.

Other than oil, India's major import items include gems and semi-precious stones, chemicals including fertilizers, and machinery and electronic goods.
Source: IANS
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