Hong Kong, China (BBN)– India’s economy is set to expand by 8.5 percent in the fiscal year to March 2011 (FY2010) but persistently high inflation and a rising rupee could undermine future strong growth, the Asian Development Bank (ADB) said on Tuesday.
The Asian Development Outlook 2010 Update (ADO Update), released on the day, raised its gross domestic product (GDP) growth figure for FY2010 to 8.5 percent from ADB’s April projection of 8.2 percent, while retaining its FY2011 estimate at 8.7 percent.
“Growth is being supported by robust investment, increased capital inflows, and stronger industrial output, buoyed by rising consumer demand,” the ADB noted.
The current account deficit forecast was also adjusted to 2.7 percent of GDP in FY2010, from 1.5 percent previously to reflect a sharp pickup in trade flows, with exports projected to grow by 18 percent in FY2010, and imports by around 20 percent.
On the other hand, the ADB raised its forecast for annual average inflation in FY2010 to 7.5 percent, up from 5.0 percent in April, warning that high food prices remain a near-term concern.
It also noted that the rupee’s appreciation by more than 11 percent in real terms between August 2009 and August 2010, poses an additional challenge for policymakers as they seek to maintain high growth while winding back the monetary and fiscal stimulus measures used to help the economy recover from the global economic crisis.
The report also said that strong, well-timed monetary and fiscal stimulus policies helped cushion the impacts of the global downturn, and these are now being gradually removed with the Reserve Bank of India tightening monetary policy progressively this year.
The Reserve Bank of India is now projecting overall inflation to moderate to 6 percent by end-March 2011, which should provide some relief but if price pressures do not abate as expected the central bank will be hard pressed to intervene in the foreign exchange market to dampen rupee appreciation due to limited options for sterilization, the report added.
BBN/SI/AD-28Sept10-10:55 am (BST)