Hong Kong, China (BBN)- The Indian economy has been under pressure with the recent depreciation of the rupee and capital outflows adding to structural constraints which are weighing heavily on its prospects for returning to a high growth path,  the Asian Development Bank (ADB) said.

The update of ADB’s flagship annual economic publication, Asian Development Outlook 2013, released on Wednesday, paints a sobering picture of India’s outlook. With gross domestic product (GDP) in the first quarter of FY2013 (which ends March 2014) expanding at its slowest pace since the global financial crisis, ADB revised down its growth forecast to 4.7 percent from 6.0 percent projected in April.

For FY2014, it sees some moderate improvement, with growth estimated at 5.7 percent, but below the previous forecast of 6.5 percent. In FY2012 GDP expanded 5.0 percent.

Nevertheless, the Indian Government has taken a number of measures to address financial market concerns and bolster growth prospects, including: raising the interest rate to support the currency; reducing impediments to inward Foreign Direct Investment; introducing control on outward capital transfers by Indian companies and citizens; and introducing 10 percent import duty on gold.

Besides, the Reserve Bank of India agreed with the Ministry of Finance of Japan in September 2013 to expand its swap agreement from $15 billion to $50 billion. The government also indicated its intention to prop up the rupee’s stability by deepening financial markets and easing external financing constraints.
Though these measures are useful to alleviate the immediate pressures in the financial and currency markets, proper macroeconomic policies should be continued.

“The recent financial market turbulence is a timely reminder of the need for structural and fiscal reform not just to ensure long-term growth but also to keep financial markets stable in the short-run,” said ADB Chief Economist Changyong Rhee.

The report also said containing inflation pressure, consolidating fiscal positions by reducing general subsidies, and managing well recently passed reform bills to keep fiscal pressures in check should receive high priority. The authorities should allow exchange rate flexibility to ensure sufficient stock of foreign reserves while balancing its impact on inflation and corporate foreign liabilities.

To convince the markets that India remains on the strong and sustainable growth path, structural reforms must be strengthened to expedite large infrastructure projects already delayed, encourage foreign direct investment, and alleviate other constraints to long term growth. “One bright spot is the recent effort at expediting regulatory clearance for several large projects in key infrastructure sectors such as power, roads, and railways by the Cabinet Committee on Investment.”
Elections and a new government in early FY2014 may help give fresh impetus to resolving structural problems, while the softer currency and expected pick-up in economic activity in major markets should see exports grow at a faster clip than in FY2012.

Policy measures since July 2013 to entice foreign investors back to India to help finance the current account deficit are expected to gain traction in the near future, it added.

Wholesale prices have seen some renewed upward pressure from currency depreciation impacts and a spike in food and fuel costs, but tighter monetary policy will have some mitigating effect, along with depressed economic activity. Inflation for FY2013 is now seen at 6.5 percent, below the 7.2 percent forecast in April.

BBN/SSR/AD-02Oct13-10:37 am (BST)