Strong, but slower, growth on the horizon

HONG KONG: India’s GDP growth is likely to remain robust over the next two years, but may come down a tad from the average 8% growth of the past three years, according to the Asian Development Bank (ADB). That growth trend, however, is largely in line with the trend for the developing Asian economy, which had an unexpectedly good year in 2005.

The 2006 edition of the bank’s annual economic publication, Asian Development Outlook (ADO), released on Thursday, projects GDP growth of 7.6% in 2006 and 7.8% in 2007 for India. It says that consumption and investment demand will be held back a bit by higher oil prices - which could stoke inflation - and higher interest rates.

Noting that the country’s GDP growth of the past three years had been driven by broad-based domestic demand and “expansive business dynamics”, the report identifies two key policy challenges as India continues its structural transformation.

First, it says, India must continue to consolidate its fiscal position, while simultaneously ensuring spending on infrastructure improvements to support industry and services development, and investment to advance rural productivity and human development. Second, it notes, India must improve the investment environment by lowering the cost of doing business.

India, the report says, “has ambitions to lift its growth rate to over 9% in the medium term.” This, it adds, is likely to require an increase in the ratio of its investment to GDP and an improvement in capital productivity. Both will need determined reform efforts, it says.

The report said that in 2005, the Indian economy surged by 8.1%, driven by strong performances in industry and services, and a rebound in agriculture, which had performed poorly in 2004.

“For India, sustaining growth growth rate is essential to reduce poverty,” says ADB chief economist Ifzal Ali.

The developing economies of Asia - particularly China, India and South Korea (which, taken together, have a combined weight of 66% of regional income) - will remain the world’s most dynamic, according to Ali. Overall, the 43 economies of developing Asia are likely to see their GDP grow 7.2% in 2006 and 7% in 2007, down from 7.4% in 2005.

“2005 was a surprise on the upside,” says Ali. “In comparison to that stellar performance, growth will be a touch lower in the next two years. Macroeconomic policy will be less accommodative, and with rising interest rates globally, countries in Asia will raise their interest rates. Also, higher oil prices will need to be passed through. The slightly lower growth projections of the next two years are a reflection of prudent macroeconomic management.”

China’s economy, for instance, grew 9.9% in 2005, driven by booming exports and investment. However, the government is now targeting a slower growth trajectory in order to focus on the social and environmental stresses that have emerged as a consequence of rapid economic expansion in recent years. According to the ADO, China’s growth is projected to ease to 9.5% in 2006, and further to 8.8% in 2007.

“The decision of the People’s Republic of China (PRC) to proactively move to slow its economy will have the biggest impact on East Asian growth in the years ahead,” says Ali.

The report notes that the high investment levels in China in recent years have led to overcapacity in some industries. It identifies the risks: incomplete reforms; widening income inequalities; a deteriorating natural environment; and international trade frictions.

But overall, the outlook for Asia remains rosy, says Ali.