ADB says India can weather Fed storm

The Asian Development Bank says Asian economies can ride out the storm when the US Federal Reserve finally begins ending years of easy money, with even those most at risk, India and Indonesia, which hold enough currency reserves to face the issue, the ADB said.

At the same time, the Manila-based institution on Wednesday slashed its growth forecast for India to 4.7 per cent from 6 per cent for the current financial year ending March 2014, pointing to supply-side bottlenecks and long delays in reform of the financial structure (See: ADB pegs India's 2013-14 growth lower at 4.7%)

Several credit rating agencies and economics-focussed institutions have been snipping their economic growth projections for India to below 5 per cent for 2013-14. But the government continues to be relatively bland in its response.

Economic affairs secretary Arvind Mayaram said on Tuesday that growth would exceed 5 per cent in the year, forecasting a pick-up in momentum from the July-September quarter.

India's economy grew at its slowest pace in four years in the fiscal first quarter at 4.4 per cent. In 2012-13, GDP growth was the slowest in a decade at 5 per cent.

In its update to the Asian Development Outlook report, ADB said a weak currency, mounting inflationary pressures, and diminished employment prospects will continue to impinge on growth in consumer demand.

''Various surveys point to households becoming gloomier and consumer confidence continuing to sag in urban areas,'' ADB said. ''However, strong growth in agriculture expected in FY2013 may boost rural consumption.''

The Asian bank expects economic growth in India to pick up in 2014-15 to 5.7 per cent, down from its earlier projection of 6.5 per cent.

The ADB said prospective tapering of US quantitative easing has destabilized financial markets in emerging economies, in particular India and Indonesia.

The Indian rupee fell by over 16 per cent against the US dollar between May to end August, making it Asia's worst-performing currency – worse than the Indonesian rupiah, which fell by 13.2 per cent.

The ADB said widening current account deficits have for long made both economies more susceptible to shifts in market sentiment, as have India's fiscal deficits.

''Fortunately, both have sufficient foreign exchange reserves, enough as of August to cover imports to India for 7 months and to Indonesia for 5 months,'' it said.

ADB expects India's current account deficit to narrow to 3.8 per cent of gross domestic product (GDP) in 2013-14, revised downward from the 4.4 per cent GDP projected earlier.

The government expects to limit the deficit this year to 3.7 per cent of GDP, which translates to around Rs44 lakh crore or $70 billion. But such expectations are generally overoptimistic, as experience has shown.