The Indian economy will expand at a slower pace of 4.7 per cent in the fiscal year ending March 2014 as the rupee depreciation and capital flight adversely affects investments and infrastructure development, the Asian Development Bank (ADB) has said.
Earlier in July this year the bank had cut Indian's growth to 5.8 per cent in the 2013-14 financial year, against the 6 per cent growth rate projected in April this year (See: ADB lowers India's 2013-14 growth forecast to 5.8%)
"With gross domestic product in the first quarter of (2013-14) expanding at its slowest pace since the global financial crisis, ADB revised down its growth forecast to 4.7 per cent from 6 per cent projected in April," it said in its flagship Asian Development Outlook 2013.
The Indian economy has been under pressure with larger-than usual outflows of short-term capital and a subsequent depreciation of the rupee. This has added to structural constraints and are weighing heavily on the prospects of a return to a high growth path, the report said.
ADB said India's growth could see some improvement to 5.7 per cent in 2014-15, although slower than the previous forecast of 6.5 per cent.
"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.
ADB noted the RBI's increased vigil against inflation, which could be around 6.5 per cent, but below the 7.2 per cent forecast earlier.
While tighter monetary policy will have some mitigating effect on rising prices, the ADB report said there has been a spike in food and fuel costs on account of currency depreciation.
A tighter monetary policy along with rising inflation, on the other hand, has depressed economic activity, ADB noted.
"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 ADB report said.
Nevertheless, ADB said the Indian government has taken a number of steps to address financial market concerns to revive growth prospects besides expanding the bilateral swap arrangement with Japan to $50 billion from $15 billion.
ADB has called for a strengthening of the country's structural reforms to expedite large infrastructure projects that are delayed and to encourage foreign investment in order to convince the market that India remains on the strong and sustainable growth path.
The report says slowing economic activity in the People's Republic of China (PRC) and India and jitters over the United States quantitative easing programme will further hit growth in the Asia Pacific region in the near term.
''Asia and the Pacific 2013 growth will come in below earlier projections due to more moderate activity in the region's two largest economies and effects of QE nervousness,'' said Rhee.
''While economic activity will edge back up in 2014, current conditions highlight the need for the region to exercise vigilance to safeguard financial stability in the short term while accelerating structural reforms to sustain economic growth in the longer term.''
(Also see: ADB says India can weather Fed storm)