Asian Development Bank (ADB) Revises Growth Downward Of India And China

The Asian Development Bank (ADB) yesterday revised the growth forecast downward for two of the major emerging market economies, India and China. Growth was revised downwards for India on the back of delayed monsoon and weak investment climate while in case of China the growth was lowered given the bleak global demand and the uncertain outlook for the country’s largest trading partners.

The move in case of India came in despite the government recently taking quick steps against the pending reforms. The markets have welcomed the government’s move with a sharp rise of around 8 per cent in less than a month. However, one should note that the broader markets are the leading indicators and hence they discount the future expectations. One should note that the government’s allowance of FDI in some of the sectors will take some time to actually get implemented and one should not ignore the near term risk constraints which the economy is facing. The following are some of the key points taken out from yesterday’s release of the ADB:

India

•  Falling global demand and a delayed monsoon curtailing agricultural growth have exacerbated India’s recent economic slowdown, and have led to reduced growth forecasts by the Asian Development Bank (ADB) for fiscal years 2012 and 2013.

•  India’s gross domestic product is expected to grow by 5.6 per cent in FY2012 and 6.7 per cent in FY2013, a significant drop from ADB’s earlier projections of 7.0 per cent and 7.5 per cent respectively.

•  The report raises projected inflation to 8.2 per cent in FY2012 (from 7.0 per cent) on the back of higher domestic food and fuel prices. Inflation is then expected to trend downwards to 7.0 per cent in FY2013.

•  Industrial output is expected to remain subdued in FY2012, with only a modest improvement in FY2013, while weak demand from industrialized countries continues to take its toll on exports.

•  The slowdown in new infrastructure projects and the shelving of some approved projects points to continued weakness in investment.

China

•   The growth forecast is revised to 7.7 per cent from the 8.5 per cent projected in April for FY2012. While for 2013 forecast is also ratcheted down to 8.1 per cent from 8.7 per cent.

•  Subdued exports, weaker investment, softer consumption and a slump in industrial output dragged heavily on the economy in the first half of 2012, with GDP growth easing to 7.8 per cent from 9.6 per cent over the same period a year earlier.

•  Export and import growth is expected to remain subdued, however, with external trade expanding 8 per cent in 2012  and 10 per cent in 2013.

We at Dalal Street Investment Journal have kept on saying from the past that inflationary pressure would continue to hover above the economy. And with inflation on a high end, we would expect the Reserve Bank of India to continue to maintain status quo in its next monetary meet. Currently there is euphoria on D-Street in the wake of the government giving a nod to big bang reforms but one should not ignore other key parameters like inflation, interest rate and twin deficit (current and fiscal deficit) which continue to be on the higher side for the economy. However the sentiments are upbeat in the markets and hence the leading equity Indices are expected to remain positive.