ADB says growth will slow down to 8% next fiscal

MARCH 27, 2007: The Asian Development Bank (ADB), a member of the World Bank Group, has projected that India's GDP growth for the next fiscal year will moderate to 8 per cent and pick up to 8.3 per cent in 2008 despite easing inflation during this year.

Its annual report says restraint on demand growth from home buyers, manufacturing investors and consumers will be accompanied by fiscal discipline, as a result of which domestic demand growth will be limited overall. It also says that a modest rupee appreciation will contain export growth but import growth will remain moderate as well, due to the easing rise in demand.

"These forces are expected to moderate growth rates, bringing aggregate growth down to 8 per cent in FY2007"; Rising interest rates in the coming fiscal would have subtle and wide-ranging consequences, mediated, most importantly, through property development, the bank says. "As liquidity becomes scarce, banks are beginning to re-examine lending practices, which will lead to scaled back lending for construction and housing loans to allow them to deal with the emerging maturity mismatch."

It points out that "construction has already decelerated significantly in FY 2006" and "consumer credit should also come under pressure as banks reallocate loanable funds". According to the ADB, this loss of construction momentum is likely to persist through early next fiscal, with knock-on effects for other components of demand.

"Spending on consumer durables, which has benefited from the construction and sale of new homes, will continue to slow in FY2007,"the outlook report says.

Added to this, interest rate increases would also induce consumers to delay consumption, which would result in further reducing consumer durable's demand.

While manufacturing investment will be slightly restrained as falling demand for durables and new homes eases pressure to add industrial capacity, the report says that "rising costs of borrowing will also have a direct effect on manufacturing investment, despite good corporate earnings in the current year".

Despite a firm monetary position, "the present momentum in the economy should ensure a soft landing".

The report estimates that with demand back in control, interest rates are likely to stabilise and turn down slightly by 2008. Banking on an interim relief on account of the Pay Commission, which is expected to buoy consumer spending, growth should return to around 8.3 per cent.

In its outlook for 2008-09, the report says that while construction on some lands has been put on hold, it is likely to restart as the cost of funds becomes more conducive to long-term investments.

Source: The Indian Express