New Delhi: Owing to increased public spending and improved business confidence, the Asian Development Bank (ADB) has hiked its growth forecast for India from five per cent to six per cent this fiscal.
The update to ADB's Asian Development Outlook (ADO) 2009 report released on Tuesday said that India will grow at seven per cent in 2010, a revision from its earlier forecast of 6.5 per cent.
"Normal rainfall in fiscal 2010, a pick-up in exports (as the recession ends in industrial economies), and strengthened investor confidence is now projected to lift GDP growth to seven per cent in fiscal 2010," the report said.
"GDP growth in the second and third quarters is expected to fall below the 6.1 per cent first-quarter expansion because of weak agriculture, but to recover sufficiently in the fourth to post a six per cent annual expansion."
According to ADB, "an increase in public spending, a quicker than expected return of capital inflows, stronger industrial production, and signs of improved business confidence will lift economic growth to six per cent in India this year, up from an earlier estimate of five per cent".
The report noted that the growth for 2009 would continue to be driven by Government expenditure, with the combination of counter-cyclical fiscal policies and renewed investor confidence expected to sustain an expansion in private consumption and investment.
The impact of difficult weather conditions on rural incomes and consumption would be partly offset by budgetary programmes to aid households in the countryside and possible supplementary support, it added.
"The Government's strong fiscal stimulus, complementing the Reserve Bank of India's (RBI's) aggressive monetary policy easing, has successfully brought last year's economic slowdown to an end," said ADB Chief Economist Jong-Wha Lee.
On the downside risk, the report said the Government's stimulus programme would likely lead to financial crowding of private investment in 2010, and underscored the need for fiscal adjustments.
"The positive response to monetary policy adjustments and fiscal stimulus as well as a quicker than expected return of capital inflows have provided a lift to the domestic economic environment."
Another potential threat was that domestic food price inflation could create a dilemma for monetary management in 2009 as the RBI seeks to keep inflation expectations in check, but not to choke off recovery.
ADB also said bad weather conditions were likely to put upward pressure on food prices in the coming months, although late monsoonal rains appeared to be filling water reservoirs to an adequate level to ensure a reasonable winter crop harvest which provides some relief.
"High food prices have a heavy effect on the poor and the Government stands ready to cushion the impact by using its large food grain stocks and by importing essential commodities," it said.