The Asian Development Bank in its outlook 2009 stated that India's economic growth would slow down to 5% in 2009 from 7.1% in 2008. The Bank further said that the country's economy would grow solidly next year following a recovery in global economy along with lower local interest rates that encourage private investment and manufacturing activities.
The ADB outlook projects India's GDP at 6.5% in 2010 following stimulus packages announced by the government between December 2008 and February 2009. It forecasts lower inflation rates in the current year and coming years in view of strong agricultural output, lower taxes on goods and declining domestic demand. It projects inflation at 3.5% in the current year. The inflation forecast for the coming year is 4%, when domestic markets recover and prices of international commodities rise.
The Bank cautioned of serious risks and challenges in the coming days. The impact of the extended recession in major industrial economies, beyond the second quarter of fiscal year 2010, could slow down India's recovery. It warned of a trade off between short-term stimulus and long-run sustainability and stressed the need to bring down deficit in medium-term to a manageable level.
ADB Acting Chief Economist Jong-Wha Lee said that expansionary fiscal policies would weaken investor confidence unless it is clarified that the current large deficits are temporary. It said that the government's budget deficit is estimated at 6% of GDP in 2008 from the targeted 2.5% deficit. However, taking into account the state government's off -budget item and deficits, it would raise the total deficit to 10% of GDP.
The ADB outlook report suggested a review of tax policy, the quality of public spending and the effectiveness of public programs by the government to ensure that it has room for infrastructure and social sector spending that is required to achieve speedy, longer-term inclusive growth.
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