Weak global demand, geopolitical tensions could hurt the economy: ADB India head

New Delhi: India's economic performance remains robust, but weak demand in advanced economies could hit export growth, while disruptions to oil supplies could raise energy costs and inflation, the Asian Development Bank's (ADB) Country Director for India, Mio Oka said.

Oka said climate factors will also be crucial as the ongoing heatwave and the progress of the monsoon season will significantly impact agriculture and the rural economy.

"Although global inflation has eased, it remains above target in many economies. In India, inflation has gone down due to tighter monetary policy, but food prices, which play a large role in India’s consumer inflation, remain elevated," she said in an email interview.

Monsoons will help

"Favorable monsoon and kharif seasons could help lower food prices, bringing consumer inflation closer to the 4% target and potentially allowing for monetary policy easing," she added.

The recently concluded financial year, FY24, witnessed geopolitical conflicts and tepid growth in advanced economies.

While sluggish growth and lower demand impacted exports, geopolitical tensions have led to volatility in energy prices.

However, amid a global slowdown, India remains the fastest-growing among major economies.

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According to government estimates, India will clock 7.6% GDP growth in FY24 after the economy registered a surprise growth of 8.4% during the December quarter, belying fears of tempering as manufacturing, electricity, and construction put up a robust show. 

Further, India's consumer price index (CPI)-based retail inflation has been easing since December 2023.

During April, retail inflation eased to 4.83% in April, down from 4.85% in March, mainly due to falling fuel prices.

"This growth is driven by strong investment expenditure, bolstered by government capital expenditure and rising private investments," Oka said.

Services sector to keep momentum

"On the supply side, the services sector, especially real estate, financial and business services, is expected to maintain strong momentum," she added.

The ADB, a multilateral development bank focussed on the Asia and Pacific regions, expects Indian GDP to grow 7% in 2024-25.

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"The Indian government has done a commendable job in successfully navigating the economic turbulence, leaving India’s macroeconomic parameters robust," Oka said.

"This solid foundation allows the new government to focus on maintaining macroeconomic stability and fiscal consolidation," she added.

New govt should ease regulation

The new Central government should include capital expenditure, digitization of the economy, and a business-friendly regulatory environment in its priorities while ensuring a reduction on its carbon intensity and enhancing adaptability of its climate goals, she said.

"Policy priorities should include land and labour market reforms, better urban planning and governance, and increased investments in education and health," she added.

Oka said for India to achieve middle-income status, as seen in many East and Southeast Asian economies, it would require increased productivity and structural transformation of the economy.

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"Currently, many Indian workers are in low-productivity sectors like agriculture. The goal should be to transition these workers to formal industries and services while boosting agriculture productivity," she added.

The government has been aiming to propel India to a $30 trillion-dollar economy by 2047.

Meanwhile, ADB has made commitments worth $2.6 billion in 2023 to fund the government's priority agendas like job-creation, infrastructure-building, green growth and economic inclusiveness. It also committed over $1.2 billion in private sector lending and co-lender mobilization for India.

Exciting project pipeline

"Our core focus is on climate change and poverty reduction," Oka said.

"Going forward, we have several exciting projects in our pipeline for 2024 and 2025 focusing on clean energy, e-transport, affordable housing, and MSME financing," she added.

On the recommendations of the G20 Independent Capital Adequacy Framework Panel, Oka said ADB undertook a Capital Adequacy Framework review in September 2023 that could enable its lending capacity by up to $100 billion over 10 years.

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Under the Indian presidency of the G20 in 2023, an expert panel headed by economists N.K. Singh and Lawrence Summers have recommended the need for MDBs to increase their annual spending by $3 trillion by 2030, including $1.8 trillion for additional climate action and $1.2 trillion for achieving other sustainable development goals (SDGs).

"ADB also launched the Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) to augment climate finance," she added.