Asia Economy

India's economic growth could rebound to above 7% next year, ADB says

Key Points
  • The Asian Development Bank said in a report on Wednesday that India is expected to grow by 6.5% in the current fiscal year and 7.2% in the next year.
  • India, Asia's third-largest economy, grew at a six-year low pace of 5% year-over-year in the April-to-June quarter.
  • But government measures such as the recent corporate tax cuts could help to stem the slowdown in the Indian economy, said Yasuyuki Sawada, ADB's chief economist.
The largest national flag at Rajiv Chowk on March 7, 2014 in New Delhi, India.
Ramesh Pathania | Hindustan Times | Getty Images

India's economic growth may be slowing down, but the country could stage a turnaround to expand by more than 7% next year, according to the latest forecasts by the Asian Development Bank.

In the April-to-June quarter, Asia's third-largest economy grew 5% year-over-year — a six-year low pace. That prompted several economists to warn that the country's growth rate could fall below 6% this year.

ADB also downgraded its growth projections for India. In a report released Wednesday, the Manila-based development bank said India is expected to grow by 6.5% in the current fiscal year — down from its previous forecast of 7.2%. For the next fiscal year, that growth rate could rebound to 7.2%, slightly lower than the earlier forecast of 7.3%, said ADB.

"This year's downward revision seems to be mainly driven by overall broader slowing down of domestic consumption, investments, manufacturing production and service sector production," Yasuyuki Sawada, ADB's chief economist, told CNBC's "Street Signs Asia."

Recent tax cut in India won't fuel a huge rally: OCBC
Recent tax cut in India won't fuel a huge rally: OCBC

But several government measures, such as the recent corporate tax cuts, could help stem the slowdown in the Indian economy, Sawada added.

"These policy measures (would) really play a key role in bouncing back the India economy next year," said the economist.

Economic headwinds remain

The cut in Indian corporate taxes announced last week sent the country's stock market surging.

At a time when manufacturers based in China are said to be looking for alternative locations to circumvent tariffs due to the trade war, India's tax cuts could make it more attractive to those companies, said Samir Arora, founder and fund manager at Helios Capital Management.

There have been reports about India targeting the likes of Apple, Foxconn and Wistron as the country tried to reap some benefits from the U.S.-China trade war.

The tax cuts could help India to clinch a deal with tech giant Apple, which "will send a strong to signal" to other companies that the country is a viable alternative location for manufacturing, Arora explained.

Still, some analysts have questioned whether the tax cuts could boost growth enough to offset the loss in tax revenue. HSBC economists estimated that the move would increase India's fiscal deficit to 3.7% of its gross domestic product, higher than the government's target of 3.3%.