Asian Development Bank has said that India's fiscal deficit targets are unlikely to be met this year due to large government spending and slow pace of domestic fuel price adjustment.
"Fiscal indicators show government spending considerably above planned levels in the first few months of fiscal year 2006, implying that meeting the legally mandated fiscal deficit target of 3.8 per cent of GDP will be difficult," ADB said in its Asian Development Outlook (ADO) 2006 Update.
With rapid industrial growth putting increasing pressure on inadequate physical infrastructure, and private investments in general infrastructure taking time to materialise, ADB said privately managed special economic zones can help soothe the infrastructure deficit.
The Manila-based multilateral agency also noted the importance of informed debate on the fiscal inducements required by Special Economic Zones.
The ADB report said the slow pace of domestic fuel price adjustment is a cause for concern as it is resulting in losses to the state-owned oil-marketing companies on the order of 2 per cent of GDP and rising.
These short-falls imply substantial fiscal and quasi-fiscal pressures at a time when fiscal resources are stretched to the maximum.
"Price hikes are inevitable, and delays fuel inflationary expectations and uncertainty," it warned.
ADB has forecasted the economy to grow 7.8 per cent in 2006-07, which is a slight upward revision from 7.6 per cent anticipated in April.
The economy is also likely to grow by 7.8 per cent in 2007-08, ADB said, adding the forecasts assume normal monsoons and continuing delays in the pass-through of high international oil prices to consumers.
"We are witnessing a steadily-accelerating industrial expansion. Growth in manufacturing and in capital goods production has been robust, driving the economy forward," ADB chief economist Ifzal Ali said.
While the service sector is growing sharply, the rapid expansion in manufacturing and manufactured exports is a welcome sign of a more diversified growth path, he said.
Recent industrial results build on three years of acceleration and confirm that on the strength of India's growing role in the international industrial supply chain and expanding domestic demand, the economy is shifting from a services-led model to a more balanced, services- and industry-led growth trajectory.
Assuming the advance of global oil prices slows over the coming months, ADO Update forecasts current account deficits of 2.1 per cent of GDP in 2006-07 and 1.9 per cent in 2007-08. Rising food prices are adding further inflationary pressure and ADO Update attributes the price increases to the release of pent-up demand by agro-processors and other adjustments to newly liberalised commodities sector, and to poor harvests prior to 2005-06.
Meanwhile, robust demand for bank credit is driving up interest rates and complicating attempts to control money supply growth and inflation.
Delays in fuel price adjustments counteract these added inflationary pressures, according to ADO Update. Inflation is forecast at 5.5 per cent in 2006-07 and 5 per cent in 2007-08.
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