The forecasts are subject to risks like another bad monsoon, slow headway on fiscal consolidation and reforms, and continued sluggishness in the global economy, the ADB said in its flagship annual economic publication, Asian Development Outlook (ADO) 2013 released today.

 

The report said reforms are needed in India to facilitate the turnaround from growth deceleration due to structural bottlenecks, deteriorating investment and a worsening current account deficits.

 

“Supply and policy obstacles have seen growth decelerate and investment and industrial output slump, with the stasis compounded by weak global demand,” said ADB Chief Economist Changyong Rhee. “Policymakers need to remove structural hurdles to faster growth, and while there have been some encouraging recent reforms, more is needed.”

 

The report noted that in FY2012, growth decelerated to 5%, its lowest level in a decade, exacerbated by a slump in services, weak consumption, and contracting exports, while the late onset of the monsoon cut agricultural growth in half. Supply bottlenecks affecting key commodities, contentious tax policies, and procedural delays stifled investment, with manufacturing registering one of its weakest periods of expansion in the post-1991 reform era. The current account deficit expanded sharply from the record level it touched the year earlier, reflecting a contraction of exports and moderation in service and remittance receipts.

 

The next two years should see some improvement, ADO 2013 says, with a normal monsoon likely to lift agriculture, and exports, industry and services expected to expand on stronger domestic and external demand. Core inflation pressures are likely to recede, aided by more regular weather conditions and easing global commodity prices, although wholesale prices will remain elevated. Inflation in FY2013 is seen at 7.2%, easing back to 6.8% the following year as government steps to raise diesel prices are completed.

 

Recent reforms, like the creation of the Cabinet Committee on Investment to expedite government clearances for large projects, and cabinet approval of a land acquisition bill, are steps in the right direction, but the report says much more is needed if India is to go back to 8% plus growth. This includes ending delays in environmental clearances, obtaining parliamentary approval of the complex land acquisition bill, and improving infrastructure for fuel deliveries to power plants to end electricity shortages.

 

The report noted that the Central government aims to cut its budget deficit in FY2013 through enhanced revenue collection and reduced subsidies. With the tax structure remaining largely the same, the reduction in deficit would be heavily dependent on a pickup in growth and continued revisions of diesel prices. The rising current account deficit is also a concern, given a deepening dependence on external debt and foreign portfolio inflows to finance the shortfall. Reversing this trend will require removing constraints which are deterring investment and undermining exports and domestic growth, it said.

 

The report said that, in developing Asia as a whole, rising private consumption and stronger intraregional trade will spur a pickup in growth as economic activity in the United States and Europe remains in the doldrums.

 

“The rebound in People’s Republic of China (PRC) and solid momentum in Southeast Asia are lifting the region’s pace after the softer performance of 2012,” said Mr Rhee.

 

“Domestic spending, in particular consumption, is the main driver of the recovery, and is a welcome shift from the reliance on the markets of advanced economies.”

 

The report forecast GDP growth in developing Asia of 6.6% in 2013 and 6.7% in 2014. In 2012, the region grew 6.1%.

 

The report warns that political risks linked to wrangling over the US debt ceiling, fatigue over tough austerity measures in the eurozone, and long simmering tensions over border disputes in Asia present the main threats to the near term outlook. It notes that the region’s favorable fiscal position cannot be taken for granted, with improved revenue efficiency, better governance, and other longer-term structural issues needing to be addressed.

 

The report projects stronger economic activity to spur renewed price pressures, with inflation seen moving up from 3.7% in 2012 to 4.0% in 2013 and 4.2% in 2014. These pressures remain manageable for now, but will need to be monitored closely, especially as strong capital inflows raise the spectre of potential asset market bubbles.

 

Across the subregions, East Asia will set the pace with the highest projected growth of 7.1% in 2013 and the same in 2014. China—the world’s second largest economy—is forecast to expand 8.2% in 2013 on the back of rising domestic demand and improved exports, with spillover benefits for neighboring economies. Growth will edge back slightly to 8.0% in 2014 as the government moves to cool pressure on the environment and to address income inequality, it said.

 

According to it, South Asia will see a turnaround after two years of economic softening, with growth estimated at 5.7% in 2013 and 6.2% in 2014. 

 

"India will lead the upturn, with projected growth of 6.0% and 6.5%, but the world’s second most populous country is still struggling to realize its full potential, with structural and policy issues inhibiting investment.

 

Southeast Asia was the only subregion to see growth accelerate year-on-year in 2012, led by a recovery in Thailand and strong public spending in the Philippines. This buoyancy is set to continue on the back of robust consumption, rising investment and increased intraregional trade, with GDP growth projected at 5.4% in 2013 and 5.7% in 2014. The impending startup of the ASEAN Economic Community in 2015 will enlarge trade volumes within this bloc of dynamic economies, helping to diversify export markets, the report says.

 

Higher public spending, particularly in Kazakhstan and Azerbaijan, will boost Central Asia, with projected growth of 5.5% in 2013 and 6.0% in 2014. The completion of some major public construction projects, including a large liquefied natural gas pipeline in Papua New Guinea (PNG), will see growth in the Pacific cool slightly to 5.2% in 2013. Growth in the Pacific is expected to bounce back to 5.5% in 2014 as exports commence from the PNG pipeline and elsewhere in the subregion new public construction activity gets under way, including post-cyclone reconstruction work. A promising pickup in tourist numbers should also benefit some smaller Pacific economies.

 

The report said Asia is moving along a dangerously unsustainable energy path that will result in environmental disaster and a gaping divide in energy access between rich and poor unless the region dramatically changes course.

 

“Asia could be consuming more than half the world’s energy supply by 2035, and without radical changes carbon dioxide emissions will double,” said Mr Rhee. “Asia must both contain rising demand and explore cleaner energy options, which will require creativity and resolve, with policymakers having to grapple with politically difficult issues like fuel subsidies and regional energy market integration.”

 

Asia’s Energy Challenge, the special theme chapter in ADO 2013, highlights the complex balancing act the region faces to deliver energy to all its citizens while scaling back its reliance on fossil fuels.

 

If by 2035 Asia merely expands energy access without fundamentally changing the way it consumes, the report predicts the region’s oil consumption will double, natural gas consumption will triple, and coal consumption will rise a whopping 81%, with costly and devastating environmental impact, it said.

 

The report said Asia’s limited indigenous energy resources present an additional challenge. With only 9% of proven global oil reserves, the region is currently on track to almost triple oil imports by 2035, rendering it significantly more vulnerable to external supply shocks.

 

In Asia, 1.8 billion people still rely on wood and other traditional fuel as their primary energy source. Since modern energy access is essential for their social and economic advancement, Asia must find the political will and innovation to scrap outdated policies and recalibrate its energy mix. For one, policymakers will need to replace general fuel subsidies that artificially lower the cost of power and impose huge fiscal burdens with targeted subsidies for the poor. The report suggests eliminating wasteful subsidies worldwide would also lower CO2 emissions by 2.6 billion tons in 2035.

 

Carefully designed support for renewable energy technologies must be stepped up. Next generation wind, solar and biofuel technologies, which are expected to be more cost competitive than current options and do not compete with food crops, offer potential solutions, it said.

 

According to it, Asia has great potential in shale gas, with China having the world’s largest endowment. But technical uncertainties such as leakage and water contamination must be addressed. The Fukushima disaster powerfully underscored the risks of nuclear power, but a phase out would see a sharp spike in fossil fuel use. A far greater focus on green, energy efficient cities and transport systems, along with scaled up research into clean energy, are equally critical, it said.

 

The report said countries cannot meet all their power requirements on their own, so Asia must accelerate cross-border interconnection of power and gas grids to improve efficiency, cut costs, and take advantage of surplus power. With increased cooperation, a pan-Asia energy market is achievable by 2030, tt said.

 

"Ensuring the poor are not left out will require policies to secure an adequate energy floor for low income earners, and the development of effective off-grid power supply options for remote communities. Narrowing the energy divide between richer and poorer countries requires targeted international aid to build power infrastructure which benefits the less well off," it added.

 

 

 

 

 

 

NetIndian