Asian Development Bank (ADB) on Wednesday cut India’s economic growth rate, measured in terms of changes in GDP (Gross Domestic Product), by 50 basis points (bps; 100 basis points equal 1 percentage point) to 6.5 per cent. This is lower than the RBI’s projection of 6.6 per cent and at the lowest end of the government’s projection band of 6.5-7 per cent.

In the latest global economic growth outlook report (ADO), the ADB said that India’s growth outlook has been revised downward to 6.5 per cent from 7 per cent for this year, and to 7 per cent from 7.2 per cent for the next year (2025-26), due to lower-than-expected growth in private investment and housing demand. “The downward revision of the forecast for fiscal year 2024-25 reflects a deceleration of growth in Q2 (July-September) FY2024-25 to 5.4 per cent from 8.2 per cent in Q2 FY2023-24,” the agency said.

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Further, it said that growth in the second quarter slowed more than expected, due to weak industrial output, as tighter prudential norms by the central bank curtailed growth in unsecured personal loans, along with muted public capital spending and elevated food prices. Industrial growth was lower than expected at 3.6 per cent, while growth in the agriculture and services sectors remained strong at 3.5 per cent and 7.1 per cent, respectively.

Industrial demand, on the other hand, is affected by tighter prudential norms from the central bank for unsecured personal loans and continued elevated food prices. Government capital expenditure for FY2024 also continues to lag behind the budget target, a risk highlighted in an earlier edition of the ADO.

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Regardless, “India’s growth will remain robust, with the economy supported by higher agriculture output resulting from the summer (or kharif) crop season (which will also put downward pressure on food prices), continued resilience of the services sector, and lower-than-expected Brent crude prices in 2024 and 2025,” the report said.

Strong forward-looking and labour market indicators (such as PMI for industry and services, urban labour force participation, and the Reserve Bank of India’s industrial outlook) suggest that economic momentum will recover in the coming quarters. The forecast for FY2025 has been reduced slightly due to lower-than-expected growth in private investment and housing demand, resulting from tight monetary policy aimed at combating inflation.

“Downside risks remain from geopolitical threats to supply chains and adverse weather conditions,” the report concluded.