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Modi election points to India economy 'turnaround': ADB
by Staff Writers
Hong Kong (AFP) Sept 25, 2014

India's economy shows promise of a "turnaround" following Narendra Modi's election, while Asian markets will likely ride out the effects of further stimulus tapering by the United States, the Asian Development Bank said Thursday.

The Manila-based lender was bullish on India's future in a supplement to its 2014 economic outlook for the region saying it expected gross domestic product (GDP) to grow 6.3 percent next year, up from an earlier projection of six percent.

"After winning a decisive parliamentary victory, the new (Modi) government is better positioned than the old to pursue the reform necessary to unlock the economy's growth potential," the bank said in its summary.

"Reform to stimulate investment, the timely award of environmental clearances, and measures to control inflation are expected to augment firming exports demand from major industrial economies to boost economic growth," it added.

Prime Minister Modi swept to power in May on a pro-business platform that generated a tide of hope after years of political stagnation and slowing economic growth.

India's economy expanded 5.7 percent in the first quarter of the financial year, the best quarterly performance in more than two years.

And a sharp narrowing of its current account deficit -- the broadest measure of trade -- also boosted investor sentiment.

But despite winning the biggest mandate in 30 years, Modi's right-wing government has not yet introduced big-ticket reforms that are needed to kickstart growth. Industrial output expanded an unexpectedly slow 3.4 percent in June.

"One of the major threats is that many reforms that those countries are banking on to keep the growth momentum may not be carried out on schedule," ADB chief economist Wei Shang-Jin said, mentioning India.

- Fed rate rise pain likely limited -

The ADB kept in place its growth forecasts for Asia at 6.2 percent this year and 6.5 percent growth in 2015.

"Developing Asia's growth is expected to be...the fastest growing region in the world for this year and for next year," Wei told reporters at Hong Kong's Foreign Correspondents' Club on Thursday.

In a cheer for regional stock markets the Bank said the developing regions of Asia would likely avoid much of the panic caused in 2013, when the Fed raised the prospect of a taper to its stimulus. The announcement led investors to move vast sums of money out of emerging markets and towards safer havens.

But the bank said Asian markets have not seen large inflows of short-term capital since the last panic "which reduces the risk of large outflows" in the event of further tapering.

It added that regional economies had kept policy rates elevated "limiting the risk that a surprise factor will worsen any financial turbulence".

"US monetary policy, if on schedule, is unlikely to generate major disturbances in Asia," Wei said.

The Fed is sticking to its slow-but-steady plans to tighten monetary policy, deciding last week that the US economy would still need "unconventional" support well into next year.

Dovish Fed chair Janet Yellen left in place expectations for an initial rise in the federal funds rate only in mid-2015.

Investors are wary of a rate increase hurting Asian equities and currencies by making them vulnerable to a sell-off, as the incentive for investors to seek higher yields in regional markets is reduced.

Targeted easing and a mini-fiscal stimulus should keep China -- the region's biggest economy and a key driver of global growth -- on track for 7.5 percent expansion this year and 7.4 percent in 2015, the bank added.

The ADB's main area of concern remains with the "ASEAN-5" economies of Indonesia, Malaysia, the Philippines, Singapore and Thailand.

"Thailand is the weakest among the five," Wei said, adding that other "ASEAN-5" nations are doing better.

Ongoing political instability in Thailand, a government spending slowdown in the Philippines, weaker commodity export prices in Indonesia and soft domestic demand in Vietnam meant the bank downgraded 2014's expected GDP forecast to 4.8 percent, from 5.2 percent previously.


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