(EnergyAsia, April 10 2013, Wednesday) — India must implement reforms to counter the country’s structural bottlenecks, declining investment inflows and worsening current account deficit to restore the economy to high growth, said the Asian Development Bank (ADB).

In its flagship annual Asian Development Outlook 2013 (ADO 2013) report, the bank projects India’s GDP to grow by 6% in the current fiscal year to March 31 2014 and by 6.5% the following year FY 2014 on the back of stronger external demand and progress on reforms. The forecasts are subject to risks like another bad monsoon, slow headway on fiscal consolidation and reforms, and continued sluggishness in the global economy.

“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.”

In FY2012, ADB said India’s economy grew by 5%, its lowest level in a decade, as a result of a slump in services, weak consumption and contracting exports, while the late arrival of monsoon rain slashed agricultural growth by 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.

India’s 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 said, 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 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, said the ADB.