Indian growth moderated in the first quarter of fiscal year (FY) 2017 due to lingering effects from demonetization and transitory challenges related to the new goods and services tax (GST) regime. Weakness in private consumption, manufacturing output, and business investment has resulted in lowering the short-term growth outlook for the country for FY2017 and FY2018, says a new Asian Development Bank (ADB) report.

In an update to its flagship annual economic publication, Asian Development Outlook (ADO) 2017, ADB forecasts growth to reach 7% for FY2017, a 0.4 percentage point decline from the April estimates, while the outlook for FY2018 is now at 7.4% from the previous 7.6% projection. India’s fiscal year ends in March.

''India's ambitious reform agenda will lead to higher long-run growth for its economy,'' said Yasuyuki Sawada, ADB Chief Economist. ''Despite the short-term hiccups as firms adapt to the national GST, we believe that continued reform progress will help India remain one of the world’s most dynamic emerging economies.''

Growth in the first quarter of FY2017 slowed down to 5.7%, as growth in private consumption and industry declined compared to previous quarters. Fixed capital formation grew by a sluggish 1.6%, indicating a sharp slowdown in private investment. Government consumption and services, however, continued to buoy economic activity.

Moving forward, the Update notes that forecasts for the rest of FY2017 will be more bullish as private consumption is expected to pick up on the back of low inflation and anticipated wage hikes. Manufacturing is also likely to bounce back as the sector adjusts to the new tax regime, while services will remain robust as trade and transport services revive with the easing of cash constraints. Investment growth, however, is likely to remain muted in FY2017 as budgetary constraints limit government expenditure. Growth will further pickup in FY2018 as the new tax regime improves domestic competitiveness and government efforts to improve the health of the banking sector aid private investment yield results.

Inflation, on the other hand, is expected to average 4% in FY2017 and 4.6% in FY2018, significantly lower than the previous estimates of 5.2% and 5.4%, respectively.

The report underlines the commitment by Indian policymakers to meet the fiscal deficit target in FY2017, despite the presence of some risks in the form of lower nontax revenue and a slow start to the disinvestment of public sector enterprises. Tax collections are likely to pick up as firms adjust to the new tax regime.

Strong global growth and an improved business climate will help India's exports grow at a faster pace in FY2017 and FY2018. Efforts to improve domestic demand will also spur import growth as private investment picks up, thereby widening the current account deficit compared to the past couple of years. Government efforts to liberalize foreign ownership caps across sectors and to foster a friendly investment climate will help attract stable foreign direct investment flows and comfortably finance the current account deficit.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB is celebrating 50 years of development partnership in the region. It is owned by 67 members-48 from the region. In 2016, ADB assistance totaled USD 31.7 billion, including USD 14 billion in cofinancing.