Hong Kong: 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 by 6.3 percent next year, compared to 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 by 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 economic growth. Industrial output expanded by an unexpectedly slow 3.4 percent in June.
Cheer for Asian markets:
In a cheer for regional stock markets ADB said the developing regions of Asia would likely avoid much of the panic caused in 2013 by the beginning of the Federal Reserve's stimulus tapering when investors moved vast sums of money towards safer havens.
The bank said regional economies had kept policy rates elevated "limiting the risk that a surprise factor will worsen any financial turbulence".
The report added that 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.
The Federal Reserve 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.
Regionally ADB kept its Asia forecasts for 6.2 percent growth in 2014 and 6.5 percent growth the following year.
Targeted easing and a mini fiscal stimulus should keep China -- the region's largest economy -- on track for 7.5 percent growth this year and 7.4 percent in 2015, the bank added.
ADB's main area of concern remains with the "ASEAN-5" economies of Indonesia, Malaysia, the Philippines, Singapore and Thailand.
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 last year.
