The Asian Development Bank (ADB) today praised Prime Minister Narendra Modi for his efforts to roll out the Goods and Services Tax (GST) that will integrate indirect taxes in the country.
However, the ADB said that Indian markets need to become more "deregulated" and FDI friendly to realise the true potential.
Ahead of its 50th annual meeting to be attended by the finance ministers and central bank governors of the member nations, ADB President Takehiko Nakao said unlike China, India is yet to reach its full potential.
ADB has forecast India's economic growth rate at 7.4 per cent in the current fiscal year, up from 7.1 per cent in the previous year, and pegged 7.6 per cent for the next fiscal.
"India has very strong potential but its markets should be more integrated. The power of state governments must be balanced with the Central government's power," he told reporters here.
Without explaining what he meant by the integrated market, Nakao said, "An integrated Indian market, which is more deregulated and more welcoming to foreign direct investments, should be linked to other parts of Asia and the world."
Market integration, by definition, occurs when prices among different locations or related goods follow similar patterns over a long period of time.
He said the emerging orientation in developed nations like the US for protectionism on trade is not affecting Asian growth and certainly has not been a factor in deciding India's growth projections.
"ADB's forecast on India doesn't include that kind of an element and the growth rate is forecast at 7.4 per cent (this year) and 7.6 per cent next year," he said.
The ADB president said there was an impact of the Indian government's demonetisation decision, which took 86 per cent of currency out from circulation. "But that is now stable," he added.
"Prime Minister Modi's effort of integrating tax system by the GST (Goods and Services Tax) is being implemented. So, the reform impetus is gathering more momentum," he added.
On protectionism, he said one of the reasons Asian economies have been growing is that they have enjoyed from open free trade system and Asian countries have made efforts shifting from more interventionist to enterprise focused.
"Of course, a free trade is important basis for growth... protectionist is staring hard on Asia," he said.
The impact of new agreements like the Trans-Pacific Partnership (TPP) and the UK exiting the European Union will have to be watched out for, he said.
"I think there are many efforts also to make trade system more open including the RCEP," Nakao said.
Also, there are efforts to strike bilateral deals, which he said, were not a "major threat."
"My short answer at this moment is, I don't think protectionism is affecting our growth projections although we must make efforts to keep up the momentum of further opening of trade," the ADB president said.
(With PTI inputs)
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