The World Bank on Thursday substantially scaled down its FY23 growth projection for India to just 6.5% from 7.5% predicted in June, presenting the gloomiest forecast for the country by any major agency, as it warned of “deteriorating external environment”.
For FY24, it has trimmed the growth forecast by 10 basis points to 6.5%.
“Amid slowing global growth, (India’s) export growth will moderate while import growth will be driven by recovering domestic demand,” the bank said in its latest South Asia Economic Focus report. Nevertheless, India will still remain the world’s fastest-growing major economy. The multilateral body has also acknowledged India’s relatively strong macroeconomic fundamentals.
With this, the bank joins a number of agencies that have revised down their India forecasts after the June quarter GDP data were out. Fitch recently cut its FY23 forecast for the country to 7% from 7.8%. Moody’s trimmed its projection to 7.7% for CY22 from 8.8%. Goldman Sachs cut its 2022 growth forecast for India to 7% from 7.6%; for the fiscal year (FY23) as well, the projection is now pegged at 7%, against 7.2% earlier.
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Citigroup has slashed its FY23 growth projection to 6.7% from 8%. The Reserve Bank of India (RBI) this month cut its forecast for this fiscal to 7% from 7.2%. The International Monetary Fund, too, is expected to revised down its FY23 projections for India from 7.4% later this month, amid wide expectations that it will sharply lower its forecasts for advanced nations.
Although Unctad recently slashed its India forecast to just 5.7%, it was for CY22.
In its latest report, the bank said, India’s private investment will be dampened by heightened global uncertainty, elevated input prices and rising borrowing costs. Growth in private consumption, the principal pillar of the economy, will be undermined by high inflation and persisting weakness in parts of the country’s labour market, it said.
Retail inflation, the multilateral body forecast, will gradually ease, averaging 7.1% in FY23 and likely to revert to the RBI’s tolerance range (2-6%) by the end of the current fiscal.
“The expected headwinds brought by lower growth and higher inflation are likely to lead to slow income growth. Hence, poverty and vulnerability are unlikely to recede to pre-pandemic levels and preserving some of the social protection measures adopted during the pandemic may be warranted,” the bank said.
While trimming the economic growth forecast, the multilateral body has factored in the benign impact of the improved balance sheets of banks and the corporate sector, increased capacity utilisation in manufacturing and the rollout of the production-linked incentive schemes.
Favourable base effect and gradual moderation in input costs will help the country rein in food inflation, while moderating global oil prices will keep a lid on price pressure in fuel.
The bank expects gradual monetary policy normalisation to continue (the RBI will continue to raise the rates). Even with the declining fiscal deficit, slower growth will keep the public debt at an elevated level of over 83% of GDP in FY23 and FY24.
Nevertheless, it has taken due cognisance of India’s relatively robust macroeconomic fundamentals. Although rising merchandise trade deficit will more than double the current account deficit to 3.2% of GDP in FY23 from a year before, stable portfolio capital inflows, buoyant FDI and high foreign exchange reserves provide buffers against the external financing risks.
It also stated that gradual fiscal consolidation in India will be led by strong revenue growth and continued decline in current spending as a share of GDP.