World Bank on Thursday lowered growth forecast for India by 1 percentage point from its June forecast to 6.5 per cent for FY23. This is in line with the forecast for entire South Asia which saw a downward revision to 5.8 per cent for 2022, one percentage point lesser than previous estimate.
Still, the Bank has acknowledged various positives for India in Its latest South Asia Economic Focus, titled ‘Coping with Shocks: Migration and the Road to Resilience’. Still, its growth projection is lesser than others. S&P Global Ratings and OECD retained India’s growth forecast for the current fiscal at 7.3 per cent and 6.9 per cent, respectively. ADB cut India’s GDP (Gross Domestic Product) growth forecast by 50 basis points to 7 per cent for FY23, while Fitch slashed India’s growth forecast by 80 basis points to 7 per cent. Ind-Ra expects growth at 6.9 per cent, while SBI Economic Research Division pegs it at 6.8 per cent. The RBI, too, cut its forecast by 20 basis points to 7 per cent.
In its report, World Bank said: “While economic distress is weighing down all South Asian countries, some are coping better than others. Exports and the services sector in India, the region’s largest economy, have recovered more strongly than the world average while its ample foreign reserves served as a buffer to external shocks.”
Further, it said that both manufacturing and services activities have been expanding in India since at least January, and at faster speeds than the rest of the world. The continued improvement in economic activities is in part — thanks to relaxed Covid measures and a pick-up in domestic demand including for contact-intensive services.
In the most recent release of GDP growth, India’s economy is estimated to have expanded by 13.5 per cent (y-o-y) in April-June quarter (2022 Q2), although it contracted compared with the previous quarter. On the production side, the services and construction sectors expanded at the fastest rates. On the demand side, private consumption expanded from a year ago, but mostly due to a low base effect as the economy was suffering from the impact of the Covid Delta wave in the second quarter of 2021.
Talking about forex reserves and currency, the report said India has had relatively small currency pressures, especially against trading partners’ currencies, while its dollar exchange rate fell slightly as the US dollar strengthened. Relatively smooth exchange rate adjustments help reduce the balance of payments tensions, as cheaper domestic goods and more expensive imports help correct trade deficits. But “a drastic depreciation can feed into inflation through imports and raise costs in local currency terms for domestic borrowers trying to make repayment on foreign debt,” it cautioned.
Import bills
Further, it highlighted that in response to Indonesia’s ban on palm oil exports during the first half of the year, India increased imports of edible oils from Malaysia, which softened the blow of the trade restriction. India also increased its share of oil imports from Russia. Historically, India imported 2-4 per cent of the total value of its mineral fuel and oil imports from Russia. The share has risen to over 10 per cent in April-May 2022.
The increase is even larger in shares of total volume, considering that India has been getting discounts on its oil imports from Russia that amounted to $20-30 per barrel initially and fell to $7-8 per barrel more recently. “The ability to shift trading partners affords countries greater flexibility and helps reduce import bills,” the report acknowledged.