World Bank revises upwards India's GDP growth forecast to 6.9% for FY23

The World Bank on Tuesday revised upwards its GDP growth forecast for India to 6.9 per cent for 2022-23, saying the economy was showing higher resilience to global shocks.

In its India Development Update, the World Bank said the revision was due to higher resilience of the Indian economy to global shocks and better-than-expected second quarter numbers.

India's economy grew at 6.3 per cent in September quarter 2022-23 as compared to 13.5 per cent in the preceding June quarter, mainly on account of contraction in output of manufacturing and mining sectors.

This is the first upgrade of India's growth forecast by any international agency amid the global turmoil.

In October, the World Bank had cut India's GDP growth forecast to 6.5 per cent from 7.5 per cent earlier. Now, it has upgraded the projection to 6.9 per cent for 2022-23 (April 2022 -March 2023).

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The report titled 'Navigating the Storm', said while the deteriorating external environment will weigh on India’s growth prospects, the economy is relatively well positioned to weather global spillovers compared to most other emerging markets.

Impact of a tightening global monetary policy cycle, slowing global growth and elevated commodity prices will mean that the Indian economy will experience lower growth in 2022-23 compared to 2021-22 (8.7 per cent), it said.

Despite these challenges, it said, the update expects India to register a strong GDP growth and remain one of the fastest growing major economies in the world, due to a robust domestic demand.

"The World Bank has revised its 2022-23 GDP forecast upward to 6.9 per cent from 6.5 per cent (in October 2022), considering a strong outturn in India in second quarter (July-September) of 2022-23 financial year," the India Development Update said.

"India’s economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies," World Bank's Country Director in India Auguste Tano Kouame told reporters here.

However, he said, continued vigilance is required as adverse global developments persist.

The report projected that the Indian economy will grow at slightly lower rate of 6.6 per cent in 2023-24.

"A challenging external environment will affect India’s economic outlook through different channels...rapid monetary policy tightening in advanced economies has already resulted in large portfolio outflows and depreciation of the Indian rupee while high global commodity prices have led to a widening of the current account deficit," it said.

Economy insulated

The report said India’s economy is relatively insulated from global spillovers compared to other emerging markets because India has a large domestic market and is relatively less exposed to international trade flows.

The country however remains affected by spillovers from the US, Euro area and China.

The report finds that while 1 percentage point decline in growth in the US is associated with a 0.4 percentage point fall in India’s growth, the effect is around 1.5 times larger for other emerging economies, it said, adding, analysis for growth spillovers from the European Union (EU) and China also yields similar results.

Improved FDI inflows

India’s external position has also improved considerably over the past decade and the current account deficit is adequately financed by improving foreign direct investment inflows and a solid cushion of foreign exchange reserves.

It may be noted that India has one of the largest holdings of international reserves in the world.

Reforms

With regard to reforms, the report said, prudent regulatory measures have also played a key role in developing resilience in the economy.

Increased reliance on market borrowings has improved the transparency and credibility of fiscal policy and the government has diversified the investor base for government securities, it said.

The introduction of a formal inflation targeting framework during the past decade was an important step in lending credibility to monetary policy decisions, it said.

"While there are still some challenges in the financial sector, the adoption of several regulatory and policy measures—including introduction of a new Insolvency and Bankruptcy Code and creation of the new National Reconstruction Company Limited—facilitated an improvement in financial sector metrics over the past five years," it said.

The report noted that these policy interventions are also expected to help alleviate pressures related to non-performing loans.

The World Bank saw the government meeting the fiscal deficit target of 6.4 per cent of the GDP in 2022-23.

“A well-crafted and prudent policy response to global spillovers is helping India navigate global and domestic challenges,” said Dhruv Sharma, Senior Economist, World Bank, and lead author of the report.

Inflation

On inflation, the report said, both levers of macroeconomic policy – fiscal and monetary – have played a role in managing the challenges that have emerged over the past year.

The report noted that the RBI withdrew accommodative monetary policy settings in a measured approach as it balanced the need to rein in inflation while continuing to support economic growth.

It expected inflation at 7.1 per cent in current fiscal year and its moderation to 5.2 per cent in 2023-24.

Fiscal policy supported the central bank’s rate actions by cutting excise duty and other taxes on fuel to moderate the impact of higher global oil prices on inflation, it said.

However, the report cautioned that there is a trade-off between trying to limit the adverse impact of global spillovers on India’s growth and available policy space.