World Bank slashes India’s economic growth forecast to 6.5% for FY23

The World Bank on Thursday slashed its growth estimate for India by one percentage point to 6.5 per cent for FY23, citing the blowback of the Russia-Ukraine war and ongoing global monetary policy tightening.

This is the lowest growth estimate by any multilateral agency for FY23. The International Monetary Fund, which projected India’s economy to grow at 7.4 per cent, is expected to revise its estimate next week.

In its latest South Asia Economic Update, the multilateral lending agency said economic growth in India would slow in FY23 because the country was coming off a strong recovery in FY22.

“The spillovers from the Russia-Ukraine war and global monetary policy tightening will continue to weigh on India’s economic outlook: elevated inflation on the back of higher prices of key commodities and rising borrowing costs will affect domestic demand, particularly private consumption in FY2023/24, while slowing global growth will inhibit growth in demand for India’s exports,” the World Bank said.

Last week, the Reserve Bank of India pared its growth estimate for FY23 to 7 per cent from 7.2 per cent estimated earlier.

The World Trade Organization (WTO) on Wednesday slashed its forecast for global trade volume growth to 1 per cent from 3.4 per cent estimated earlier, which could adversely impact exports from India, which contracted in September for the first time in 19 months.

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“In India, services exports have recovered more strongly than in the rest of the world, and India’s ample foreign reserve buffers have afforded resilience to the country’s external sector,” the World Bank said.

The World Bank said private investment growth in India was likely to be dampened by heightened uncertainties and higher financing costs.

“The ongoing simplification of various business regulations will help ease the transition by creating new jobs and facilitating business transactions,” it added.

India’s economy is estimated to have expanded by 13.5 per cent in the June quarter of FY23, although it contracted sequentially when compared to the previous quarter.

“The continued improvement in economic activities in India is in part thanks to relaxed Covid measures and a pick-up in domestic demand including for contact-intensive services as Covid risk subsides,” the World Bank said.

The report said employment had started expanding in India month to month since March, but the recovery speed was slow until August, when it exceeded that in the rest of the world.

“India’s economy-wide employment index is improving month-over-month but at slower speeds than the rest of the world outside of Asia, and demand for the rural work program remains elevated,” it added.

The World Bank said India had 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 added.

The report said India’s ban on broken rice export was expected to impact about one-fifth of the country’s rice exports, which could lead to global supply concerns and allow rival exporters (e.g. Thailand and Vietnam) to raise prices, adding to global food inflation.

The World Bank expects India’s fiscal deficit to fall gradually, supported by higher revenue growth and reduced spending.

“In India, it is projected to be 9.6 percent of GDP in FY22 and to decline to 8.4 and 7.9 percent in FY23 and FY24, respectively,” it added.