New Delhi/Washington | The World Bank and the Asian Development Bank on Tuesday projected moderation in the Indian economic growth between 6.3 per cent and 6.4 per cent due to a slowdown in consumption and challenging external conditions.
The World Bank in its latest 'India Development Update' (IDU) slashed the GDP forecast to 6.3 per cent against the earlier estimate of 6.6 per cent in 2023-24 (FY24).
"In India, South Asia's largest economy, high borrowing costs and slower income growth are expected to dampen consumption and lower growth to 6.3 per cent in FY 2023/24,” the World Bank said in a report for South Asia released on Tuesday ahead of the annual spring meeting of the International Monetary Fund and the World Bank.
Growth is likely to be constrained by slower consumption growth and challenging external conditions, it said, adding that government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures.
Multi-lateral funding agency Asian Development Bank also said India's economic growth is expected to moderate to 6.4 per cent in the current financial year due to tight monetary conditions and elevated oil prices as compared to 6.8 per cent expansion for the financial year ended March 2023.
The projections are part of the latest edition of ADB's flagship economic publication, Asian Development Outlook (ADO) April 2023.
ADB, however, made a slightly optimistic projection of 6.7 per cent for FY2024-25 ending March 2025 driven by private consumption and private investment on the back of government policies to improve transport infrastructure, logistics, and the business ecosystem.
Echoing similar views, the World Bank report said India was one of the fastest-growing economies in the world despite significant challenges remaining in the global environment.
"The Indian economy continues to show strong resilience to external shocks. Notwithstanding external pressures, India's service exports have continued to increase, and the current-account deficit is narrowing," said Auguste Tano Kouame, World Bank's Country Director in India.
Although headline inflation is elevated, it is projected to decline to an average of 5.2 per cent in 2023-24, amid easing global commodity prices and some moderation in domestic demand, the IDU said.
"The Reserve Bank of India has withdrawn accommodative measures to rein in inflation by hiking the policy interest rate. India's financial sector also remains strong, buoyed by improvements in asset quality and robust private-sector credit growth," it said.
The ADB report projected moderation in inflation to 5 per cent while Current Account Deficit to 2.2 per cent in the current financial year. With regard to inflation, the World Bank Report expects it to ease to 5.2 per cent, against 6.6 per cent in the current fiscal.
The central government is likely to meet its fiscal deficit target of 5.9 per cent of GDP in 2023-24 and combined with consolidation in state government deficits, the World Bank report said, the general government deficit is also projected to decline.
As a result, the debt-to-GDP ratio is projected to stabilize, it said.
On the external front, the current account deficit is projected to narrow to 2.1 per cent of GDP from an estimated 3 per cent in the current financial year on the back of robust service exports and a narrowing merchandise trade deficit.
Asked if the oil output cut have been taken into account, said Dhruv Sharma, Senior Economist, World Bank said the CAD of 2.1 per cent has not factored into oil output cut by Opec-plus.
OPEC+ on Sunday announced a surprise oil production cut of more than 1 million barrels a day.
"Spillovers from recent developments in financial markets in the US and Europe pose a risk to short-term investment flows to emerging markets, including India," he said.
However, Indian banks remain well capitalized and the impact of policy tightening on banks' balance sheets has been less severe in India due to relatively modest pace of tightening, he added.
Despite resilience amid slowing global growth, there are headwinds to India's growth in 2023-24, the report said, adding, recent financial sector turmoil in the US and Europe could reduce appetite for emerging market assets, trigger another bout of capital flight and put pressure on rupee.
Tighter global financial conditions could also weigh on the risk appetite for private investment in India, it said.
Moreover, it said, faster than expected inflation due to higher food or fuel prices may weigh on domestic demand.
The report also mentioned that except for Bhutan, all countries in the South-Asia region have downgraded their forecasts.
Growth in Pakistan, which is still reeling from the impact of last year's catastrophic floods and facing supply chain disruptions, deteriorating investor confidence, and higher borrowing and input costs, is projected to drop to 0.4 per cent this year, assuming agreement on an IMF programme is reached, it said.
In Sri Lanka, GDP is expected to contract by 4.3 per cent this year reflecting the lasting impact of the macro-debt crisis, with future growth prospects—following last month's IMF program approval—heavily dependent on debt restructuring and structural reforms, the bank said.
The resumption of tourism and migration has supported growth in Maldives and Nepal. But high external debt and tightened global financial conditions pose risks to Maldives' fiscal and external accounts, and in Nepal, external shocks, domestic import restrictions, and monetary tightening are expected to hamper growth, said the report.
"South Asia's economies have been scarred by a combination of extreme shocks over the past three years, and the recovery remains incomplete,” said Martin Raiser, World Bank Vice President for South Asia.
“Countries should use the opportunity of lower energy prices and improving trade balances to move away from ad hoc measures, such as fuel subsidies and import restrictions implemented to address these shocks, and focus on reforms needed to build resilience and boost medium-term growth,” it said.