The Asian Development Bank (ADB) forecasts India’s GDP growth to moderate to 7.5% in 2022-23 from an estimated 8.9% in 2021-22, but will pick up to reach 8% in 2023-2024.
The ADB has factored in the Russia-Ukraine conflict’s implications for India, which will be largely indirect through higher oil prices, and has assumed that the severity of the COVID-19 pandemic will subside with a rise in vaccination rates.
Although oil prices will exert upward pressure on the inflation front, the impact on inflation would be moderated by fuel subsidies and oil refineries stocking up on cheap crude from the Russian Federation, the ADB noted, predicting an average inflation rate of 5.8% in 2022-23, and 5% in 2023-24. There would still be an upward pressure on consumer prices with oil prices expected to average over $100 a barrel through 2022.
Food prices
In its Asian Development Outlook report released on Wednesday the bank stated that food prices were expected to rise in tandem with increasing commodity prices
Higher public capital spending was expected to improve the efficiency of India’s logistics infrastructure, crowd-in private investment, generate jobs in construction and sustain growth, the bank said, emphasising that economic activity this year would hinge on catalytic effects of public investment.
The ADB expects capacity utilisation rates in Indian industry to improve over the first half of 2022-23, creating room for fresh investments, as private consumption could pick up amid the ebbing pandemic severity and mobility restrictions.
A key challenge
“Inflation will accelerate and the current account deficit widen due to the surge in global oil prices,” it said, identifying the mobilisation of domestic resources as a key challenge at ‘all levels of government’ as India’s tax to GDP ratio of about 17% has been largely unchanged since the early 1990s.
Mobilising resources was particularly challenging for the State governments and improving their fiscal resources was critical for India’s sustained and inclusive growth, , the report said.
“This is especially important because of rising State fiscal deficits since 2011-12 and higher ratios of State debt to GDP ratios since 2015-16. Worsening State finances have macroeconomic implications, especially on general government finances,” the report pointed out. India’s general government debt, a third of which was accounted for by the States, touched nearly 90% of the GDP in 2020-21 and was expected to stay high in the medium term.
GST implementation
Stressing that the States were constrained in ‘how much and from where they can borrow’, the ADB highlighted that the implementation of the Goods and Services Tax had also reduced their autonomy to raise revenues from sales taxes.
“The economic impact of the COVID-19 pandemic has further affected the revenue of the States and put a higher burden on them for financing pandemic-related expenditure. As a result, their budget deficits in 2020-21 and 2021-22 surpassed the mandated 3% of State GDP limit, with the deficit going as high as 7%”, it said.
“Elevated public debt levels add stress to public finances, making it even more important to ensure that new debt is used to finance investments with adequate returns. Higher debt pushes up interest rates, crowds out private investment, and results in a low-growth and a less sustainable debt path,” the bank warned, mooting the implementation of the 15th Finance Commission’s recommendations to put the States’ finances on a sounder footing.
