The World Bank on December 6 lifted its growth forecast for India’s economy this year to 6.9%, after having downgraded it to 6.5% in October, citing resilience in economic activity despite a deteriorating external environment.
The Bank said it revised the GDP forecast considering the strong upturn in the July to September quarter of 2022-23, when it grew 6.3% despite inflationary pressures and tighter financing conditions, “driven by strong private consumption and investment”.
“The government’s focus on bolstering capital expenditure also supported domestic demand in the first half of 2022-23. High frequency indicators indicate continued robust growth of domestic demand at the start of Q3 (October to December quarter),” the Bank noted in its latest India Development Report titled ‘Navigating the Storm’.
“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,” said Auguste Tano Kouame, World Bank’s country director in India.
In response to a query on whether India was experiencing ‘jobless growth’, Mr. Kouame said that jobs are being created, but they are all in the informal sector. “So, the policy question here is what to do to formalise that… How to make job creation visible,” he remarked, adding that the renewable energy and green economy sectors can create a lot of jobs.
The Bank expects the Indian economy to grow at a slightly slower 6.6% in 2023-24 as a challenging external environment and faltering global growth will affect its economic outlook through different channels.
The report said that while a one percentage point decline in growth in the United States is associated with a 0.4 percentage point decline in India’s growth, the effect is around 1.5 times larger for other emerging economies, and the result is similar for growth spillovers from the EU and China.
Dhruv Sharma, senior economist at the Bank and lead author of the report, said that a well-crafted and prudent policy response to global spillovers is helping India navigate global and domestic challenges. The report, however, cautions about trade-offs between trying to limit the adverse impact of global spillovers on growth and the available policy space.
Like its COVID-19 response, the Indian government’s response to the external shock combined demand-side and supply-side policies, with both fiscal and monetary policy levers deployed, the report noted.
“The RBI’s gradual withdrawal of liquidity and policy rate hikes have been aimed at anchoring inflation expectations. However, this has increased borrowing costs, which along with elevated input prices have potentially constrained private investment. The central bank’s management of short-term volatility in exchange rates has contributed to a decline in reserves, though they are still at a relatively high level,” it pointed out.
Strong revenue growth would largely offset India’s higher subsidy bill and lower fuel taxes, but these measures have slowed the pace of fiscal consolidation. “The confluence of multiple challenges on the external front poses a challenge to India’s growth trajectory, but balanced policymaking, which factors in these trade-offs, will help India navigate global headwinds,” the report underlined.
A widening goods trade deficit, driven by rising imports and softening exports, has expanded India’s current account deficit to 2.8% of GDP in Q2 this year from 1.5% in the first quarter, the Bank said, adding that India scores better than only the Philippines and Thailand on this metric of macroeconomic stability. However, the trade deficit will be “somewhat offset by resilient services trade surplus”, it stressed.
Despite an over 10% dip in India’s forex reserves this year, they are still over $500 billion and provide “adequate buffer against global spillovers” with an import cover of at least eight months, the Bank said. “Since the taper tantrum in 2013, India’s forex reserves have almost doubled and provide better coverage of external debt than other emerging market economies,” the report noted.
“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,” the Bank said.