World Bank pares FY24 growth target to 6.3% on slower consumption

For 2022-23, the multilateral agency said growth is expected to be 6.9 per cent as against 7.7 per cent growth during the first three quarters.

According to the second advance estimates released by the National Statistical Office, the economy is estimated to grow 7 per cent in 2022-23. For 2023-24, the Economic Survey released in January-end had pegged India’s baseline growth rate at 6.5 per cent, while the Reserve Bank of India’s growth forecast for the current fiscal is 6.4 per cent.

Despite the external challenges to growth, India was one of the fastest growing economies in the world, the World Bank said. Though there were some signs of moderation in the second half of FY23, growth was underpinned by strong investment activity bolstered by the government’s capex push and buoyant private consumption, particularly among higher income earners, it said.

Auguste Tano Kouame, World Bank’s Country Director in India said, “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.”

Listing out the downside risks to India’s growth, the World Bank report said the 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 the Indian rupee. “Tighter global financial conditions could also weigh on the risk appetite for private investment in India… faster-than-expected inflation due to higher food or fuel prices may also weigh on domestic demand. These downside risks to growth could affect fiscal consolidation plans. The debt path is highly sensitive to variation in nominal growth rates and further moderation in economic growth could lead to an increase in the already high public debt-to-GDP ratio,” it said.

Though there could be short-term risks after the collapse of three mid-sized banks in the US, and the acquisition of Credit Suisse by UBS, it said the Indian banks are well-capitalised. “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. But Indian banks remain well capitalised,” said Dhruv Sharma, Senior Economist, World Bank, and lead author of the report.

In December 2022, it had upgraded India’s growth forecast for 2022-23 to 6.9 per cent from 6.5 per cent earlier (in October 2022) citing strong resilience despite a challenging external environment. This estimate was retained in the January update.

The World Bank in its report on Tuesday said that estimates suggest “the pandemic induced a spike in extreme poverty ($2.15), of up to 4 percentage points, moderated in FY 21-22.” “Facilitated by widespread access to vaccines, extreme poverty rates are estimated to have declined to 13.8 percent in FY 21-22, although not as low as pre-pandemic levels,” it said.

Continued poverty reduction in FY 2022-23 will depend on how the “economic rebound translates into productive jobs for the bottom half of the population and the welfare implications of fiscal consolidation efforts,” it said.

On the external front, the current account deficit is estimated to narrow to 2.1 per cent of GDP from an estimated 3 per cent in FY23 on the back of robust service exports and a narrowing merchandise trade deficit. For inflation, the report said that though headline inflation is elevated, it is expected to decline to an average of 5.2 per cent in FY24 amid easing global commodity prices and some moderation in domestic demand.

“Despite the sizeable increase in the nominal policy interest rate, the real interest rate has only increased to just over 0 percent and remains below the 1-1.5 percent level that the RBI considers to be the neutral rate,” it said.

The Central government is likely to meet its fiscal deficit target of 5.9 per cent of GDP in FY24, it said, adding that the general government deficit is also expected to decline with consolidation in state government deficits. The general government deficit (combined fiscal deficit of Centre and states) will likely consolidate by 0.7 percentage points to 8.7 percent in FY 2023-24 due to “continued, albeit slower, revenue growth and lower current spending”, reflecting the withdrawal of pandemic-related welfare measures. The lower projected fiscal deficit will stabilise the debt-to-GDP ratio at around 83 per cent, it said.