Remarkably resilient: World Bank ups FY23 India growth forecast to 6.9%

The World Bank on Tuesday raised its gross domestic product (GDP) growth forecast for India for the current financial year (FY23) to 6.9 per cent from 6.5 per cent because of the economy’s relative resilience to external headwinds and the ‘strong outturn’ in the September quarter, it said.

This comes after a spate of downgrades earlier by banks and multilateral institutions. The World Bank, too, had cut India’s FY23 GDP forecast to 6.5 per cent from 7.5 per cent in October. In fact, this was the first upgrade of India’s growth forecast by any multilateral agency in FY23. The World Bank figure is very close to the Reserve Bank of India’s projection of FY23 GDP growth of 7 per cent.

“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,” Auguste Kouamé, World Bank’s country director for India, said in the agency’s latest India Development Update.

However, he said, continued vigilance was required as adverse global developments persist.

The reason for India’s insulation from global spillovers was its large domestic market, which was relatively less exposed to international trade flows. The report said India’s external position had also improved considerably over the past decade. Besides, policy reforms and prudent regulatory measures had also played a role in helping develop this resilience, it said.

“A well-crafted and prudent policy response to global spillovers is helping India navigate global and domestic challenges,” said Dhruv Sharma, senior economist at the World Bank, and the lead author of the report.

India’s GDP expanded 6.3 per cent in the September quarter, slower than the 8.4 per cent growth seen a year ago, as manufacturing output contracted and the base effect waned. However, it was better than analyst expectations, which was one of the reasons cited by the World Bank for its latest growth upgrade. It expected an inflation rate of 7.1 per cent in FY23 before moderating to 5.2 per cent in FY24.

Sharma did warn that India would not be completely insulated from spillovers from the US, Europe, and China, and as a result the GDP growth forecast for FY24 was cut to 6.6 per cent from 7 per cent earlier.

“A challenging external environment will affect India’s economic outlook through different channels… rapid monetary policy tightening in advanced economies has already resulted in large portfolio outflows and depreciation of the Indian rupee while high global commodity prices have led to a widening of the current account deficit,” the report stated.

That the global situation remains precarious was again brought to the fore by a separate report released on Tuesday by ratings agency Fitch. In its latest Global Economic Outlook (GEO) report, Fitch said it now expects world GDP to grow 1.4 per cent in 2023, down from 1.7 per cent forecast earlier.

However, it retained its FY23 GDP forecast for India at 7 per cent, though it cut the growth projection for the next two years. It expects lower growth in India at 6.2 per cent in FY24 and 6.9 per cent in FY25, compared with earlier forecasts of 6.7 per cent and 7.1 percent respectively.

With regard to reforms in India, the World Bank report said increased reliance on market borrowings had improved the transparency and credibility of fiscal policy and the government had diversified the investor base for securities.

The introduction of a formal inflation targeting framework in the past decade was an important step in this direction, it added.

The World Bank saw the government meeting the fiscal deficit target of 6.4 per cent of the GDP in FY23, on the back of strong growth in revenue collections, in spite of pressures on the food and fertilizer subsidy front.

Sharma said that the general government (centre plus states) deficit was projected to decline to 9.6 per cent in FY23 from 10.3 per cent in FY22 and 13.3 per cent in FY21. Public debt was also projected to decline to 84.3 per cent of GDP in FY23, from a peak of 87.6 per cent in FY21, it said.

On inflation, the report said, both levers of macroeconomic policy – fiscal and monetary – had played a role in managing the challenges that emerged since last year. The report noted that the RBI withdrew its accommodative monetary policy in a measured approach as it balanced the need to rein in inflation while continuing to support economic growth.