In its latest India Development Update, the World Bank said the revision was due to the Indian economy’s greater resilience to global shocks and better-than-expected second-quarter numbers.
This comes as a pause as the World Bank lowered India’s FY23 growth forecast in its World Economic Outlook report from the last 3 times.
In October, it had cut India’s GDP forecast by one percentage point to 6.5% from its June estimate of 7.5%, citing the impact of the ongoing war in Ukraine, rising global interest rates and the high inflation.
The Indian economy grew by 6.3% in the September 2022-23 quarter compared to 13.5% in the previous June quarter, mainly due to the contraction in output of the manufacturing and mining sectors.
This is the first update of India’s growth forecasts by any international agency amid the global turmoil.
Here’s what prompted the World Bank to revise its growth forecasts:
* Fastest growing economy
Amid existing global challenges such as tightening monetary policy cycle, slowing growth and rising commodity prices, India’s economy is expected to experience lower growth in the 2022-23 financial year than in 2021-22.
However, he reiterated that despite such challenges, India will experience strong GDP growth and remain one of the fastest growing major economies in the world, thanks to robust domestic demand.
Growth in the first half of FY22-23 was supported by solid domestic demand and despite a challenging external environment, the report said.
It also noted that exports performed better than expected despite challenging global growth conditions caused by slowing growth in major trading partners (US, UK and China), the Russia-Ukraine war and persistent supply disruptions global (caused by global container shortages and supply bottlenecks).
Conversely, other emerging market economies (EMEs) – China, Mexico, Brazil – decelerated in the July-September 2022 quarter.
* More secluded
The report titled “Navigating the Storm” found that the Indian economy is relatively more insulated from the global fallout than other emerging markets.
“India is less exposed to international trade flows and relies on its large domestic market,” he said.
High-frequency indicators show that private consumption and investment continued to grow strongly in October.
Electricity generation and freight traffic remained firmly above pre-pandemic levels. Similarly, passenger vehicle sales and air passenger traffic have grown substantially (although still below pre-pandemic levels).
* Sensex, Nifty at the highest level
After the collapse of the early days of the war between Russia and Ukraine, both sensex and Nifty have now recovered thanks to better-than-expected corporate earnings in the first quarter of FY22-23, moderation in domestic inflation and global commodity prices first.
Furthermore, the return of overseas portfolio investors also boosted investor sentiment.
Both sensex and Nifty hit new highs in the first half of fiscal year 22. But it has been on a downward trend since October 2022. The rest of the fiscal year was held back by the normalization of policies in advanced economies and the resulting geopolitical risks from the Ukraine-Russia conflict.
* Growth of the financial sector
India’s financial sector has also strengthened significantly over the years, but is still recovering from a long period of stress and thus lags other EMEs in terms of capital adequacy and NPL ratios.
Corporate and household debt has declined and remains supportive, but public debt has increased significantly, as a percentage of GDP, driven by the pandemic. However, the increase in market borrowing has improved the transparency and credibility of fiscal policy.
The government has also diversified the investor base for government bonds. Furthermore, the RBI’s inflation targeting has helped consolidate inflation expectations and price stability has improved.
* Increase in private consumption, investment
The report found that private consumption and investment grew strongly, despite high inflation and borrowing costs.
This sharp increase in private consumption was supported by Christmas spending in September.
Rising private consumption offset a contraction in government consumption caused by fiscal consolidation and the gradual withdrawal of pandemic-related stimulus, the World Bank said.
Similarly, investment growth remained robust on the back of the capital account boost from the Centre, despite global uncertainty and rising costs due to monetary policy normalisation.
* Increased production of services
The World Bank report also found that the services sector grew 9.3% year over year compared to 10.5% in the second quarter of fiscal year 23, on the back of solid growth in business services, contact-intensive areas of retail, transport, hotels and restaurants, and public administration.
Growth in the agricultural sector accelerated to 4.6% despite the irregular monsoon season and export restrictions on wheat and rice products.
However, the manufacturing sector continued to be negatively impacted by slowing external demand, global supply chain disruptions and rising input costs. This resulted in a 4.3% drop in production.
* Best positioned rupee
The Indian rupee did relatively well in 2022 compared to other emerging-market peers, said World Bank senior economist Dhruv Sharma.
“The rupee has depreciated by about 10% this year. That may seem like a large number, but compared to many other emerging markets, India hasn’t fared so badly,” Sharma said in a conference call. press following the launch of the World Bank’s India Development Update titled ‘Navigating the Storm’.
The rupee had fallen to a record low of 83 against the US dollar in mid-October, triggered by the tightening of monetary policy by the US Federal Reserve and the central banks of other advanced economies. However, it is now down from the lows and is currently around 82 against the US dollar.
* Exports better than expected
Despite a difficult external environment, exports performed better than expected.
However, exports are susceptible to a slowdown in global growth: the income elasticity of exports is high, implying that India’s global demand for goods and services is cyclical.
* WPI decreases but inflation worries
Inflation accelerated significantly in February-April 2022 due to rising fuel and food prices, which make up about half of the inflation basket, and high underlying inflation. It peaked at 7.8% in April.
Even though inflation slowed in October to 6.7%, it is still above the RBI’s tolerance range of 2-6%.
While domestic fuel prices have fallen by more than 8% since May after the government cut excise taxes, food prices have continued to remain high. However, one bright spot here is that prices are on a downward trajectory.
The government has taken supply-side measures to reduce food inflation by easing disruptions in the supply of fertilizers to farmers, export restrictions on wheat and rice products, and lower import duties on edible oils.
The Wholesale Price Index (WPI), which tracks the prices at which companies sell to each other, is in double digits as of April 2021 and has averaged 14.2% in the first half of the fiscal year 23. However, commodity price moderation and favorable base effects have reduced WPI inflation since June.
* The fiscal deficit target is on track
The central government is on track to meet its fiscal deficit target of 6.4% of GDP for 2022-23 on the back of strong revenue growth, the World Bank said in its report.
High nominal GDP growth in the first quarter supported strong growth in revenue collection, especially the Goods and Services Tax (GST), despite fuel tax cuts.
Despite increased spending due to increased fertilizer subsidies and food subsidies for vulnerable households in response to the commodity price shock, the government is on track to meet its 6.4% fiscal deficit target of GDP for fiscal year 22-23 and the government deficit is expected to decline to 9.6% from 10.3% in FY21-22 and 13.3% in FY20-21.
Government debt is also expected to fall to 84.3% of GDP in AF23, from a peak of 87.6% in AF21, he said.
Central government revenues increased by 9.5% and expenditures by 12.2%. As a result, he said, the fiscal deficit hit 37.3% of the annual target in the first half of FY22-23, higher than the 35% in the same half last year.
* International reserves
At over US$500 billion, India holds one of the largest reserves of international reserves in the world. While reserves are down about 13% this year, they still provide nearly eight months of import cover, based on total imports over the past four quarters (Q3 FY21-22 to Q2 FY22-23).
As a result, pressure on the Indian rupee has been eased relative to other EMEs.
* What others predict
In October, the International Monetary Fund (IMF) cut its economic growth forecast for India to 6.8% for 2022 from 7.4% in its July estimate.
But he also sounded a word of caution to the world’s major economies and said global growth should slow further next year as the worst is yet to come.
Fitch Ratings says India could be one of the fastest growing emerging markets this year and forecasts growth of 7%.
Last month, global rating agency Moody’s Investors Service lowered its forecast for Indian GDP growth to 7% from 7.7% this year. Growth is expected to slow to 4.8% in 2023 before rising to around 6.4% in 2024.
In a recently released report, Goldman Sachs had said that the Indian economy is likely to lose its growth momentum in 2023 due to rising borrowing costs and depleted benefits from the reopening of the Covid pandemic. The firm forecast India to expand by 5.9% in calendar year 2023 from 6.9% previously.
Meanwhile, at its September monetary policy meeting, the RBI had lowered its FY23 GDP forecast to 7% from 7.2% previously, citing the impact of geopolitical tensions, tightening global financial conditions and the slowdown in external demand.
(With contributions from agencies)
