World Bank retains India’s growth at 6.3%

India will remain one of the fastest growing major economies even as its growth is expected to moderate to 6.3% in 2023-24 from 7.2% in 2022-23, the report said

New Delhi The World Bank on Tuesday retained India’s economic growth forecast for 2023-24 at 6.3% in its biannual review, amid challenging external conditions and waning pent-up demand, as it expects global headwinds to persist and intensify due to high global interest rates and geopolitical tensions.

Rising food prices will keep retail inflation elevated, the report said. (Shutterstock)

“An adverse global environment will continue to pose challenges in the short-term,” said Auguste Tano Kouame, World Bank’s country director in India. While the bank’s projection is lower than the Reserve Bank of India’s growth estimate of 6.5% in August, it expected robust services activities and strong investment to drive the economy.

“Tapping public spending that crowds in more private investments will create more favourable conditions for India to seize global opportunities in the future and thus achieve higher growth,” Kouame said.

The bank’s half-yearly report on the Indian economy – India Development Update – in April had slashed India’s growth forecast to 6.3% for the year to March from its December estimate of 6.6% due to adverse global conditions as rising borrowing costs and slower income growth led to moderating consumption.

India will remain one of the fastest growing major economies even as its growth is expected to moderate to 6.3% in 2023-24 from 7.2% in 2022-23, the report said. “The expected slowdown is mainly due to waning base effects, slowing global growth, and domestic price pressures. Private consumption growth is likely to slow as the post-pandemic catch up fades, and external demand for India’s exports will be affected by slowing growth in major trading partners, including the EU (European Union),” it said.

Strong investment will drive India’s growth despite a sharp increase in lending rates. Consumption growth, however, will moderate, the report said. Its optimism on an investment-led growth was based on improved balance sheets of banks and corporates, increased capacity utilization, and focus of the government on capital spending on infrastructure. India’s central bank’s recent monetary tightening saw policy rates rise by 2.5 percentage points.

“Private consumption growth is likely to taper off as post-pandemic pent-up demand fades and high food price inflation constrains demand, particularly for low-income households,” the bank said. Government consumption may also see slower growth, it added.

Rising food prices will keep retail inflation elevated, the report said. “Abnormal rainfall during the monsoon months caused a sharp increase in food prices in July 2023. Though eased in August, it is expected to continue to weigh on headline inflation through the rest of the fiscal year,” it said.

The central bank’s hawkish monetary policy stance and raising benchmark interest rates over the past year has helped contain core inflation, which is expected to continue to decelerate gradually, the report added.

Adverse weather conditions contributed to a spike in inflation in recent months. Retail inflation rose to 7.8% in July due to a surge in cereal prices. “Inflation is expected to decrease gradually as food prices normalize and government measures increase the supply of key commodities,” the report said.

“While the spike in headline inflation may temporarily constrain consumption, we project a moderation. Overall conditions will remain conducive for private investment,” said lead author Dhruv Sharma, senior economist at the World Bank.

The report was published just before the meeting of the rate-setting panel of the Reserve Bank on October 4-6.

Upside risks are rising for the broader food basket, even as both tomato prices and inflation have headed lower, Sonal Varma, chief economist for India and Asia ex-Japan at Nomura said in an article in Mint, HT’s sister publication.

“GDP growth has evolved largely in line with the RBI’s expectation of 6.5% in 2023-24. After a strong Q1, high frequency data points to continued economic momentum in Q2 (July-September), with stronger domestic demand impulses from private consumption and fixed investment offsetting the drag from the external sector,” she said.

“The key question is whether domestic demand impulses will sustain. We believe risks are skewed to the downside,” she added.

India’s GDP growth in the June quarter was 7.8%, marginally below the 8% projected on August 10 by the monetary policy committee of the central bank.