World Bank slashes India's GDP growth forecast to 7.5%

The World Bank has trimmed India's GDP growth forecast for the financial year 2022-23 to 7.5% from 8% as headwinds from rising inflation, supply chain disruptions and geopolitical tensions offset recovery.

This is the second time that the World Bank has revised down its GDP growth forecast for India in the ongoing financial year. In April, the World Bank had slashed India's GDP forecast from 8.7% to 8%.

The World Bank's FY23 GDP projection for India is still higher than the 7.2% forecast given by the Reserve Bank of India (RBI). The central bank had lowered its real GDP forecast from 7.8% to 7.2% in April.

India's economic growth will be supported by fixed investment undertaken by the private sector and by the government, which has introduced incentives and reforms to improve the business climate, according to the World Bank.

This forecast reflects a 1.2-percentage-point downward revision of growth from the January projection, it says. "Growth is expected to slow further to 7.1% in 2023-24 back towards its longer-run potential."

While delivering the monetary policy statement on Wednesday, RBI governor Shaktikanta Das said the monetary policy committee has retained the real GDP growth for 2022-23 at 7.2%, with Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%.

This comes at a time when both headline and core consumer inflation have breached the upper end of the central bank’s headline inflation target range of 2-6%. The Reserve Bank of India further hiked its inflation projection for the financial year 2022-23 to 6.7% from 5.7% earlier.

Growth slowed in the first half of 2022 as activity was disrupted both by a surge in Covid-19 cases, accompanied by more-targeted mobility restrictions, and by the war in Ukraine, the World Bank says. "The recovery is facing headwinds from rising inflation. The unemployment rate has declined to levels seen prior to the pandemic, but the labor force participation rate remains below pre-pandemic levels and workers have shifted to lower-paying and less-secure jobs."

The focus of government spending has shifted toward infrastructure investment, labour regulations are being simplified, underperforming state-owned assets are being privatised, and the logistics sector is expected to be modernised and integrated, it adds.

IMF, too, had slashed India's GDP growth forecast for the fiscal 2022-23 from 9% to 8.2% amid high inflation.

Meanwhile, India's largest lender, the State Bank of India, upgraded India's GDP growth forecast from 7.3% to 7.5% in FY23, on the back of a better statistical base and continued credit growth.

In April, the Reserve Bank of India in its report titled "Revive and Reconstruct" said that the Indian economy is expected to fully recover from Covid-19 losses by the financial year 2034-35.

Reducing debt to more sustainable levels will be daunting, the RBI had said. "Even under best possible macroeconomic outcomes, general government debt may not decline below 75% of GDP over the next five years. If adverse scenarios materialise, debt may, in fact, hover above 90% of GDP all through."