Why World Bank revised India’s GDP forecast upwards

INTERNATIONAL DESK: The World Bank on Tuesday revised upwards its GDP growth forecast from 6.5% for India to 6.9% for 2022-23, saying the country was showing higher resilience to global shocks.

In its latest India Development Update, the World Bank said the revision was due to higher resilience of the Indian economy to global shocks and better-than-expected second quarter numbers.

This comes as a breather since the World Bank had been lowering India’s FY23 growth forecast in its World Economic Outlook report since the last 3 times.

In October, it had slashed India’s GDP forecast by one percentage point to 6.5% from its June estimate of 7.5%, citing impact of ongoing war in Ukraine, rising global interest rates and high inflation.

India’s economy grew at 6.3% in September quarter 2022-23 as compared to 13.5% in the preceding June quarter, mainly on account of contraction in output of manufacturing and mining sectors.

This is the first upgrade of India’s growth forecast by any international agency amid the global turmoil.

Here’s what prompted World Bank to revise growth forecast:

Fastest growing economy

Amid existing global challenges like tightening monetary policy cycle, slowing growth and elevated commodity prices, Indian economy will experience lower growth in 2022-23 financial year compared to 2021-22.

However, it reiterated that despite such challenges, India will register a strong GDP growth and remain one of the fastest growing major economies in the world, due to robust domestic demand.

Growth in first half of FY22-23 was supported by solid domestic demand and despite a challenging external environment, the report said.

It further noted that exports performed better than expected despite challenging global growth conditions caused by slowing growth in major trade partners (the US, UK and China), Russia-Ukraine war and persistent global supply disruptions (caused by global shortage of shipping containers and supply bottlenecks).

In contrast, other emerging market economies (EMEs) — China, Mexico, Brazil — decelerated in July-September 2022 quarter.

The report titled ‘Navigating the Storm’ highlighted that Indian economy is relatively more insulated from global spillovers than other emerging markets.

“India is less exposed to international trade flows and relies on its large domestic market,” it 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 grew sharply (albeit still below pre-pandemic levels).

Sensex, Nifty at record high

After the slump witnessed in the initial days of Russia-Ukraine war, both sensex and Nifty have now bounced back driven by better-than-expected corporate earnings in the first quarter of FY22-23, moderation in domestic inflation and global commodity prices.

Besides, the return of foreign portfolio investors has also boosted investor sentiments.

Both sensex and Nifty scaled new highs over the first half of FY22. But experienced a downward trend from October 2022. Rest of the financial year was dampened by policy normalization in advanced economies and geopolitical risks arising from the Ukraine-Russia conflict.

Financial sector growth

India’s financial sector has also deepened considerably over the years but is still recovering from a long period of stress and thus lags relative to other EMEs in terms of capital adequacy and NPL ratios.

Corporate and household debt has declined and remains benign but public debt has increased sharply, as a share of GDP — driven by the pandemic. However, increased market borrowing has improved the transparency and credibility of fiscal policy.

The government has also diversified the investor base for government securities. In addition, inflation targeting by the RBI has helped to anchor inflation expectations and price stability has improved.

Boost in private consumption, investment

The report noted that private consumption and investment grew strongly, despite high inflation and borrowing costs.

This sharp rise in private consumption was bolstered by festive-season spending in September.

The rise in private consumption has 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 has remained robust on back of Centre’s capex push, despite global uncertainty and rising costs amid monetary policy normalisation.

Rise in services output

The World Bank report also noted that the services sector expanded 9.3% year-on-year as compared to 10.5% in Q2 of FY23 on back of solid growth in business services, contact-intensive segments of retail trade, transport, hotels and restaurants, and public administration.

Agriculture sector growth accelerated to 4.6% despite erratic monsoon season and export restrictions on wheat and rice products.

However, manufacturing sector continued to be adversely impacted by slowing external demand, global supply chain disruptions and higher input costs. This resulted in 4.3% contraction in output.

Rupee better placed

Indian Rupee has fared relatively well in 2022 in comparison to other emerging market peers, senior World Bank economist Dhruv Sharma said.

“The rupee has depreciated just about 10% over the course of this year. That might sound like a large number, but relative to many other emerging market peers, India hasn’t fared that badly,” Sharma told a press briefing after the launch of the World Bank’s India Development Update titled ‘Navigating the Storm’.

The rupee had plunged to a record low of 83 against the US dollar in mid-October, triggered by tightening monetary policy by the US Federal Reserve and central banks in other advanced economies. However, it has now come off lows and is currently around 82 against the US dollar.

Better than expected exports

Despite a challenging external environment, exports performed better than expected.

However, exports are susceptible to a global growth slowdown – the income elasticity of exports is high, which implies that the global demand for India’s goods and services is cyclical.

WPI eases but inflation a concern

Inflation accelerated significantly during February-April 2022 due to higher prices of fuel and food, which constitute about half of the inflation basket, and elevated core inflation. It peaked at 7.8% in April.

Even though inflation decelerated in October to 6.7%, it is still above RBI’s tolerance band of 2-6%.

While domestic fuel prices have declined by over 8% since May — after government cut excise duties — food prices have continued to remain elevated. However, a positive point here is that the prices are on a downward trajectory.

The government has taken supply-side measures to push down food inflation via easing disruptions in supply of fertilizers to farmers, export restrictions on wheat and rice products, and reduction in import duties on edible oils.

Wholesale price index (WPI), which tracks prices at which businesses sell to each other, has been in double digits since April 2021 and averaged 14.2% in the first half of FY23. However, moderating commodity prices and favourable base effects has brought down WPI inflation since June.

Fiscal deficit target on track

The central government is on track to meet its fiscal deficit target of 6.4 %of the GDP for 2022-23 on the back of strong growth in revenue collections, the World Bank said in its report.

High nominal GDP growth in the first quarter supported strong growth in revenue collection, especially Goods and Services Tax (GST), despite tax cuts on fuel.

Notwithstanding an increase in spending due to expanded fertilizer subsidies and food subsidies for vulnerable households in response to the commodity price shock, the government is on track to meet its FY22-23 fiscal deficit target of 6.4% of GDP and the general government deficit is projected to decline to 9.6 %from 10.3% in FY21-22 and 13.3% in FY20-21.

Public debt is also projected to decline to 84.3 %of GDP in FY23, from a peak of 87.6% in FY21, it said.

The central government’s revenues increased by 9.5% and spending by 12.2%. As a result, it said, the fiscal deficit touched 37.3% of the annual target in H1 FY22-23, above the 35% of the same half last year.

International reserves

At over $500 billion, India has one of the largest holdings of international reserves in the world. While the reserves have declined by about 13% this year, they still provide close to eight months of import cover, based on total imports over the last four quarters (from Q3 FY21-22 to Q2 FY22-23).

As a result, pressure on the Indian rupee has been muted compared to other EMEs.

What others forecast

In October, the International Monetary Fund (IMF) had slashed India’s economic growth forecast to 6.8% for 2022 from 7.4% in its July estimate.

But, it also sounded a word of caution for major economies of the world and said that global growth is expected to slow further next year as worst is yet to come.

Fitch Ratings says India could be one of the fastest-growing emerging markets this year and pegs growth at 7%.

Last month, global ratings agency Moody’s Investors Service lowered India’s GDP growth forecast to 7% from 7.7% for this year. It expects growth to decelerate to 4. 8% in 2023 and then to rise to around 6.4% in 2024.

In a recently released report, Goldman Sachs had said that Indian economy is likely to lose its growth momentum in 2023 owing to higher borrowing costs and fading benefits from Covid pandemic reopening. The firm projected India to expand by 5.9% in calender year 2023 from 6.9% earlier.

Meanwhile, in its September monetary policy meet, RBI had lowered its GDP forecast for FY23 to 7% from the earlier 7.2%, citing impact of geopolitical tensions, tightening global financial conditions and slowing external demand.

(This story originally appeared in The Times of India on Dec 06, 2022)