Tue, 06 Dec 2022 12:05 PM (IST)
INDIA’S Real Gross Domestic Product (GDP) growth is expected to decline in FY 22-23 amid a deteriorating external environment according to World Bank’s India Development Update Report. GDP growth is expected to decline to 6.9 per cent in FY22-23 according to the international development organization.
The GDP growth in the second quarter of the fiscal slowed to 6.3 per cent as against a growth of 13.5 per cent in the previous quarter. The World Bank had earlier estimated India's GDP to grow at 7.5 per cent. Real GDP growth was 8.7 per cent in FY21-22.
World Bank's India Development Update said India is affected by spillovers from the US, Euro area and China. It however saw the government meeting the fiscal deficit target of 6.4 per cent of the GDP in 2022-23.
In October, the World Bank had estimated GDP growth for the year at a rate of 6.5 per cent, for which it has made an upward revision in the update.
"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," World Bank's Country Director in India Auguste Tano Kouame told reporters.
However, he said, continued vigilance is required as adverse global developments persist.
The report projected that the Indian economy will grow at a slightly lower rate of 6.6 per cent in 2023-24.
"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," it said.
The report analysed India's economy as being relatively insulated from global spillovers compared to other emerging markets because India has a large domestic market and is relatively less exposed to international trade flows. Nevertheless, spillovers from the US, the Euro area and China have the potential to affect the economy.
The report finds that while a 1 percentage point decline in growth in the US is associated with a 0.4 percentage point fall in India's growth, the effect is around 1.5 times larger for other emerging economies, it said, adding, analysis for growth spillovers from the European Union (EU) and China also yields similar results.
India's external position has also improved significantly over the last ten years and its current account deficit is adequately financed by improving foreign direct investment (FDI) inflows and a solid cushion of foreign exchange reserves.
With regard to reforms, the report said that regulatory measures have also played a major role in developing resilience in the economy.
Increased reliance on market borrowings has improved the transparency and credibility of fiscal policy and the government has diversified the investor base for government securities, it said.
"While there are still some challenges in the financial sector, the adoption of several regulatory and policy measures—including introduction of a new Insolvency and Bankruptcy Code and creation of the new National Reconstruction Company Limited—facilitated an improvement in financial sector metrics over the past five years," it said.
The report noted that these policy interventions are also expected to help alleviate pressures related to non-performing loans.
“A well-crafted and prudent policy response to global spillovers is helping India navigate global and domestic challenges,” said Dhruv Sharma, Senior Economist at World Bank, and lead author of the report.
The report said that both levers of macroeconomic policy – fiscal and monetary – have played a role in managing the challenges of inflation that have emerged over the past year.
The report noted that RBI withdrew accommodative monetary policy settings in a measured approach as it balanced the need to rein in inflation while continuing to support economic growth.
It expected inflation at 7.1 per cent in the current fiscal year and its moderation to 5.2 per cent in 2023-24.
Fiscal policy supported the central bank's rate actions by cutting excise duty and other taxes on fuel to moderate the impact of higher global oil prices on inflation, it said.
However, the report cautioned that there is a trade-off between trying to limit the adverse impact of global spillovers on India's growth and available policy space.
The World Bank expects inflation rate to be 7.1 per cent in current fiscal year.
(With inputs from PTI)