The Asian Development Bank (ADB) on Tuesday slashed its India growth forecast for FY24 to 6.4 per cent from 7.2 per cent estimated earlier, citing risks arising from global and domestic factors.
“If global conditions do not deteriorate as much as anticipated, higher global demand will likely spur growth in India. However, any worsening of geopolitical tensions is likely to exert further downward pressure on global demand and increase uncertainty, tamping down India’s growth rate and pushing up inflation. Domestically, weather shocks to agricultural production, including abnormal rainfall or higher temperatures, could spur food inflation, thereby putting further pressure on the central bank to raise interest rates,” ADB said in its latest Asian Development Outlook.
For FY23, ADB pared down its growth forecast to 6.8 per cent from 7 per cent estimated earlier.
ADB said private consumption will be the main driver of growth and the large domestic consumption base will mitigate the impact of a global slowdown. “A robust labor market and rising consumer confidence are indicators of relatively strong growth in consumption in FY24 and FY25. Further, a higher tax rebate and a raised income threshold for tax exemption, announced in the most recent budget, may increase disposable income for the middle class, also boosting private consumption. Public consumption is likely to grow only slowly, as central government expenditure shifts toward investment,” it said.
The report said private investment growth is likely to be lower in FY24 given tightened monetary policy, high lending rates, global uncertainty, and moderating optimism on business conditions. “However, FY25 should bring fast growth in investment because of strong macroeconomic fundamentals; lower non-performing loans in banks than in recent years, which supports banks’ ability to lend; and significant corporate deleveraging, which has improved corporations’ ability to borrow. Several government policies aiming to improve transport infrastructure, logistics, and the business ecosystem will induce greater private investment. However, the contribution of net exports to growth will be small as growth in both exports and imports of goods moderates in tandem with a slowing global economy, even as India’s service exports remain relatively robust.”
About the supply side, ADB said while the projection for agriculture is robust, manufacturing growth will be sluggish in FY24 due to global slowdown. Manufacturing will pick up in FY25 as expected improvement in global economic conditions lifts private investment. “It will be tamped down by weak global demand but is expected to benefit as input price inflation moderates while relatively high prices persist for outputs. Production incentives introduced in April 2021 to boost manufacturing productivity and export competitiveness have attracted investment amounting to $5.6 billion. Electronics was one of the first industries covered by these schemes and is likely to see increased production and exports this fiscal year. However, other beneficiary industries may not see a significant impact on output as early as FY24.”
ADB said services will grow strongly this fiscal year and next as the impact of Covid-19 wanes. “Growth in services will be helped by recovery in tourism and other contact services as COVID-19 impacts dissipate and the share of services in domestic consumption continues to increase. Further, relatively resilient service exports despite the global slowdown will continue to boost growth in the sector.”
ADB projected consumer inflation to moderate to 5 per cent in FY24, assuming moderation in oil and food prices. “This will bring the rate back within the monetary policy target of 2–6 per cent. Inflation in FY25 is expected to slow further to 4.5 per cent as inflationary expectations are tamped down and global inflationary pressures subside. Monetary policy in FY24 is expected to become progressively less accommodative as core inflation, which excludes fuel and food prices, persists because of high inflation expectations and high input costs. Policy will become more accommodative in FY25 in tandem with expected actions by the US Federal Reserve.”
The report said India’s public debt is on a sustainable path. “After general government debt increased from 75 per cent of GDP in 2019 to 89 per cent in 2020 as the authorities responded to the pandemic, it declined to 84 per cent in FY2022 and is expected to continue to decline gradually over the medium term.”