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Published: June 7, 2023
Updated: June 7, 2023

World Bank Lowers India's GDP Growth Forecast for FY 2023/24 to 6.3% Amid Inflation and Borrowing Costs

The World Bank has revised down its GDP growth forecast for India in the fiscal year 2023/24 to 6.3% due to high inflation and rising borrowing costs. However, the report highlights unexpected resilience in private consumption, investment, and robust growth in the services sector as factors supporting an upward revision to growth in 2023. India is expected to remain the fastest-growing economy among the largest Emerging Market and Developing Economies (EMDEs). This article delves into the details of the World Bank's report and its implications for India's economic prospects.

Slowdown in Growth and Factors Influencing it:

The World Bank's Global Economic Prospects report projects a further slowdown in India's growth to 6.3% for the fiscal year 2023/24, a downward revision from the earlier estimate of 6.6%. The primary reasons for this decline are constrained private consumption caused by high inflation and the impact of rising borrowing costs on government consumption. Despite this moderation, India is expected to maintain its position as one of the fastest-growing economies globally.

Recovery Expected in the Medium Term:

Looking ahead, the World Bank anticipates a slight pickup in India's growth trajectory by the fiscal year 2025/26. This recovery is attributed to the expected easing of inflation towards the midpoint of the tolerance range and the potential benefits of ongoing reforms. The report emphasises that India will continue to outpace other major EMDEs in terms of both aggregate and per capita GDP growth.

Resilience in Private Consumption and Investment:

The World Bank's report highlights the unexpected resilience observed in private consumption and investment, along with robust growth in the services sector, which contributed to an upward revision in growth for 2023. Despite the challenges posed by inflation and borrowing costs, the Indian economy demonstrated strength in these areas. The manufacturing sector rebounded in 2023 after a contraction in the second half of 2022, while investment growth remained robust, supported by increased government capital expenditure and rising corporate profits.

Positive Indicators and Outlook:

The report notes encouraging signs in India's labour market, with unemployment declining to 6.8% in the first quarter of 2023—the lowest level since the onset of the COVID-19 pandemic. Labour force participation also witnessed an increase. Moreover, the headline consumer price inflation returned to within the central bank's target range of 2-6 percent, indicating stability in price levels. These positive indicators provide a foundation for future economic growth.

Future Growth Projections:

The World Bank forecasts a GDP growth rate of 6.4% for the fiscal year 2024/25, indicating a moderate improvement. Looking further ahead, the growth rate is expected to reach 6.5% in the fiscal year 2025/26. These projections reflect the World Bank's assessment of India's economic trajectory, considering various factors such as inflation trends, fiscal policies, and the pace of reforms.

The World Bank's revised GDP growth forecast for India underscores the challenges posed by high inflation and rising borrowing costs, leading to a projected slowdown in the fiscal year 2023/24. However, the country's resilience in private consumption, investment, and services sector growth provides hope for a gradual recovery. As India continues to be the fastest-growing economy among major EMDEs, the focus on managing inflation and implementing reforms will be critical in sustaining a robust growth trajectory in the medium to long term.