The global supply and inflation shocks have dragged down India's GDP growth forecasts over the past three months. The International Monetary Fund (IMF) has cut its growth forecast for India's GDP this year to 6.8% from 7.4%. The World Bank has snipped it to 6.5% from 7.5%. These are dramatic cuts in a very short period. However, the Reserve Bank of India (RBI) has adjusted its 2022-23 growth estimate only mildly to 7% from 7.2%, showing confidence in India's ability to absorb the global economic and geopolitical shocks.
But even as IMF and World Bank have lowered India's GDP forecasts, they have acknowledged India's strength. The World Bank has stated that India is not as vulnerable to the global economic downturn as other regional economies. IMF has pointed out that India is set to become the world's third-largest economy by 2028, having a GDP of about $5.36 trillion, overtaking Japan. The projections estimate that India will catch up with Germany by 2026. Last quarter, India overtook Britain (economically in a bad state, to be fair) to claim 5th spot in the world's largest economies.
Still, India cannot dodge the global rough weather. It needs to mitigate the fallout of the global slowdown without trading its long-term growth capacity for short-term pain mitigation.
India's biggest challenge now is to bring down inflation even at the cost of some growth so that it can keep growing at a high rate for many years. Though its current growth rate would ensure it is not trapped in the high inflation-low growth spiral, it still needs to keep its economic fundamentals in good shape. The key is to prevent inflation expectations from getting out of hand and creating a vicious price-wage hike spiral. Also, once inflation infects the broader economy and affects daily living, it creates political issues that can affect policymaking.
RBI has not panicked despite consumer inflation remaining above its target of 4% for nearly three years, and above its upper tolerance limit of 6% for nearly a year. It has remained biased towards growth. But now it must respond to the energy and food price volatility, monetary tightening in the key economies, and the rupee's erosion against the dollar.
Read more at: https://economictimes.indiatimes.com/opinion/et-commentary/gdp-growth-india-slips-but-canters-on/articleshow/95055211.cms