According to the most recent India Development Update (IDU) from the World Bank, India has shown resilience despite a difficult global climate.
With a 7.2% growth rate in FY22/23, India was one of the fastest-growing major economies, according to the Bank's main half-yearly assessment on the Indian economy, the IDU. When compared to the other G20 countries, India's growth rate was second highest and about double the average for developing market economies. Strong consumer spending, government spending on infrastructure, and a fortified banking system all contributed to this resiliency. First quarter FY23/24 bank credit growth was 15.8%, up from 13.3% in the prior year's first quarter.
Due to rising global interest rates, geopolitical tensions, and sluggish global demand, the IDU predicts that global headwinds will continue to persist and intensify. Against this backdrop, global economic growth is expected to moderate over the next few years.
The World Bank expects India's GDP to rise by 6.3% in FY23/24. Difficult external conditions and ebbing pent-up demand are largely to blame for the predicted slowdown. Still, projections call for investment growth to continue solid at 8.9% and service sector activity growth of 7.4%.
“An adverse global environment will continue to pose challenges in the short-term," said Auguste Tano Kouame, World Bank's Country Director in India. “Tapping public spending that crowds in more private investments will create more favorable conditions for India to seize global opportunities in the future and thus achieve higher growth.”
Inflation has risen sharply in recent months, and bad weather is a contributing factor. In July, food price increases drove headline inflation to 7.8 percent. As food prices return to normal and the government takes steps to increase the supply of vital commodities, inflation is projected to gradually decline.
“While the spike in headline inflation may temporarily constrain consumption, we project a moderation. Overall conditions will remain conducive for private investment,” said Dhruv Sharma, Senior Economist, World Bank, and lead author of the report. “The volume of foreign direct investment is also likely to grow in India as rebalancing of the global value chain continues.”
From the perspective of the World Bank, the budget deficit is expected to reduce to -0.1% of GDP in FY23 and -0.1% in FY24. At 83% of GDP, the public debt is projected to level off. The external current account deficit is forecast to decrease to 1.4% of GDP, with sufficient financing from net inflows of foreign direct investment and the backing of sizable foreign exchange reserves.
OUTLOOK
The India Development Update is a companion article to the South Asia Development Update, a twice-a-year World Bank research that analyses economic developments and prospects in the South Asia area and discusses policy concerns faced by governments. The October 2023 edition titled Toward Faster, Cleaner Growth reveals growth in South Asia is higher than any other developing country region in the world, but slower than its pre-pandemic pace and not fast enough to reach its development goals. To help governments in the region manage budgetary risks and speed up growth, the report offers both immediate and long-term policy recommendations, such as increasing private sector investment and capitalizing on possibilities presented by the global energy transition.