World Bank Forecasts Indian Economy to Expand by 6.3% in FY24

04 Oct, 2023

World Bank Forecasts Indian Economy to Expand by 6.3% in FY24

In its recent India Development Update released on Tuesday, the World Bank has projected that the Indian economy will exhibit resilience by growing at a rate of 6.3 percent during the current financial year, FY23-24. This forecast comes in the face of heightened inflation and global economic challenges. While the growth estimate remains unchanged from the Bank's earlier April update, it is slightly lower, by 20 basis points, than both the government and the Reserve Bank of India's (RBI) estimates, which stood at 6.5 percent for FY24.

The World Bank has, however, revised its inflation projection for FY24 upwards, from 5.2 percent in its April update to 5.9 percent. This adjustment is attributed to various factors, including monsoon deficiencies impacting prices, El Niño phenomena, and disruptions in the global supply chain. With inflation expected to persist, it is anticipated that the RBI's Monetary Policy Committee, set to commence its meeting, will maintain the repo rate at its current level.

Dhruv Sharma, Senior Economist at the World Bank and lead author of the report, remarked, "While the spike in headline inflation may temporarily constrain consumption, we project a moderation. Overall conditions will remain conducive for private investment."

In recent months, adverse weather conditions have contributed to an inflationary spike, with headline inflation reaching 7.8 percent in July, primarily driven by surging prices of essential food items like wheat and rice. The Bank anticipates that inflation will gradually decrease as food prices stabilize, and government measures enhance the supply of essential commodities.

The report also highlights the persistence of global economic headwinds due to factors such as high global interest rates, geopolitical tensions, and sluggish global demand. Consequently, the report suggests that global economic growth will slow down over the medium term.

Auguste Tano Kouamé, World Bank's Country Director in India, emphasized, "An adverse global environment will continue to pose challenges in the short term...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."

Regarding India's fiscal deficit, the World Bank expressed optimism, suggesting the possibility of a positive surprise in achieving the fiscal deficit target of 5.9 percent of GDP for the current financial year. This optimism is based on expected revenue mobilization and the buoyancy of Goods and Services Tax (GST) collections. Kouamé dismissed concerns of fiscal slippages due to upcoming elections, asserting that there is "almost zero risk" of such deviations from the fiscal consolidation path.

The report anticipates continued fiscal consolidation in FY24, with the central government fiscal deficit projected to decrease to 5.9 percent of GDP from 6.4 percent in the previous fiscal year. It also predicts that public debt will stabilize at 83 percent of GDP. On the external front, the current account deficit is expected to narrow to 1.4 percent of GDP, with ample support from foreign investment flows and significant foreign reserves.

To achieve the goal of becoming a high-income country, the World Bank underscores the importance of India's growth rate approaching 8 percent. A key factor in this endeavor is increasing the female labor force participation rate, which currently lags behind that of emerging market economies. The report suggests that India has room for improvement in this regard.

The report also sheds light on the disparity in job opportunities between men and women, with the quality of women's jobs in India significantly lower than that of men. Female labor force participation varies across Indian states, and the relationship with per capita income is not consistently aligned.

In the midst of expectations for increased growth, the World Bank predicts that private consumption will rise to 6 percent next year and 6.4 percent in 2025-26, up from 5.9 percent this year. Government consumption is also expected to increase to 5.1 percent and 5.8 percent in the next two years, while growth in gross fixed capital formation, an indicator of investment, is anticipated to moderate.

Dhruv Sharma summarized, "We do have a moderating trajectory when it comes to investment growth. But what's important to know…is that investment growth is actually higher than its average over the last several years. So, it's actually moderating down back to its longer-term average and is still a major driver of growth."