ADB cuts FY23 GDP forecast for India to 7% citing sluggish global demand

Earlier forecast was 7.2%; institution says high inflation is another growth hurdle, cut FY24 forecast to 7.2% from 7.8%

The Asian Development Bank (ADB) cut its fiscal year 2022-23 (FY23) gross domestic product growth forecast for India to 7 per cent from 7.2 per cent on Wednesday, citing sluggish global demand and tightening of monetary policy to manage inflationary pressures from elevated prices for oil and other commodities.

“While India’s GDP is steadily closing in on its pre-pandemic trend level, economic growth in the near term is likely to be affected by the global slowdown and high inflation,” said ADB Country Director for India Takeo Konishi. “We expect that the government’s continued efforts to improve the regulatory climate for businesses and infrastructure will boost investment and create more jobs in the medium term,” he said.

The multilateral institution also cut its FY24 forecast to 7.2 per cent from 7.8 per cent.

In a statement, the agency said that retail inflation is forecast to remain elevated over the next two years, averaging 6.7 per cent in FY23 before moderating to 5.8 per cent in FY24. “Inflationary pressures will crimp private consumption. However, subsidised fertilisers and gas, free food distribution, and excise duty cuts will help offset some of the impacts of high inflation on consumers,” it said.

ADB said that while the services sector is rebounding, the manufacturing sector is expected to grow slower because of rising input costs. Agriculture value-added is likely to be marginally lower, as the sown area has declined, and the monsoon remains uneven, it said, adding that a slowdown in global growth will result in sluggish exports, while the value of imports is likely to increase.

“Investment growth is likely to be led by public rather than private investment. Increased borrowing costs for the government, due to rising policy rates, will accentuate fiscal pressure until FY24 along with the cost of subsidies,” ADB said, adding that India’s current account deficit may widen to 3.8 percent of GDP in FY23 due to rising imports and a slowdown in exports.

ADB is just the latest agency to have cut its FY23 GDP forecast for India. After the Q1 GDP print of 13.5 percent, a number of banks and financial institutions slashed their India growth forecasts for the current financial year. These included State Bank of India, Goldman Sachs, Citigroup, ratings agencies Moody’s, Fitch and India Ratings.

The agency’s India forecast cut was part of a larger downgrade for Asian developing economies, amid mounting challenges that include increased monetary tightening by central banks, fallout from the protracted Russian invasion of Ukraine, and recurrent Covid-19 lockdowns in China.

“The region’s economy is expected to grow 4.3 per cent this year, compared with the bank’s projection in April of a 5.2 per cent expansion. The growth forecast for next year has been lowered to 4.9 per cent from 5.3 per cent. Excluding China, the rest of developing Asia is projected to grow by 5.3 per cent in both 2022 and 2023,” it said.

Additionally on Wednesday, ratings agency Moody’s said that along with China and Japan, the currencies of India, South Korea, Malaysia, Philippines, and Thailand are under some pressure. In a report, it said that not only will the Asia-Pacific central banks need to raise rates further through the end of this year and into next year, but they will have to stay at high levels for longer if the U.S. federal funds rate remains at a high rate through 2024 as is now expected.

“The fastest- growing economies at the moment—Malaysia, Vietnam and India—are likely to slow the most as their period of rapid post-Covid recovery comes to an end,” Moody’s said.