Impending slowdown

Global uncertainty will affect economic growth

The World Bank and the Asian Development Bank (ADB) on Tuesday came up with new growth estimates. Expectedly, both projections underline that the Indian economy will slow in 2023-24. According to the World Bank’s projections, India will grow at 6.3 per cent, while the ADB expects growth at 6.4 per cent. The projections are close to what the Economic Survey had forecast in January. It had projected a baseline growth rate of 6.5 per cent with a range of 6-6.8 per cent. Projections by multilateral agencies are within the given range. However, given the evolving global and domestic macroeconomic conditions, these projections could come under pressure and growth could be close to the lower end of the range provided by the Economic Survey, if not below.

The World Bank expects the Indian economy to have grown at 6.9 per cent in 2022-23, which is also close to the official estimate of 7 per cent. However, it is worth noting that gross domestic product growth slowed to 4.4 per cent in the third quarter of 2022-23 and a lot will depend on the fourth-quarter number. If the final number comes below the given projection, estimates for the current year will also need to be adjusted. Further, the macroeconomic conditions are far from supportive. The global economy, according to the World Bank, is expected to grow 1.8 per cent in 2023 compared to 2.8 per cent in 2022. It would thus be difficult for the Indian economy to reverse the loss of momentum witnessed in the second half of last fiscal year at a time when the global economy is slowing.

Additionally, the banking-sector stress on both sides of the Atlantic has increased uncertainty in financial markets. Since monetary policy will need to be tightened further, both in the US and Europe, to contain inflation, more banks and financial institutions could come under pressure, which would affect capital flows. Although the current-account deficit has moderated, large outflows can increase volatility in financial markets with implications for growth. Besides, the decision by large crude oil producers to cut production suggests that importers like India cannot perhaps expect relief on this front. Potential escalation in geopolitical tensions could also affect economic outcomes in more ways than one.

In the given global economic backdrop, it is heartening that the Indian banking system is in relatively good shape. Both corporate and bank balance sheets have improved over the last few years. However, this will not be enough. As the World Bank has noted, the impact of monetary-policy tightening, growth uncertainty, and lower spending by the government would constrain demand. The Reserve Bank of India (RBI) has raised the policy interest rate by 250 basis points in the current cycle so far and is expected to deliver another rate increase this week. Since the inflation rate is above the RBI’s tolerance band, it is likely that the policy interest rate will remain elevated for some time, which would affect demand. On the fiscal front, the government has to move forward on the consolidation path and will not be in a position to support growth in the medium term without slippage risks, which must be avoided at this stage. In the given circumstances, therefore, it would be important to avoid policy mistakes and strengthen macroeconomic stability.