New Delhi: The Asian Development Bank on Wednesday lowered its growth forecast for India for 2022-23 to 7% from 7.2% estimated in July, given higher-than-expected inflation and monetary tightening. It also lowered India’s growth estimate for 2023-24 to 7.2% from 7.8%.
It said elevated oil and commodity prices and high inflation will likely require continued tightening of monetary policy to ensure that inflation expectations do not get entrenched, “which would likely hinder economic growth in the short run.”
The Manila-based multilateral funding agency forecast India’s inflation at 6.7% for FY23, and 5.8 % for next year. It pointed out that demand pressures from strengthening economic activity are tamped down by easing supply bottlenecks.
GDP growth is revised down from ADO 2022’s forecasts to 7.0% for FY2022 and 7.2% for FY2023 as price pressures are expected to adversely impact domestic consumption, and sluggish global demand and elevated oil prices will likely be a drag on net exports,” said ADB in the Asian Development Outlook 2022 Update.
It said that inflation has turned out to be more persistent than expected, and led to a sharp tightening in monetary policy. “The projections for inflation are revised up over the forecast horizon. Because of the less-than-favourable global environment, the forecasts for the current account deficit for both fiscal years are also raised,” it said.
India’s retail inflation has been hovering at a record 7%, remaining above the Reserve Bank of India’s upper tolerance limit of 6% for eight straight months now, largely led by higher food prices and pressures from rising global oil and commodity prices.
“These developments indicate that while rising global oil and commodity prices and supply constraints following the Russian invasion of Ukraine have stoked inflation, domestic factors, such as heatwaves and heavy rainfall, are having a major impact on inflation,” it said.
The report pointed out that the slowdown in global growth and high oil prices will hurt India’s export prospects in 2022-23. It added that imports are expected to grow faster on rising domestic demand, and remittances may fall as global income falters, despite a depreciating rupee.
“Weaker than expected global demand over the next 2 years will also adversely affect exports and growth, despite the structural reforms being undertaken by the government,” it said.
The rate setting panel of Reserve Bank of India hiked repo rate by 50 basis points for the third time in a row in August, taking the policy rate to the pre-pandemic levels of 5.4%.
“Because economic activity remains below the pre-pandemic trend level, and inflation is largely caused by supply-side factors, the hike was primarily aimed at anchoring inflation expectations and reducing capital outflows following US monetary tightening,” said the outlook report.
It estimated India’s current account deficit to widen to 3.8% of GDP in 2022-23 from 1.2% of GDP last year and narrow to 2.1% in 2023-24.
“Subsidised fertilizer and gas, the free food distribution programme, and the excise duty cuts will help offset some of the effects of high inflation on consumers, but the tax on packaged food products will likely be a burden on consumers already dealing with rising inflation,” said the report.
India’s economy grew 13.5% year on year in the first quarter of fiscal year 2022 reflecting strong growth in services that reflected pent-up demand being released for contact intensive service sectors as the country returns to normalcy from COVID-19.
The multilateral agency also lowered its growth forecast for South Asia to 6.5% for 2022 from 7.0% estimated earlier and to 6.5% from 7.4% for 2023 as global economic headwinds continue to reduce demand and cause supply disruptions. “This outlook reflects the pattern of growth in India, which accounts for 80% of the sub-regional economy,” said the report.
