India’s growth forecast for fiscal 2023-24 has been lowered to 6.3% by the World Bank, attributing it to consumption constraints caused by high inflation and rising borrowing costs. This downward revision contrasts with the World Bank’s raised global growth forecast for 2023.
Inflation’s Impact on Consumption
High inflation reduces private consumption and hampers growth, with inflation-driven higher interest rates leading to reduced borrowing and directly affecting economic expansion. However, India’s Consumer Price Index (CPI) inflation has declined to 4.7% in April 2023, below the Reserve Bank of India’s 6% tolerance limit.
Government Spending Cuts and Economic Consolidation
Economic consolidation measures, including spending cuts, implemented by the government to reduce the fiscal deficit, have influenced India’s GDP forecast. The current central budget deficit, where government spending surpasses revenue, necessitates measures to address the fiscal deficit and its subsequent impact on GDP.
Rising Borrowing Costs and Fiscal Deficit Concerns
India’s projected total market borrowing of Rs 15.43 lakh crore for the fiscal year 2023-24 is expected to result in increased borrowing costs due to rising interest rates. The concerns over a higher fiscal deficit arising from these costs may lead to spending cuts. Notably, India achieved a fiscal deficit of 6.4% in the previous financial year, meeting the government’s target and demonstrating improvement compared to the preceding year.
Manufacturing Sector Recovery and Buoyant Investment Growth
The World Bank acknowledges the recovery of India’s manufacturing sector in 2023 and buoyant investment growth propelled by increased government capital spending. Anticipated growth in corporate profits is likely to stimulate private investment. Furthermore, the unemployment rate fell to 6.8% in Q1 2023, reaching its lowest level since the onset of the Covid pandemic.
Reserve Bank of India’s Stance on GDP Growth
The Reserve Bank of India (RBI) recently maintained the repo rate at 6.5%, providing a positive outlook for the market. The RBI predicts GDP growth of 6.5%, with quarterly projections of 8% in Q1, 6.5% in Q2, 6% in Q3, and 5.7% in Q4. The RBI expects domestic demand to be a key driver of economic growth.
