 "World Bank")
The World Bank on Wednesday slashed its FY23 growth forecast for India to 8 per cent from 8.7 per cent estimated in January, citing tepid recovery in consumption demand and escalating uncertainties due to the Russian invasion of Ukraine.
“The recovery in private consumption will be constrained by the incomplete recovery in the labor market, and inflationary pressures weighing on households’ purchasing power. The negative impact of the war in Ukraine on FY2022/23 growth is expected to be moderate, so growth will begin to taper off in the second half of 2022,” the World Bank said in its bi-annual “South Asia Economic Focus” report.
The World Bank said a further escalation in war in Ukraine could scare investors in emerging market securities and debt instruments and lead to a capital flight from South Asia to “safe havens” in the West.
“Foreign investors have already been exiting India’s financial market since October 2021, due to the impending monetary tightening by the US Federal Reserve. Recent developments in Eastern Europe have intensified the capital outflow, weakening the Indian rupee (INR). Maintaining macroeconomic stability through prudent and transparent policies will be important also if the Indian government turns to domestic borrowing,” it said.
Though South Asia has limited trade and financial links with Russia and Ukraine, higher commodity prices in global markets are expected to drag down this year’s GDP growth, the World Bank said.
“High commodity prices will weigh on import demand, while lower growth abroad will lead to softening demand for South Asian exports, especially from Europe,” it added.
The Washington-based multilateral lending institution said unlike many European banks, most banks in South Asia had small exposures to Russia and Ukraine.
“Although no Indian banks have subsidiaries in Russia, the country’s largest bank, State Bank of India, reported exposure of less than $10 million through a joint venture in Russia. Banks that support domestic importers and exporters with links to Russia may stop providing trade credits, thus impacting specific domestic companies involved in the trading. Over time, more of the financial sectors can be impacted through creditor-debtor relations in the global financial system,” it cautioned.
The World Bank said the increase in energy and food prices would hit poor households the hardest, exacerbating the already rising inequalities.
“Countries in the region have ways to cushion the impact of higher commodity prices. India has so far been able to purchase Ural oil at a discount from Russia,” it said.
The bank said economic recovery was uneven across sectors in India.
“On the supply side, the mining sector benefited from rising global commodity prices and expanded in both Q3 and Q4 of 2021. Manufacturing expanded in Q3, riding on increasing external demand but remained static in Q4 as the Omicron wave impacted global demand and rising input costs reduced margins. Services expanded in both quarters but remain below the pre-pandemic level. On the demand side, growth in private consumption was supported by a release of pent-up demand during the Delta wave, while investment was crowded-in by increased government capital spending. Imports and exports remained the fastest growing sectors in both Q3 and Q4, with higher growth in imports than in exports, contributing to current account deficits,” it said.
The World Bank said the credit offtake in infrastructure was expected to continue growing in 2022.
“Business expectations and investment, which had improved, might sour amid elevated input prices and a faster-than-anticipated increase in borrowing costs. The travel services balance may improve as India allows international flights to resume, while exports of computer and professional services are expected to remain strong,” it added.
