Realistic assessment

Focus on improving growth prospects

Economists at the Union Ministry of Finance (MoF) have a more realistic outlook for the Indian economy. In its monthly review for March, released this week, the ministry reiterated that downside risks outweighed the upside risks to its growth forecast of 6.5 per cent for 2023-24. The MoF’s projection is broadly in line with other agencies, such as the World Bank, which expects the Indian economy to grow 6.3 per cent, and the Asian Development Bank’s forecast of 6.4 per cent for the ongoing fiscal year. The Reserve Bank of India expects the Indian economy to grow 6.5 per cent, though it has revised its projection upward in the last meeting of the Monetary Policy Committee (MPC). Economists at the central bank seem more optimistic. Their latest monthly assessment, for instance, noted that recent data suggested multilateral institutions, particularly the International Monetary Fund (IMF), were likely to see forecast errors and the actual outcomes might surprise positively.

The IMF’s latest World Economic Outlook, compared to the previous projection, had lowered the current year’s growth forecast for India by 20 basis points to 5.9 per cent. The MoF in this context has done well to highlight the downside risks, though the actual growth outcome may be significantly lower than its projection. A lot will also depend on the growth level at which India officially ends 2022-23. According to the official projection, the economy is expected to have grown 7 per cent last fiscal year. However, it is important to note that growth in the first half of last fiscal year was driven partly by a weaker base, which will not be available this fiscal year.

Besides, as the MoF has noted, risks could emerge from higher crude oil prices after the Organization of the Petroleum Exporting Countries decided to cut production. Troubles in the banking and financial sector in advanced economies could lead to risk aversion and affect capital flows. Also, forecasts of El Nino can increase the risks for monsoons, which would not only affect the agriculture sector but demand in general. But these are not the only risks to growth. Although the inflation pressure eased in March, the rate still remains significantly above the target of 4 per cent. While the MPC decided to leave the policy rate unchanged in its last meeting, interest rates may remain elevated for some time, which will affect economic activity. Global interest rates are also expected to remain at comparatively high levels, affecting capital flows.

From a medium-term viewpoint, which is what the policy should focus on, global growth is likely to remain weak, which would affect India’s prospects. Geopolitical tensions and the ongoing Ukraine war also remain a major risk for the global economy. Growth in India is supported partly by higher government capital expenditure. But since the government will have to bring down the fiscal deficit to a more moderate level in the medium term, support from capital expenditure to growth will also moderate. On the positive side, though, the decline in the current account deficit, and healthy corporate and bank balance sheets would help maintain economic stability. Overall, since there are significant risks to growth in the current year and beyond, policy interventions should be targeted to improve the medium-term potential of the Indian economy.