OECD slashes India’s GDP growth forecast to 6.9% in FY23

India's real GDP is projected to grow by 6.9% in fiscal year FY 2022-23 and 6.2% in FY 2023-24, as the country’s economy loses momentum due to high inflation, and rising global energy and food prices, says the Organisation for Economic Cooperation and Development (OECD) in its latest report. OECD's current GDP projections are lower than its earlier estimate of 8.1% GDP growth in 2022-23.

OECD's growth projections for India are lower than the World Bank's estimates, which in its recent report said India's GDP will grow at 7.5% in 2022-23. The Reserve Bank, in its monetary policy announcement on Wednesday, also retained its GDP growth forecast at 7.2% for FY23. International organisations like the International Monetary Fund and the United Nations had projected India's GDP FY23 growth at 8.2% and 6.4%, respectively.

"While inflation will gradually decline, the current account deficit will widen due to the surge in energy import costs," says the OECD report.

India recorded the strongest rebound from the COVID-related downturn among G20 economies, but momentum is dissipating due to weaker external conditions, rising global food and energy prices and the tightening of monetary policy, the Paris-based organisation says. Notably, India was the fastest-growing major economy in the world in 2021-22, recording 8.7% GDP growth.

Russia's war in Ukraine is also adversely impacting India's growth prospects as the country is a major importer of energy, fertilisers and edible oils. "GDP growth, which reached 8.7% in FY 2021, is projected to slow to 6.9% in FY 2022 and 6.2% in FY 2023, with weaker external demand growth and tighter monetary conditions being mitigated by strong government spending and an ambitious set of measures to simplify the business environment," says the report.

Headline inflation is projected to ease gradually, though remaining above the central bank’s upper tolerance limit of 6% throughout 2022 and 2023, it adds.

Monetary policy normalisation and weaker external demand will weigh on GDP growth in FY 2022-23 and FY 2023-24, believes OECD, though strong government spending will continue to support activity. "An ambitious set of measures to simplify the business environment, create a ‘bad bank’ (National Asset Reconstruction Company), tasked with cleaning up balance sheets, and improve logistics is expected to mitigate the impact of higher credit costs on private investment," says the report.

However, households maintain cautious views regarding short and medium-term prospects, amid signs of labour market softening, deteriorating purchasing power and flattening real incomes.

OECD says major risks continue to surround the outlook. "The COVID-19 pandemic may not subside as fast and broadly as expected and the booster vaccine campaign may stall at far from universal coverage levels. A significant deterioration in investors’ risk appetite for emerging economy assets may ignite a negative feedback loop between the financial sector and real economy, which in turn may weaken banks’ capital positions," says the report.

India needs energy transformations on a scale no country has achieved in history, believes OECD. India is set to see the largest increase in energy demand of any country over the next 20 years. Continued reliance on imported fuels – which the International Energy Agency expects to rise above 90% by 2040, up from 75% today – creates vulnerabilities to price cycles and volatility, as well as possible disruptions to supply, says OECD.

The RBI's MPC on Wednesday hiked the key repo rate by 50 basis points to 4.9% to contain spiralling inflation and vowed to focus on the withdrawal of the "accommodative" policy stance. "The policy rate is projected to rise to 5.3% by the end of 2022 and remain there in 2023," says OECD.