NEW DELHI : After higher than expected growth in FY23 aided by strong farm sector output and government spending, India’s economic expansion is expected to moderate to 6% in the current financial year on account of weak global demand and the high interest rate that is taking a toll on household consumption, Organisation for Economic Co-operation and Development (OECD) said in its global economic forecast released on Wednesday.
OECD, however, has said moderating inflation and monetary policy easing in the second half of current fiscal will help discretionary household spending to regain momentum, helping the economy to accelerate to 7% growth in FY25, aided by improved global conditions.
OECD’s forecast is lower than RBI’s forecast of a 6.5% expansion this fiscal. While the International Monetary Fund had in April forecast a 5.9% growth for India this year, the World Bank on Tuesday said India is expected to grow at 6.3% in the year ending March 2024.
“Weak global demand and the effect of monetary policy tightening to manage inflationary pressures will constrain the economy in FY 2023-24, limiting real GDP growth to 6%,” the OECD said.
Robust growth in agriculture, construction and services sectors and a rebound in manufacturing in the March quarter had supported India’s 7.2% growth in FY23 beating the official forecast of 7%.
OECD said that despite an impressive growth and development record, daunting challenges remain for India. “Creating good jobs is the most promising pathway to reduce poverty, which is particularly high in the female population. Increasing investment in education and vocational training, and updating labour laws, would help to achieve this objective. India is particularly vulnerable to extreme heatwaves and must make progress in mobilising resources for investment in the green economy,” said the agency.
OECD pointed out that domestic growth prospects are strongly influenced by global developments, saying that India has seized the opportunity of discounted Urals oil, which has increased Russia’s share in its energy imports. It said fertiliser imports have also risen from Russia. Overall, Indian imports from Russia rose from $9.9 billion (1.6% of total imports) in FY 2021-22 to $46.2 billion (6.5%) in FY 2022-23, OECD pointed out.
India’s oil import bill is crucial as it is a major component of its cross-border trade. India’s trade deficit in merchandise exports had gone up in FY23 from the year ago period and the improvement in service exports was insufficient to offset the imbalance in goods trade.
OECD also said that India may see mild interest rate declines from mid-2024. “A long cycle of policy rate increases came to a halt in April. Following one further small increase, rates are expected to remain unchanged until the end of the calendar year, when evidence will confirm whether core inflation, which is less sensitive to weather conditions and geopolitical tensions, has durably diminished,” OECD said.
During the projection period, the priority for fiscal policy is to control government debt, so as to keep it at sustainable levels, reduce interest payments, and thereby free resources for public investment in physical and human capital and initiatives to adapt to population aging, the agency said.
“’The next 25 years until the 2047 centenary of Independence will be crucial for India to fight poverty and the government strategy (so-called Amrit Kaal) will require a large increase in capital investment outlays,” OECD said.
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Updated: 07 Jun 2023, 11:09 PM IST