Although considerable concerns exist in the global environment, the Update adds that India is one of the world's fastest rising economies. Overall growth is expected to be 6.9 percent for the year, with real GDP increasing 7.7 percent year on year during the first three quarters of fiscal year 2022/23. In the second half of FY 22/23, there were some indicators of moderation.
Strong investment activity, boosted by the government's capex drive, and buoyant private consumption, particularly among higher-income earners, fueled growth. Inflation remained high, averaging roughly 6.7 percent in FY22/23, but the current-account deficit narrowed in Q3 as service exports increased and global commodity prices fell. The World Bank has reduced its GDP prediction for FY23/24 to 6.3 percent from 6.6 percent. (December 2022).
Slower consumer growth and tough external factors are projected to limit growth. Rising borrowing costs and weaker income growth will weigh on private consumption growth, while government consumption is expected to increase more slowly as pandemic-related fiscal assistance measures are phased down.
"The Indian economy continues to show strong resilience to external shocks," stated World Bank Country Director in India Auguste Tano Kouame. "Despite external pressures, India's service exports have increased, and the current-account deficit is shrinking."
Although headline inflation is high, it is expected to fall to 5.2 percent on average in FY23/24 due to lower global commodity prices and some slowdown in local demand. By raising the policy interest rate, the Reserve Bank of India has discontinued accommodating policies aimed at containing inflation.
India's banking sector is solid, backed by asset quality improvements and sustained private-sector loan growth. The central government is expected to meet its fiscal deficit target of 5.9 percent of GDP in FY23/24, and the general government deficit is expected to fall as state government deficits are reduced.
As a result, the debt-to-GDP ratio is expected to level out. On the external front, the current account deficit is expected to fall to 2.1 percent of GDP in FY22/23, down from an estimated 3 percent in FY22/23, thanks to strong service exports and a shrinking merchandise trade imbalance.
"Spillovers from recent developments in financial markets in the United States and Europe pose a risk to short-term investment flows to emerging markets, including India," said Dhruv Sharma, World Bank Senior Economist and report lead author. "However, Indian banks continue to be well capitalized."
