3 Reasons The World Bank Trimmed India's GDP Forecast

The World Bank raised its 2023 global growth forecast even as it trimmed India's GDP growth forecast to 6.3% in FY24 from 6.6% forecast in January 2023. Here are some reasons the World Bank cut India's forecast, even while raising the global GDP numbers.

1) A slowdown in private consumption as inflation remains elevated

The World Bank expects growth in India to slowdown further to 6.3% in the financial year FY 2023/24 (April to March). This is a 0.3 percentage point downward revision from the previous estimates of 6.6%. One of the prime reasons the World Bank trimmed the forecast is due to high inflation, leading to a slowdown in private consumption. Whenever inflation is high, disposable income remains low, which means consumption is low and hence growth. Higher inflation also means higher interest rates, which eventually leads to lower borrowings by individuals and corporates, which impacts growth directly. Interestingly, CPI Inflation in India has fallen sharply to 4.7% in April 2023, coming below the RBI's upper tolerance limit of 6%. The hope now is that the RBI will start cutting interest rates sometime later this year, which should be good for growth.

2) Government consumption impacted by fiscal consolidation

This may have been another reason to trim India's GDP forecasts. Let's explain the fiscal consolidation a bit. The government currently runs a fiscal deficit, which is nothing, but, expenditure of the government being over and above its income. In order to bring down the fiscal deficit, the government curtails spending. Remember, the government is a very large spender and when spending is curtailed, it pulls down growth and hence GDP numbers.

3) Rising borrowing costs for India

The government's gross market borrowing is likely to be Rs 15.43 lakh crore projected for FY 2023-24 in the Union Budget.

As interest rates have risen, the government's borrowing costs also increase, leading to constraints in spending on account of worries over elevated levels of fiscal deficit. India's fiscal deficit of 6.4% for the last financial year ended March 2023 narrowed from a year earlier and also met the Government's target, aided by buoyant tax receipts and some fiscal headroom from lower payments.

To conclude, slowdown in private consumption on acount of higher inflation, fiscal consolidation and rising borrowing costs are some of the reasons for trimming forecasts.