Wednesday 7 December 2022
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EconomyWorld Bank downgrades India's growth forecast but notes 'India is recovering stronger...

World Bank downgrades India’s growth forecast but notes ‘India is recovering stronger than the rest of the world’

The World Bank today projected a growth rate of 6.5% for the Indian economy for the year 2022-23, a drop of 1% from its previous June 2022 projections, citing the deteriorating international environment. In its latest South Asia Economic Focus report released ahead of the annual meeting of the International Monetary Fund and the World Bank, the Bank, however, noted that India is recovering stronger than the rest of the world.

The Indian economy grew by 8.7% in the previous year. "The Indian economy has done well compared to the other countries in south Asia, with relatively strong growth performance… bounced back from the sharp contraction during the of Covid," Hans Timmer, the World Bank chief economist (South Asia), said.

Timmer said India had done relatively well with the advantage that it did not have a large external debt, there were no problems coming from that side, and there was prudent monetary policy. He noted that the Indian economy had done especially well in the services sector and especially service exports.

"But we have downgraded the forecast for the year that just started and that is by and large because the international environment is deteriorating for India and for all countries. We see kind of an inflexion point in the middle of this year, and first signs of slowing across the world," the World Bank chief economist (South Asia) said.

The second half of the calendar year is weak in many countries and will be relatively weak also in India, Timmer said. He explained that was mainly because of two factors. One is the slowing of growth in the real economy of high-income countries.

The other one is the global tightening of monetary policy that tightens financial markets and not just that it leads to outflows in many developing countries, but it also increases interest rates and uncertainty in developing countries which has a negative impact on investment.

"So, it (India) has done relatively well. It is not as vulnerable as some of the other countries. But it's still in tough weather. It (India) has to navigate the higher commodity prices and there are more headwinds at the moment," he said in response to a question.

Timmer said India was doing better than the rest of the world, adding that there were more buffers in India, especially large reserves at the central bank. That's very helpful. "Then the government has very actively reacted to the Covid crisis," he said.

The Indian government has set an example for the rest of the world by expanding social safety nets using digital ideas. "I think it's almost up to a million people that they are reaching at the moment. It's a good response also," he said.

At the same time, Timmer said that he did not agree with all the policies of the Indian government. "Especially their reaction to the high commodity prices might seem logical in the short run but might backfire in the long run. For example, the export ban on and the export ban or the very high tariffs on rice exports," he said.

They seem logical to create food security domestically, but ultimately that creates more problems in the rest of the region and the rest of the world. "So not all policies are optimal, but a strong reaction to the crisis in terms of relief efforts, strong monetary policies, and in general a trend towards a more business-friendly environment," the World Bank chief economist (South Asia) said.

Responding to a question, Timmer said that India needed to address some key issues. "Although we look at a relatively favourable growth rate, it is growth that is supported by only a small part of the economy. It sounds good, but if it is not coming from a much broader base, then that growth rate of a relatively small part of the economy doesn't translate into significant growth of income for all the households, he said.

Timmer pointed out that only 20% of women are participating in the labour market. "That is a problem that has to be addressed. You don't solve that just by extending your social security system. That's important. Ultimately, the people should be given the tools to generate income themselves," he said.

"What we have seen in the region and to some extent in India also is that the government was not really prepared to absorb all those shocks that we are seeing in the region. The COVID shock, the war in Ukraine and the commodity prices are once-in-a-lifetime shocks and they come one after the other and then the environmental disasters also," the World Bank chief economist (South Asia) said.

Both the government and the people are not prepared to cope with that. And that is because just too few people are fully participating in the economy, he argued, adding that that's a high priority for India to make progress there.

"In India, the focus is on the existing big firms. The focus is on FDI. And that's all very good. The focus is on social safety nets. That's also very good. But it's not enough. You need to integrate more people into the economy," Timmer said.

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