ADB slashes India growth forecast to 7.2% for FY23, sees higher inflation

Private investment will soften due to higher cost of borrowing for firms, says development bank's outlook

The Asian Development Bank (ADB) on Thursday slashed its growth forecast for India to 7.2 per cent for FY23 from 7.5 per cent estimated earlier citing higher than anticipated inflation since April and subsequent monetary tightening by the central bank.

The Manila-based multilateral development bank also raised its inflation forecast for India to 6.7 per cent for FY23 from 5.8 per cent projected earlier.

“Although consumer confidence continues to improve, higher-than-expected inflation will erode consumer purchasing power. Some of the impact of this may be offset by a cut in excise duties, the provision of fertilizer and gas subsidies, and the extension of a free-food distribution program,” ADB said in its latest Asian Development Outlook supplement.

India’s GDP growth moderated to 4.1 per cent in the March quarter of FY22 on “disappointing” growth in private consumption and a contraction in manufacturing.

ADB said private investment will soften due to the higher cost of borrowing for firms as the Reserve Bank of India (RBI) continues to raise policy rates to contain inflation. “Net exports will shrink due to subdued global demand and a rising real effective exchange rate eroding export competitiveness despite a depreciating rupee,” it added.

About the supply side, ADB said higher commodity prices will boost the mining industry. “But manufacturing firms will bear the brunt of higher input costs due to rising oil prices. The services sector, hit hard by COVID-19 since 2020, will do well in FY23 and beyond as the economy opens up and travel resumes. Even so, growth in Fy24 is revised down to 7.8 per cent (from 8 per cent estimated earlier),” it said.

Industry group Ficci in its latest Economic Outlook Survey released separately on Thursday reduced the median GDP growth forecast to 7 per cent from 7.4 per cent estimated in April---within a range of 6.5 per cent to 7.3 per cent--blaming geopolitical uncertainty and its repercussions for the Indian economy.  

“Indian economy is not immune to global volatility, as is evident from the deepening inflationary pressures and increasing uncertainty in financial markets. The participants pointed out that these factors are exerting pressure on India's economic prospects and are likely to delay the recovery,” it said.

Ficci said major risks to India’s economic recovery include rising commodity prices, supply-side disruptions, bleak global growth prospects with the conflict prolonging in Europe. “A slowdown in the Chinese economy is also expected to have an impact on India's growth. Increased input cost is impairing discretionary spending as these get passed on to the final consumer through higher selling prices,” it added.