The Organisation for Economic Co-operation and Development (OECD) on Wednesday forecast India’s GDP growth at 6.9 per cent for FY23. This is 120 basis points lower than the 8.1 per cent projection made in December.

“After recording the strongest GDP rebound in the G20 in 2021, the Indian economy is progressively losing momentum as inflationary expectations remain elevated due to rising global energy and food prices, monetary policy normalises and global conditions deteriorate,” OECD said in its latest economic outlook.

Further, it estimates a growth of 6.2 per cent in FY24, despite a pick-up of corporate investment facilitated by the Production Linked Incentive (PLI) scheme. “While inflation will gradually decline, the current account deficit will widen due to the surge in energy import costs,” it said.

What contributed

This forecast has been made on a day when the RBI kept the 7.2 per cent estimated growth rate for current fiscal with risks broadly balanced. On Tuesday, World Bank had slashed India’s forecast to 7.5 per cent for the current fiscal.

OECD, in its outlook said, the waning scale of the Covid-19 shock, the elimination of containment measures, the ability of exporters to take advantage of favourable external conditions, and government support to vulnerable households combined to produce remarkably high GDP growth in FY22. Merchandise exports rose to a record level, exceeding official government targets and validating India’s strategy of managed liberalisation through preferential trade agreements with major partners.

However, consumption growth has slowed, with sales of two-wheelers falling to a 10-year minimum, subdued private sector credit growth, and contracting employment, although companies report difficulties in filling vacancies.

Consumer price inflation for energy-related items and edible oils started trending up even before the Ukraine war and has accelerated afterwards. Inflation has also risen and become wide-ranging: almost 75 per cent of the CPI sub-components exceed the 4 per cent inflation target.

Despite uncertainty, reflected in the higher yield on 10-year government bonds, equity markets have been boosted by the initial public offer of State-owned LIC. Meanwhile, the import coverage of foreign exchange reserves, which exceeded 18 months in March 2021, declined to 12 months in March 2022.

Neutral monetary stance

OECD noted that RBI began monetary policy tightening in May, intending to anchor inflation expectations and limit second-round effects. “Given the financial and social costs of high inflation, the RBI should gradually move towards a more neutral monetary stance,” it said. On Wednesday, RBI hiked policy repo rate by 50 basis points to 4.9 per cent and also removed the accommodative stance.

OECD advised that the government should counter signs of a rapid deterioration in living standards with income support for vulnerable households. Risks include the appearance of a new Covid variant, failure to tame inflation, a reversal of capital flows to emerging markets, and a significant widening of the current account deficit.