India's economic picture is darkening

World's Bank downward revision on India's economy is on account of both global and domestic factors, but mainly the external environment

Though the economy had sent out signals of recovery with the retreat of the Covid pandemic early this year, the outlook seems to have turned less rosy now. Last week, the World Bank marked down the forecast for the country’s growth to 6.5% from its earlier projection of 7.5%. Other agencies have also lowered their growth estimates to a considerable extent. The Reserve Bank of India (RBI), the Asian Development Bank and Fitch Ratings have lowered their estimates to 7%. Even those who have set a relatively higher target have agreed that the momentum has slowed down. The slowdown is more than natural deceleration after the high 9% growth earlier this year. The recovery is still in place, but some agencies do not rule out the chance of the situation getting worse going forward. It can further slow down to 5.8-6% next year.

The downward revision is on account of both global and domestic factors, but mainly the external environment. The World Bank has said that monetary policy tightening across the world and the impact of the Ukraine war will “weigh on India’s economic outlook”. Goods exports contracted for the first time since February 2021 in September. Imports growth has also slowed down and that is taken as a sign of falling domestic demand. Oil prices have started going up again. Inflation, which is high, may remain so in the coming months, and the higher interest rates are likely to further dent domestic demand. The global slowdown and the prospect of a recession in the US and other developed countries will hit exports. The World Trade Organisation (WTO) has lowered its forecast for global trade volume growth to 1%, down from 3.4% earlier. The World Bank expects that the slowdown would start in the October-December quarter as the cumulative effect of all the adverse factors start being felt.

Though the economy as a whole may have recovered to pre-Covid levels, large parts of it are still in distress. Micro, Small and Medium Enterprises (MSME), which employ large numbers of people, continue to struggle. According to the latest Periodic Labour Force Survey, the labour force participation rate in urban areas is lower than during pre-Covid levels. The labour market is weak in rural areas, too. There is no sign of revival of private investment, and private consumption will continue to be affected. The government’s finances are already overstretched, and it is in no position to increase public spending to give a boost to growth. India may still be among the fastest growing economies, but the pain of a slowdown will also be more because it is also among the poorest.