ADB lowers India’s growth forecast to 6.3 per cent for FY24, raises inflation forecast

Asian Development Bank, Wednesday, revised India’s growth forecast downward to 6.3% from 6.4% projected earlier, pointing out that erratic monsoons are likely to impact agricultural output.

“Slowing exports could foment headwinds for the economy, and erratic rainfall patterns are likely to undermine agricultural output,” ADB said in its report.

The Manila-headquartered bank revised its inflation outlook upwards to 5.5%, on account of unexpectedly high food prices, from 5% projected in its April report.

India’s inflation has been trending above the Reserve Bank of India’s upper band limit of 6% for the last two months, with August inflation easing to 6.8% from 7.4% in July.

While ADB was pessimistic about FY24, it retained its growth forecast for next year, projecting Indian economy to grow 6.7% in FY25, on back of rising private investment and industrial output.

Data released last week showed industrial output rising to a five-month high of 5.7% in July, compared with 3.8% in the previous month.

“Indian growth in the rest of this fiscal year and next will be propelled by robust domestic consumption as consumer confidence improves, and by investment, including large increases in government capital expenditure,” ADB said.

“The services sector will continue to grow strongly in FY24 and FY25, supported by a high-performing banking sector, as well as professional services and real estate,” the bank further noted.

The multilateral bank lowered the inflation forecast for FY25 to 4.2%, in line with RBI’s target of 4%, on account of moderating core inflation. Reserve Bank of India in its latest state of the economy report had also hinted at core inflation being indicative of broad-based easing of price pressures.

“An important development for the conduct of monetary policy is the stabilizing of core inflation, which also reflects a broad-based easing of price pressures across its constituents, both goods and services,” the central bank had said in its State of the Economy report.

ADB expects RBI to hold rates at 6.5% in FY24 and only start cutting from next year. RBI’s Monetary Policy Committee is expected to meet in early October.

While ADB counted weather-related events and global uncertainties as downside risks, it said growth could be higher than the 6.7% projected in FY25.

“On the upside, economic growth could be higher in FY2024 than expected if foreign direct investment inflows are larger, particularly in the manufacturing sector, as a result of multinational corporations diversifying their supply chains by including India as a production location,” it said.

The report noted that even if the Asian region was witnessing robust growth and falling inflations, risks were rising.