World Bank raises India growth forecast to 7% for current fiscal year from 6.6%

The World Bank on Tuesday revised its FY25 growth forecast for India to 7%, up from its previous estimate of 6.6%. The upgrade reflects the Indian's government's continued capital expenditure on infrastructure, a rise in household investments in real estate, better-than-expected monsoon and agricultural output, and an increase in private consumption, it said.

The Washington-based multilateral development bank remains optimistic about India's medium-term prospects, citing robust revenue growth and further fiscal consolidation, despite global economic challenges.

According to its projections, India's debt-to-GDP ratio is expected to decline from 83.9% in FY24 to 82% by FY27, while the current account deficit is anticipated to remain between 1% and 1.6% of GDP until FY27.

"Amid geopolitical uncertainties and relatively restrictive monetary policy, the global economic activity experienced a deceleration in 2023 to 2.6%. India showed extraordinary resilience against challenging external conditions and grew at 8.2% in FY24, as the fastest growing major economy in the world," the World Bank stated in its India Development Update (September 2024), released on Tuesday.

"The urban labour market improved gradually since the peak of the pandemic although youth unemployment remained elevated at around 17%. Growth is forecast to remain strong over the medium term reaching 7% in FY25 and averaging 6.5% over FY25-FY27, from a high base in the previous years," it added.

Last week, Moody's upgraded its economic growth forecast for India to 7.2% in 2024 and 6.6% in 2025, from earlier estimates of 6.8% and 6.4%, respectively, driven by broad-based growth. Similarly, the International Monetary Fund (IMF) raised its GDP growth forecast for India in FY25 by 20 basis points to 7% in July.

The Reserve Bank of India (RBI) estimates gross domestic product (GDP) growth at 7.2% for FY25.

After the release of the India Development Update, Auguste Tano Kouame, the World Bank's Country Director for India, expressed confidence in India's growth trajectory, noting that the country is on track to maintain strong growth in the medium term without significant slowdown.

"If you look at India’s data over the last few years, you can see a dynamic country. The story of India is the story of success despite adversaries," Kouame said. “However, this is based on the assumption that policies and reforms continue to take place.”

Kouame also highlighted India's strong growth prospects, coupled with declining inflation, as key factors in reducing extreme poverty. He emphasized that India could further boost growth by leveraging its global trade potential.

"In addition to IT, business services and pharma where it excels, India can diversify its export basket with increased exports in textiles, apparel, and footwear sectors, as well as electronics and green technology products," he added.

India’s GDP growth moderated to 6.7% annually in the April-June quarter (Q1) of FY25, down from 7.8% in the previous quarter, according to data released by the statistics ministry last week. This deceleration was largely attributed to a decline in government capital expenditure amid the general elections and a drop in urban consumer confidence.

Nevertheless, the gross value added (GVA) – a measure of the total value of goods and services produced in the economy – increased 6.8%, up from 6.3% in the previous quarter, indicating improved business activity.

The World Bank also projected India's retail inflation, as measured by the Consumer Price Index (CPI), to rise by 4.5% in FY25, 4.1% in FY26, and 4% in FY27, aligning with RBI's target.

Tapping India's export potential

On the international trade front, the World Bank noted that India has significant untapped potential to leverage international trade for development, despite dynamic service exports.

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The report suggested that India could benefit from a new strategic plan to diversify exports and capitalize on the shifting geopolitical landscape.

""Despite its strong growth, India’s global trade share is not matching its economic size. India has not fully capitalized on the opportunity presented by China's withdrawal from labour-intensive manufacturing," the report noted.

"Trade-related jobs have been declining due to concentration in capital- and skill-intensive exports…Although FTAs have a strong economic impact on India, recent agreements excluding key areas like digital trade limit their full potential," it added.

Data from the commerce ministry  showed that India's goods trade deficit widened month-on-month in July, driven by increasing imports and subdued global demand amid geopolitical challenges.

The merchandise trade deficit – the difference between exports and imports – stood at $23.5 billion in July, up from the $20.98 billion deficit reported in the previous month.

Merchandise exports fell to $33.98 billion in July, from $35.20 billion in June and $38.13 billion in May. In July 2023, goods exports were $34.49 billion.

Meanwhile, merchandise imports increased to $57.48 billion in July, up from $56.18 billion in June, though lower than the $61.91 billion recorded in May. During July 2023, merchandise imports stood at $53.49 billion.

"With rising production costs and declining productivity, India's share in global apparel exports has decreased from 4% in 2018 to 3% in 2022," said Nora Dihel and Ran Li, senior economists and co-authors of the report.

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"To generate more trade-related jobs, India should integrate more deeply into global value chains, which will also create opportunities for innovation and productivity growth," they added.