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NEW DELHI : The World Bank on Tuesday slashed its India economic growth forecast for FY23 from the earlier estimate of 8% in April to 7.5% because of surging inflation, supply chain disruptions, and sustained geopolitical tensions.

In January, the World Bank said that India’s gross domestic product (GDP) growth would be at 8.7% for the current financial year.

However, it said growth would be supported by the fixed investments undertaken by the private sector and the government incentives and reforms measures to improve the business climate.

The World Bank’s Global Economic Prospects report said compounding the damage from the covid-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation.

“This raises the risk of stagflation with potentially harmful consequences for middle- and low-income economies alike."

The report said global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022, significantly slower than the 4.1% estimated in January. “The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, the recession will be hard to avoid," said World Bank president David Malpass.

“The markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality," Malpass added.

Global inflation is also expected to moderate next year, but it will likely remain above inflation targets in many economies, the report said, adding that if inflation remains at elevated levels, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn, along with financial crises in some emerging market and developing economies.

Growth in advanced economies is projected to sharply decelerate from 5.1% in 2021 to 2.6% in 2022, down 1.2 percentage points compared to the projections in January. Growth is expected to further moderate to 2.2% in 2023, largely reflecting the further unwinding of fiscal and monetary policy support provided during the pandemic.

The World Bank report said policymakers should refrain from distortionary policies, such as price controls, subsidies and export bans, which could worsen the recent increase in commodity prices.

“Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions, and limited fiscal policy space, governments will need to re-prioritise spending toward targeted relief for vulnerable populations," it said.

The report further stated that the ultimate impact of the war on energy markets—and commodity markets more broadly—will depend on its duration and the extent of sanctions as a result of Russia’s invasion.

The International Energy Agency estimates that, under current sanctions, Russia’s oil exports could be temporarily reduced by 2.5 million barrels per day, about 30% of its current exports and about 3% of the global supply.

“A combination of diversion of oil to other countries, use of strategic petroleum reserves, and potentially some additional production from OPEC would likely be sufficient to fill this shortfall," the report read.

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