OECD raises India's FY24 growth forecast a jot to 6%

The Organisation for Economic Co-operation and Development (OECD) on Wednesday moved its forecast on India's economic expansion for this fiscal year higher to 6%, from 5.9%, while citing weak global demand and the effect of monetary policy tightening as factors constraining the growth.

OECD expects 4.8% inflation in India in FY24, a full percentage point below its previous projection and slower than Reserve Bank of India's forecast of 5.2%. With inflation easing, it predicts RBI will make at most one more small rate hike this calendar year and start lowering rates mid-2024. "Moderating inflation and monetary policy easing in the second half of 2024 will help discretionary household spending regain momentum," OECD said in its Economic Outlook report for June.

India growth at 7% for FY25: OECD forecast
"This, along with improved global conditions, will help economic activity to accelerate in FY25," OECD said.

In FY25, it expects India's economic growth to pick up to 7%, though at a tad slower pace than its April projection of 7.1%. It expects inflation next fiscal year to be 4.4%, compared with the previous estimate of 4.2%.

"With slower growth, inflation expectations, housing prices and wages will progressively moderate, helping headline inflation converge towards 4.5%. This will allow interest rates to be lowered from mid-2024," it pointed out.

RBI's monetary policy committee, which is currently meeting, is expected to hold the rates, according to economists. It will announce the decision on Thursday.

"Following one further small increase, rates are expected to remain unchanged until the end of the calendar year, when evidence will confirm whether core inflation, which is less sensitive to weather conditions and geopolitical tensions, has durably diminished," the multilateral organisation said.

Challenges remain
OECD, which fosters cooperation among member countries on economic and social issues, noted that challenges remained, especially on the labour and skilling front, despite an impressive growth record. It argued for more investments in education and vocational training, and a revision of labour laws, especially to address gender gaps.

Low labour productivity was highlighted as an impediment to the government's 'Make in India' scheme, as it was affecting the competitiveness of India-made goods and the country's participation in global value chains.

While India's fiscal position is expected to improve "helped by greater tax compliance, fewer subsidies and ongoing privatisation of state-owned enterprises," the country needs to initiate steps to strengthen revenue mobilisation and enhance expenditure efficiency, OECD said.

Giving the example of the Pradhan Mantri Garib Kalyan Anna Yojana, it said that while the scheme provided free foodgrain to the poor during the pandemic, "the targeting was imprecise - as testified by the number of beneficiaries (820 million), well in excess of most estimates of the poor population (400-500 million) - and the cost excessive."

It called for a need to update the 2011 census for better coverage of such initiatives. On the macroeconomic front, the organisation said the general elections in 2024 could pose a challenge to growth, given that "fiscal consolidation may be delayed, and the conclusion of trade agreements may become more difficult."

"A potentially below-normal monsoon season could also impact growth," it said.

On the impact of climate changes, the report said, "India is particularly vulnerable to extreme heatwaves and must make progress in mobilising resources for investment in the green economy."

Weak global prospects
OECD raised the global growth forecast for 2023 by 0.1 percentage point to 2.7%.

"This projected recovery, while almost unchanged from our interim projections in March, maintains the slightly more optimistic outlook that had been predicted and which we are now seeing materialise," said Mathias Cormann, secretary-general, OECD.

The recovery would be weak by global standards, the organisation said.

"Policymakers need to act decisively on macroeconomic and structural policy to deliver stronger and more sustainable growth. Core inflation remains too persistent. Debt levels are too high. And potential output is too low," it said.

Placing emphasis on fiscal policy, OECD chief economist Clare Lombardelli said, "Fiscal policy should prioritise productivity-enhancing public investments, including those driving the green transition and boosting labour supply and skills."