OECD sees India growing at 6% amid global economic challenges

Weak global demand and the effect of monetary policy tightening to manage inflationary pressures will limit India’s growth to 6% this fiscal year, the Organisation for Economic Co-operation and Development (OECD) said in its Economic Outlook.

The OECD also projected that easing inflation and relaxation in monetary policy during the latter half of the fiscal could stimulate a revival in discretionary consumer spending. This momentum could extend into the following fiscal year, potentially boosting growth to 7%, it added.

India should further increase the share of renewable energy in meeting energy needs while gradually raising the tax on coal, it said, adding that the additional revenue could be used to compensate low-income households.

On the global economy, it said that the recovery will be weak. The OECD projects a moderation of global GDP growth from 3.3% in 2022 to 2.7% in 2023, followed by a pickup to 2.9% in 2024.

Lower energy prices are easing the strain on household budgets, business and consumer sentiment are recovering, albeit from low levels, and the re-opening of China has provided a boost to global activity, the grouping of advanced economies said.

The OECD said GDP growth in the US is projected to be 1.6% in 2023, before slowing to 1% in 2024 in response to tight monetary and financial conditions.

“In the euro area, declining headline inflation will help to boost real incomes and contribute to a pickup in GDP growth from 0.9% in 2023 to 1.5% in 2024. China is expected to see strong increases in GDP growth in 2023 (with 5.4%) and 2024 (with 5.1%), due to the lifting of the government’s zero-Covid policy, the organization said.

“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 materialize,” OECD secretary-general Mathias Cormann said. “Policymakers must get inflation durably down to target and unwind broad fiscal support by better targeting fiscal measures. While continuing to respond to the immediate economic challenges, it remains important to prioritize structural reforms to boost productivity, including by promoting competition, reviving investment, increasing female workforce participation, and alleviating supply constraints, while securing the green and digital transformations of our economies.”

The upturn remains fragile and risks are tilted to the downside. Uncertainty over the evolution of Russia’s war of aggression against Ukraine and its global impact remains a key concern. Some of the favorable conditions that helped to reduce energy demand this year, like a mild winter in Europe, may not be repeated next year, the grouping of developed economies said.

Monetary policy should remain restrictive until there are clear signs that underlying inflationary pressures are durably reduced, it said, adding that fiscal support, which has played a vital role in helping the global economy through the pandemic and the war in Ukraine, should be scaled back, becoming more targeted and calibrated toward future needs. Broad energy-related support should be withdrawn as energy prices fall and minimum wages and welfare benefits are being increased to take account of past inflation in many countries, it added.

“Fiscal policy should prioritize productivity-enhancing public investments, including those driving the green transition and boosting labor supply and skills,” OECD chief economist Clare Lombardelli said.

Renewed reform efforts to reduce constraints in labor and product markets and to reignite private investment and productivity growth would improve sustainable living standards and strengthen the recovery from the current low growth outlook.”

The OECD report came a day after the World Bank lowered India’s growth projections for FY24 to 6.3%, 0.3 percentage point lower than its forecast in January.

Despite the cut, the World Bank sees India retaining its fastest-growing major economy tag in FY24. The multilateral body has halved its growth forecast the US in 2024 to 0.8%, while cutting China’s by 0.4 percentage point to 4.6%.

Speaking about India retaining the fastest-growing economy tag, development economist Santosh Mehrotra said: “Merchandise export sector will get a boost and if this continues, growth will improve and, ultimately, India’s services will sustain. Job losses in the IT sector could be avoided.”
“But we have to keep in mind that exports account for not more than 22% of India’s GDP.”

Public investment is growing as the government is injecting funds into the economy, Mehrotra said.

“Government investment in GDP is back to 29% in FY23 from 26% in the pandemic period. Although public investment constitutes less than one-third of total investment in GDP, the revival of private investment remains elusive,” he added.