In its latest South Asia Development Update released on Tuesday, the World Bank announced that the Indian economy is forecasted to expand by 7.5 percent in 2024, marking a revision of its earlier projections for the same period by 1.2 percent. The report highlights a strong growth outlook for South Asia, with an overall regional growth rate expected to reach 6.0 percent in 2024. This growth is primarily attributed to robust economic expansion in India, coupled with recoveries observed in Pakistan and Sri Lanka.
The latest report indicates that South Asia is poised to maintain its status as the world’s fastest-growing region for the next two years, with growth forecasted at 6.1% in 2025.
The World Bank’s report underscores India’s significant role in the region’s economic landscape, with the country projected to drive much of the region’s growth. India’s output growth is anticipated to reach 7.5% in FY23/24 before settling at 6.6% over the medium term. The report highlights the resilience of India’s services and industry sectors, which are expected to sustain robust activity levels.
Meanwhile, in Bangladesh, economic output is expected to increase by 5.7% in FY24/25. However, this growth is expected to be tempered by factors such as high inflation and trade and foreign exchange restrictions, which are likely to constrain economic activity in the country.
Also read: India’s Economy Surpasses Expectations with Strong 8.4% Growth
The World Bank anticipates Pakistan’s economy to rebound following the contraction in FY22/23, with a projected growth rate of 2.3% in FY24/25. This growth is attributed to improving business confidence within the country. Similarly, Sri Lanka’s output growth is expected to strengthen to 2.5% in 2025, supported by modest recoveries in reserves, remittances, and tourism.
Martin Raiser, the World Bank Vice President for South Asia, highlighted the region’s promising growth prospects in the short term. However, he also emphasized the need for caution due to fragile fiscal positions and increasing climate shocks. Raiser stressed the importance of implementing policies aimed at boosting private investment and enhancing employment growth to foster greater resilience in the face of economic challenges.
Franziska Ohnsorge, the World Bank Chief Economist for South Asia, emphasized that the region is currently failing to fully leverage its demographic dividend. She characterized this as a missed opportunity for South Asia.
Franziska Ohnsorge, the World Bank Chief Economist for South Asia, highlighted that the region could significantly boost its output by employing a larger share of its working-age population, similar to other emerging markets and developing economies. Ohnsorge emphasized that if South Asia utilized its working-age population to the same extent as its counterparts, its output could potentially be 16% higher.
Regarding India, the World Bank noted that economic activity surpassed expectations in the fourth quarter of 2023, posting a growth rate of 8.4% year-on-year. This growth was underpinned by rapid increases in investment and government consumption. Recent survey data indicates continued strong performance. Furthermore, India’s composite Purchasing Managers Index (PMI) stood at 60.6 in February, well above the global average of 52.1, signaling expansion.
The report also highlighted that India’s inflation has remained within the Reserve Bank of India’s target range of 2-6% since a spike observed in mid-2023. The policy rate has remained unchanged since February 2023. However, food price inflation has remained elevated, partly due to a weak harvest caused by El Niño conditions.
Financial conditions in India have continued to remain accommodating. As of December 2023, domestic credit issuance to the commercial sector, encompassing both public and private borrowers, expanded by 14% year-on-year. This growth rate represents the fastest pace observed since 2013. Additionally, financial soundness indicators have shown notable improvement. The nonperforming-loan ratio decreased to 3.2% last year, marking a significant decline from its recent peak of around 11% in March 2018. This positive trend indicates a strengthening resilience within the financial sector, contributing to overall economic stability.
In the second quarter of 2023, regulatory capital in India amounted to 17% of bank assets, surpassing both regulatory requirements and peer averages. Despite a decline in Foreign Direct Investment (FDI) as a share of GDP in 2023, a rebound in foreign portfolio investment inflows during FY2023/24 led to an 8% increase in foreign reserves by January 2024. As a result, foreign reserves reached a level sufficient to cover approximately 11 months of imports, as highlighted in the World Bank report. This indicates a bolstering of India’s external financial position, which contributes to its resilience against external shocks and enhances overall economic stability.
The World Bank projected that India’s output growth would reach 7.5 percent in FY2023/24, driven by robust growth in the third quarter of the fiscal year. However, growth is anticipated to moderate to 6.6 percent in FY2024/25 before picking up in subsequent years, attributed to the decade-long robust public investment yielding growth dividends.
The expected slowdown in growth between FY2023/24 and FY2024/25 primarily stems from a deceleration in investment following its elevated pace in the previous year. Despite this, growth in services and industry is expected to remain robust, with the latter benefiting from strong construction and real estate activity. Additionally, inflationary pressures are projected to subside, allowing for more policy space to ease financial conditions.
Furthermore, over the medium term, the fiscal deficit and government debt are forecasted to decline. This decline is supported by robust output growth and consolidation efforts by the central government, as stated in the report.
Sources: hindustantimes.com
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