India a bright spot? IMF upgrades growth forecast, but economists say it could be a bumpy ride

The International Monetary Fund has raised its growth forecast for India, saying the country’s growth will remain strong in 2023 and 2024 — but analysts warn there will be headwinds ahead.

According to the IMF’s October update of its World Economic Outlook., India’s economy will grow 6.3% in 2023, an increase from an earlier forecast of 6.1%. 

Economists who spoke to CNBC are also bullish about India’s growth, attributing the economy’s growth to an increase in consumption, infrastructure spending, and more businesses being set up — but they say geopolitical risks and inflation concerns will be challenging.

“India will continue to be a bright spot in the global economic picture,” Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis said.

The country “has been favored by foreign investors in recent years, reflecting its promising long-term outlook helped by a youthful demographics and a fast-expanding middle class. We expect such a trend to continue,” she told CNBC.

Consumer spending remains one of the biggest growth drivers in the world’s most populous nation, she added.

India’s consumer market is set to become the world’s third largest by 2027 as the number of middle to high-income households rise, according to a report by BMI, a Fitch Solutions research unit.

“India is on the map. There is a lot of pent-up demand and sentiment is very positive. There is a sense that India is back on the frontline and the propaganda in the media helps consumption too,” she added. 

India’s government has “taken several steps to improve businesses and this is attracting global and local investors,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management.

“The China-plus-one strategy is also pushing relocation of global supply chains and India will be a beneficiary,” he added.

The optimism in India’s growth story is partly because more Indians are choosing to work or set up businesses in the country rather than “moving to the Western world in search for better opportunities,” Shah said. 

“The West is less appealing than it used to be,” Garcia-Herrero said. “And India is more appealing than it used to be — at least for very talented people.”

While the IMF maintained it’s 2024 projection of 6.3% growth in India, economists are expecting the country to face a slew of headwinds.

“Widening current account deficit, resurging inflation and heightened geopolitical tensions would be the major headwinds for India,” Garcia-Herrero warned. 

Although India’s “pre-election environment is quite conducive to growth,” the Reserve Bank of India’s loose monetary policy will be “creating future problems,” the economist said.

“India is not increasing productivity as much as needed to make their growth sustainable over time. But this will only become a problem in the next two decades, it’s not an immediate issue.”

Extreme weather events will also impact India’s growth.

Heatwaves and droughts have caused water levels in southern Indian reservoirs to fall below 10 years average, causing an adverse effect on agriculture and rural recovery, Kotak’s Shah pointed out. 

Geopolitical tensions have intensified from rising tensions between India and Canada, as well as the attack on Israel by Palestinian militant group Hamas which caused oil prices to spike by more than 4% on Monday. 

“India imports more than 80% of its oil consumption, so higher prices will impact India’s trade and fiscal deficit, inflation and growth adversely,” Shah said. 

Although economists remain optimistic about India’s growth, Garcia-Herrero emphasized the importance of foreign investments to keep the economy going. 

“In India’s position as the leader of the global south competing with China, India needs more foreign investments to create more manufacturing jobs,” she said.

In the report published Tuesday, the IMF said the global economy will continue to recover at a slow pace as a consequence of the Ukraine war, high inflation and the aftermath of the pandemic.

Its projections show that global growth will slow from 3.5% in 2022 to 3% this year, before falling further to 2.9% in 2024.

“Growth remains slow and uneven, with growing global divergences. The global economy is limping along, not sprinting,” the fund said.

The IMF also raised its 2023 U.S. growth projections by 0.3 percentage points from its July report to 2.1%, and hiked next year’s forecast by 0.5 percentage points to 1.5%.