UN cuts India's 2023 growth forecast by 20 bps to 5.8% on rate hike, global slowdown fears

The United Nations (UN) has cut its GDP growth forecast for India for calendar year 2023 to 5.8 percent, citing the effect of tighter monetary policy and weak global demand.

"Growth in India is expected to remain strong at 5.8 percent, albeit slightly lower than the estimated 6.4 percent in 2022, as higher interest rates and a global slowdown weigh on investment and exports," the UN's World Economic Situation and Prospects 2023 report, published on January 25, said.

The report is written by the UN's Department of Economic and Social Affairs, the UN Conference on Trade and Development, and the regional economic commissions for Africa, Europe, Latin America and the Caribbean, Asia and the Pacific, and Western Asia.

Like several other central banks around the world, the Reserve Bank of India (RBI) reacted to elevated inflation and hiked the policy repo rate by 225 basis points in 2022 to 6.25 percent.

One basis point is one-hundredth of a percentage point.

The rapid monetary tightening is expected to drag growth down, with the central bank's latest forecast saying India's GDP growth will edge down to 6.5 percent in 2023-24.

The government's first advance estimate for growth in this financial year is 7 percent.

However, economists from outside the RBI are not as optimistic about next year, with some even predicting growth may fall to as low as 5.1 percent due to India's exports taking a hit from weak external demand. Signs of this are already visible, with merchandise exports contracting on a year-on-year basis in two of the last three months, with November seeing a minor 0.6 percent increase.

The UN's latest growth forecast for India for the current calendar year is 20 basis points lower than what it had predicted in mid-2022.

"In India, the unemployment rate in 2022 declined to pre-pandemic levels through stepped-up urban and rural employment. But youth employment remained below pre-pandemic levels, particularly among young women, given the pandemic's severe impacts on economic sectors where women tend to cluster," the report added.

The downward revision in the growth forecast is part of a raft of cuts announced on January 25 by the multilateral organisation.

As per the UN report's latest forecast, global economic growth is seen slowing down to 1.9 percent in 2023 – one of the lowest in recent decades – from 3.1 percent previously forecast.

The UN estimates that global growth in 2022 was 3 percent.

"Stronger international cooperation is more pressing than ever before, including to address the global challenges created by the pandemic, the food and energy crisis, the climate crisis and the looming debt crisis," the report said.

"High and persistent inflation globally suggests scope for international coordination among central banks to minimise the negative spillover effects of aggressive monetary tightening on the global economy, especially among vulnerable developing countries," it added.

Commenting on Indian inflation, the UN report said headline retail inflation is expected to average 5.5 percent in 2023, down from 6.7 percent in 2022.