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IMF upgrades growth outlook, experts warn of headwinds

Pedestrians walk towards the Chhatrapati Shivaji Terminus train station at dusk in Mumbai, India, on Wednesday, Oct. 4, 2023.

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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.

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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.

India is on the map. There is a lot of pent-up demand and sentiment is very positive.

Alicia Garcia-Herrero

chief economist for Asia Pacific, Natixis

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.”

Headwinds remain

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.”

People walk across a damaged road following flash floods in the Faqir Gujri area, on the outskirts of Srinagar on July 23, 2023.

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