With the global economic environment taking a turn for the worse, the outlook for the Indian economy also appears to have dimmed. On Thursday, the World Bank lowered its forecast for India’s economic growth this year to 6.5 per cent, down from its earlier assessment of 7.5 per cent. The downward revision is based on the Bank’s assessment that monetary policy tightening across the world and the spillovers from the Russia-Ukraine war will “weigh on India’s economic outlook”. This revised assessment comes days after the RBI had lowered its own forecast for the country’s growth to 7 per cent, down from its earlier projection of 7.2 per cent. Till now the ruling dispensation had been rather sanguine about the country’s growth prospects — after all, even despite these downward revisions, India is still likely to be one of the fastest growing economies in the world. However, policymakers have now begun to voice concerns over the state of the economy.
On the domestic front, the concern is that even as the economy has recovered to its pre-Covid level, large parts continue to be mired in stress. For instance, micro, small and medium enterprises continue to struggle. An indication of this is that 16.4 per cent of those who availed credit under the Emergency Credit Line Guarantee Scheme of the government defaulted and have not been able to repay their obligations owing to financial difficulties. Considering that MSMEs employ a sizeable section of the labour force, their continuing struggles are bound to affect labour market prospects. In fact, as per the latest periodic labour force survey, the labour force participation rate in urban areas is lower than pre-Covid levels, while in rural areas, wage growth continues to be subdued indicating labour market slack. And there is still no firm evidence of a broadbased revival in the private investment cycle even though the twin balance sheet problem — an over-leveraged corporate sector and banks saddled with bad loans — that was believed to be holding back investments no longer appears to be an obstacle. In such a scenario, tighter monetary policy is only going to complicate matters further. And with already stretched government finances, the possibility of worsening growth prospects, a higher subsidy outgo and uncertainty over revenues, the capacity of public spending to provide a fillip to growth is limited.