The Organisation for Economic Co-operation and Development (OECD) on Wednesday raised its growth forecast for India by 20 basis points to 6.3 per cent for the current financial year (FY27). However, it flagged that energy price shocks amid the conflict in West Asia are weighing on economic activity and rekindling inflationary pressures.
“Energy price shocks are weighing on activity and inflationary pressures are re-emerging,” the OECD said in its latest Economic Outlook report.
India’s growth is expected to moderate to 6.3 per cent in FY27 from 7.6 per cent in FY26, reflecting the impact of higher energy prices and rationing initiatives, the OECD said. The multilateral institution had projected India’s growth at 6.1 per cent for FY27 in its interim outlook report released in March.
The OECD expects higher food and energy prices, along with exchange-rate depreciation, to raise India’s inflation to 4.8 per cent in FY27 from 2.1 per cent in FY26. However, this is lower than the OECD’s earlier projection of 5.1 per cent for the current year.
“The depreciation of the rupee is further amplifying imported inflation by raising the domestic cost of fuel, fertilisers and other tradable goods,” the report said.
Against this backdrop, the OECD expects the Reserve Bank of India (RBI) to temporarily increase the policy repo rate by around 25 basis points by the end of the June quarter to “help maintain inflation within the target band of 2-4 per cent and anchor expectations”.
The final meeting of the Monetary Policy Committee for the June policy review is currently under way, with the policy decision scheduled for Friday.
“Persistent disruptions to energy supply, including prolonged gas rationing, could further constrain production and raise inflation, including through reduced fertiliser supply and agricultural output,” the report said.
India, which depends on West Asia for around half of its oil and gas imports, has placed curbs on commercial cooking gas consumption and redirected industrial fuel towards liquefied petroleum gas production to ensure availability for domestic use.
The OECD also expects higher inflation to weigh on domestic demand.
“Private consumption growth is projected to slow as inflation reduces households’ purchasing power,” the report said.
Weaker global demand and higher production costs are expected to weigh on investment and exports, despite lower US import tariffs providing some support to exports in FY27, the report added.
The current account deficit is expected to widen as higher energy import costs outweigh the impact of weaker domestic demand, according to the report.
“On the upside, energy support could cushion real incomes and consumption more than expected,” the OECD said. However, it cautioned that such support could result in a more expansionary fiscal policy.
“Measures adopted to mitigate the energy price shock are expected to widen the deficit by around 0.4 per cent of GDP relative to the budgeted path. These measures will provide near-term support to household real incomes and limit the impact on consumption but will also slow the pace of public debt reduction, which is expected to reach 54.7 per cent in FY28,” the report said.
In this context, the OECD suggested that the government opt for targeted transfers instead of broad-based price support to reduce the fiscal cost of intervention.
According to the OECD, some of the headwinds to growth are likely to recede in FY28, with growth projected to rise to 6.4 per cent.
Commodity prices are also expected to stabilise in FY28, the report said.
“As inflationary pressures recede over the projection horizon, monetary policy is expected to ease in FY28.”
India’s fiscal policy is expected to return to a moderate consolidation path in FY28 as energy prices stabilise and temporary support measures are phased out.
Source: Business Standard
