On 29^th November 2023, the Organization for Economic Cooperation and Development (OECD) released its Economic Outlook. Global Growth has always been a concern across the spectrum. In this article, we are going to see what the OECD’s economic outlook states about the same along with India’s Projections.

OECD’s Global Economic Assessment

In its Economic Outlook, the OECD stated that the Global economy continues to meet the challenges of rising inflation along with passive growth projections. Due to tighter financial conditions, lower business, weak trade growth and consumer confidence, the GDP is now moderating, according to the OECD. It also highlights that geopolitical tensions are adding to uncertainty to the near-term outlook. The report states that though headline inflation has fallen almost in all economies, the core inflation remains relatively high.

The Paris-based OECD, in its Economic Outlook preliminary version, estimated that the Global GDP is to slow down from 2.9% this year to 2.7% in 2024. This would be the slowest growth rate in a calendar year since the pandemic year 2020. It also stated that the Global GDP would again move up to 3% in 2025 as the real income growth recovers when policymakers lower interest rates.

OECD in its Economic Outlook states that Growth in emerging-market economies will hold up better than in the advanced economies. The growth in Europe will be relatively passive in comparison with the major Asian Economies as well as in North America. In the G20 economies, annual consumer price Inflation is estimated to ease slowly from 6.3% in 2023 to 5.8% in 2024, and 3.8% in 2025, as cost pressures moderate. In most of the major economies, inflation is estimated to be back on target by 2025.

Table 1 – Global Growth is projected to remain subdued

OECD’s economic outlook states that there are significant medium and longer-term structural challenges like a decline in potential output growth, ageing populations, the climate transition, digitalisation and the AI revolution.

Projections for India

For India, OECD’s Economic Outlook has estimated that the real GDP Growth to decline to 6.3% for the Fiscal Year (FY) 2023-24 and 6.1% in FY 2024-25. This decline is due to adverse weather-related events and the weakening international outlook. Public investment and an increase in services exports will be key indicators to drive the economy. With a corresponding increase in purchasing power, inflation will decline gradually.

Chart 1 – India: Economic growth and inflation indicators

1. Real GDP per capita is based on GDP in constant prices (2015 PPP), USD. Quarterly population data are calculated by interpolating annual data. OECD estimates on population data for 2023.
2. OECD seasonal adjustment based on monthly consumer price index and core CPI (index 2012 = 100) from the Ministry of Statistics and Programme Implementation (MOSPI).

Source: OECD Economic Outlook, 114 Database.

The economic activity gained strength from productivity gains from recent policy reforms, and improved global conditions may result in an estimated increase in real GDP growth of 6.5% in FY 2025-26. The Economic Outlook of OECD stated that Government investment will remain at high levels. It also stated that monetary policy easing may start in the second half of 2024 to support business investment and discretionary household spending. The financial space for the private sector may get enhanced with further fiscal consolidation, the OECD expects.

Table 2 – India: Demand, output and prices

Domestic demand is sustaining economic activity

The Strong growth is driven by Private consumption and Public Investment in FY 2023-24. However, the Merchandise Trade was weak due to the global slowdown. This shows that domestic growth prospects are strongly influenced by global developments, even though India has a relatively low trade-to-GDP ratio. Due to the service sector, India’s Global Export market share has considerably increased over a decade. The Current Account Deficit (CAD) has narrowed in the first half of the 2023 calendar year. The merchandise trade deficit was 12% smaller in value terms of April-October 2023 compared to the same period in 2022.

Monetary Policy is tightening, Fiscal Consolidation remains a priority

Successful Monetary Policy tightening has controlled inflationary pressures. Headline inflation moderated in the first half of 2023 made the inflation below the upper threshold of the Central Bank’s 2-6% target range in September. However, Food and Energy prices remain sensitive to geopolitical tensions and weather conditions. Bank’s financial results and solvency ratios have bettered thanks to effective regulation and supervision which gives more room to use monetary policy. To speed up the activation of recent insolvency reforms and facilitate the exit of non-viable firms, additional efforts are required.

To maintain public debt at sustainable levels fiscal Consolidation remains a top policy priority. Though the average maturity of debt has lengthened, the share of GDP to public debt has grown by 15% from FY 2018-19. Either a significantly lower deficit or above-potential GDP growth is required to halt an increase in the debt-to-GDP ratio – assuming reasonable inflation and interest rates. To achieve estimated government targets, for the next two years, greater efforts are required from the State level along with policy interventions to reduce the tax gap. This requires simplifying the Goods and Services Tax (GST) rate structure, broadening the tax base for both corporate as well personal income taxes, and closing exemptions including loopholes.

Conclusion – My perspective

From the OECD’s Economic Outlook, it is clear that the Global economy is going to experience slow growth, inflation and increasing fiscal pressures. It is now left to policymakers to prioritise macroeconomic stability. This means vigilant monetary policy actions along with international cooperation, better fiscal policies and structural reforms which can foster sustainable growth.

Indian economy is resilient despite geopolitical tensions, so far. However, fiscal consolidation and monetary easing, which may happen next year, need to be done more carefully. As India is going to witness an election next year, these policy measures should be handled with care to sustain the present resilience.

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