India’s government expects economic growth to slow in the financial year ending March, as pandemic-related distortions ease and pent-up demand for goods levels out going into 2023.

Gross domestic product (GDP) will likely rise 7% this fiscal year, compared with 8.7% the previous year, the Ministry of Statistics said in its first estimate for the period that put manufacturing growth at just 1.6%.

The preliminary overall projection is lower than the government’s earlier forecast of 8%-8.5%, but above the central bank’s 6.8%.

The government uses the estimates as a basis for its growth and fiscal projections for the next budget due on Feb. 1. That will be the last full budget before Prime Minister Narendra Modi is expected to run for a rare third term in elections due in summer 2024.

India’s economy rebounded after COVID-19 restrictions were eased around mid-2022, but the war in Ukraine has spurred inflationary pressures, prompting the central bank to reverse the ultra-loose monetary policy it adopted during the pandemic.

It has raised key interest rates by 225 basis points since May to 6.25%, the highest in three years, and another modest hike is expected early this year.

Since September, economists have been cutting their 2022/23 growth projections to around 7% due to slowing exports and risks of high inflation crimping purchasing power.

Construction growth was projected at 9.1%, electricity at 9% and agriculture at 3.5%. Manufacturing and mining growth were forecast at 1.6% and 2.4%.

Growth in manufacturing was disappointing as corporate profits in the second quarter shrunk, said Madan Sabnavis, an economist at Bank of Baroda.

India’s nominal growth, which includes inflation, is projected to be at 15.4% for 2022/23, up from an earlier 11.1% estimate.

“The nominal GDP growth is higher, implying that the government’s fiscal deficit target will be achieved,” said Sabnavis.

India remains a relative “bright spot” in the world economy, but needs to leverage its existing strength in services exports and extend it to job-rich manufacturing exports, an International Monetary Fund (IMF) official said on Friday.

It is expected to remain the second-fastest growing economy – lagging only behind Saudi Arabia -- among G20 countries, according to the Organisation of Economic Co-operation and Development (OECD).

India’s growth potential is likely to be dented in the fiscal year starting on April 1, due to weak exports among other factors, Pranjul Bhandari, economist at HSBC Securities and Capital Markets, said in a note to clients.

“Buoyant albeit mixed domestic consumption should help to stave off some of the pain arising from weak exports during this period,” Aditi Nayar, economist at ICRA, remarked.

India is set to post a balance of payment deficit for the second straight year in the next fiscal, which would be the first such instance in two decades, Standard Chartered Bank said on Friday.

The foreign bank expects the country to record a BoP deficit of $24 billion this fiscal year and $5.5 billion in the next, against a surplus of $47.5 billion last year.

“Higher commodity prices, better growth in India compared to the rest of the world, and higher global interest rates amid cautious risk appetite could keep the C/A (current account)deficit wide and contain capital inflows in FY24,” Anubhuti Sahay, head of South Asia Economic Research (India) at Standard Chartered Bank, India, said in a note.

The foreign bank expects current account balance to slip into a deficit of 3% of gross domestic product this financial year from a surplus of 0.9% last year, before narrowing to 2.6% in fiscal year 2023-2024.

The BoP dynamics next year could be dominated by an absolute CAD financing requirement of around $100 billion, given the chances of higher global rates keeping debt-investment inflows cautious, the bank said.

The potentially improved risk appetite in the second half of the year could lead to net positive portfolio inflows, while an increased volatility in the banking capital segment may keep BoP forecasting “challenging,” it added.

“While the C/A deficit may appear more manageable, it still represents a large financing requirement in absolute terms, especially given the weak global growth backdrop. Our forecast of a smaller C/A deficit/GDP ratio in FY24 assumes a narrower trade deficit, but slower software and remittance inflows contributing to a large deficit size,” the foreign bank said.

Meanwhile, India will host a virtual summit of over 120 developing countries next week to share their economic woes in deliberations during its G-20 presidency this year, a top foreign ministry official said Friday.

The summit on Jan. 12 and 13 will take up key issues such as the worldwide impact of the COVID-19 pandemic; the ongoing conflict in Ukraine decreasing access and affordability of food, fertiliser and fuel; and mounting debt and inflationary pressures taking a toll on developing countries’ economies, said Vinay Kwatra, the top bureaucrat of India’s foreign ministry.

India endeavours, he said, to provide a common platform to deliberate on the concerns, interests and priorities of developing countries and exchange ideas and solutions to various problems.