India will be the fastest-growing economy among the seven largest emerging markets and developing economies, despite a challenging external environment, said the World Bank in its global economic prospects report.

A decade ago, India's GDP was the 11th largest in the world. Today, India's economy is the fifth largest, according to the International Monetary Fund, overtaking the British economy.

At the World Economic Forum in Davos last month, corporate chiefs put the growth down to a combination of a stable political environment and significant government investments in infrastructure that were fostering a positive environment for growth in India.

Though India bounced back strongly from the coronavirus pandemic, the country is grappling with the same headwinds buffeting the global economy, according to the Center for Monitoring Indian Economy think tank.

"India is large and diverse and during the pandemic, India's agricultural sector did quite well where the government interventions were measured and well directed," Mahesh Vyas, the think tank's CEO, told DW.

"The corporate sector did very well in a protected environment, although medium and small scale industries suffered. What's more, controls and interventions have helped keep inflation in check," said Vyas.

How has India's economy stayed afloat?

The World Bank stated in its "Navigating the Storm" report in November 2022 that India's economy is "relatively insulated from global spillovers compared to other emerging markets. This is partly because India has a large domestic market and is relatively less exposed to international trade flows."

Sri Lanka, for instance, is still in the midst of an economic crisis. The IMF provided the island nation with a loan of $2.9 billion (€2.7 billion) in September.

The cash-strapped Pakistani government, meanwhile, increased petrol and gas prices to a historic high this week to appease the IMF for an early release of a $1.1 billion loan tranche of a $6.5 billion bailout deal.

The World Bank has warned the global economy will come "perilously close" to a recession this year, led by weaker growth in all the world's top economies including the US and China.

"India's economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies," said Auguste Tano Kouame, the World Bank's country director in India.

"However, continued vigilance is required as adverse global developments persist."

India, like many other countries in the world, has not been exempt from multiple external shocks in the form of COVID related global supply chain disruptions, a food and energy crisis following the ongoing war in Ukraine and financial market volatility.

Challenge of rising current account deficit

Lekha Chakraborty, professor and chair at India's National Institute of Public Finance and Policy, told DW that India's "macroeconomic fundamentals are strong."

According to Chakraborty, India is facing a challenge as its current account deficit (CAD) is rising. CAD is a measurement of a country's trade, where the value of the goods and services it imports exceeds the value of the products it exports.

"So far, we have been financing CAD with capital inflows," she said.

The current account includes net income, such as interest and dividends, and transfers, such as foreign aid.

"Now with the increase in interest rates by US Fed Reserve, there is capital flight. However, the Reserve Bank of India has increased the interest rate to tackle the capital flight and mounting inflation," said Chakraborty.

India still has one of world's highest levels of income inequality

Rumki Majumdar, director of Deloitte India, believes India has huge potential as an export hub and as an investment destination in the manufacturing and services sector. Recent trade agreements have been aimed at integrating the manufacturing sector with the global supply chain.

"Consequently, there has been a healthy rise in foreign direct investment (FDI) equity flows from Japan, Singapore, the United Kingdom, and the United Arab Emirates in the fiscal year 2022–23, even as FDI from the United States fell," Majumdar told DW.

"This points to a rising confidence among global investors to invest in India and the inflows are becoming more diversified."

Majumdar also pointed out that high goods and services tax and direct tax collections have provided the government ammunition to cushion the impact of the impending global slowdown and keep the economy buoyant.

However, Chakraborty of the National Institute of Public Finance and Policy stressed that despite economic growth, India still has one of the highest levels of income inequality in the world.

"The post-COVID fiscal and monetary strategies are crucial for sustained growth recovery. When we say India is doing well, we must ask the question for whom? The widening inequality is a matter of grave concern and requires immediate policy attention," she said.

Edited by: Sou-Jie van Brunnersum

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