Next fiscal to be a story of growth in two halves

The low base effect will deliver eye-popping growth numbers in the first half of 2021-22 but the last two quarters of the year are likely to register more broad-based growth encompassing many more sectors fuelled by large public investments in infrastructure.

Global and Indian experts are unanimous that India will register strong growth in 2021-22 following the expected 7.5-8 per cent contraction in its economy in the current financial year. Various Indian and global studies have projected growth rates of 10.5 per cent (RBI), 11.5 per cent (IMF), 12.6 per cent (OECD) and 13.5 per cent (Nomura).

Experts are unanimous that India will grow very fast next fiscal

Directionally, all of them, and several others, point to a sharp rebound though they differ on the fine print of the magnitude of the turnaround. A recent report by Crisil, the Indian arm of global ratings firm Standard & Poor’s (S& P), offers a more granular look at India’s economy in the coming fiscal.

It forecasts a growth rate of 11 per cent, which is largely in line with the predictions of all the other agencies. Where it goes deeper than most other studies is in saying that like in the current year, it will be a story of growth in two discrete halves.

Eye-popping numbers in H1, broad-based growth in H2

India is likely to post eye-popping growth rates in the first half of the coming financial year, mainly on the back of a low base effect even as it faces a rising Covid graph in some parts of the country, including in Maharashtra, its most industrialised province, and Mumbai, India’s financial capital and the state’s administrative hub.

“The second half, likely marked by a more broad-based pick-up in activity amid vaccination rollout and rising herd immunity domestically and supported by stronger anticipated global growth. Economy will still operate below trend GDP is likely to touch the pre-pandemic level only by the second quarter of fiscal 2022. By the end of fiscal 2022, GDP will only be (about) 2 per cent higher than fiscal 2020 level and (about) 10 per cent below its pre-pandemic trend level,” the report states.

Policy and regulations have facilitated the recovery

“The journey from the pervasive darkness cast by an unprecedented pandemic to the beginnings of a clawback has not been easy. Policymakers and regulators have primarily facilitated the revival. India’s medium-term growth now hinges on a kickstart of the investment cycle. There are early positive signs, powered by government spending such as through the National Infrastructure Pipeline, demand-driven capex, and the Centre’s Production-Linked Incentive (PLI) scheme,” said Ashu Suyash, Managing Director and CEO, CRISIL.

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Deeps scars on important segments of economy

However, Crisil expects the pandemic to leave behind several deep economic scars on small businesses and the urban poor. Also, the rural economy is likely to be more resilient than the urban economy and the services sector is expected to lag behind manufacturing in its path to recovery.

There are some happy tidings coming from the economy as well as some distress signals. The trading segment, including exports and imports have clawed back to where they were prior to the outbreak of Covid. However, export growth recovery is more pronounced in the case of large industries and agriculture. The news is not as positive for labour-intensive sectors and small enterprises.

PLI scheme to provide huge boost

In particular, the Modi government’s production-linked incentive (PLI) scheme for 14 sectors is likely to help the economy get back its mojo. Together, these schemes could generate incremental revenues of about $500 billion over the next five years on a capital expenditure of $28-38 billion.

Then, the V-shaped recovery seen in corporate revenues is likely to be sustained in large part due to the good performance of IT exports, pharmaceuticals, a cyclical upturn in commodity prices and the growth in the automobiles sector. These factors, along with higher public investments in infrastructure sectors like roads, railways and urban infrastructure are expected to lift corporate revenues by 15-16 per cent in the coming fiscal.

Pandemic effect will linger for some years

However, the lag effect of the Covid-19 pandemic will continue to be felt for a few more years. “CRISIL expects GDP growth to average 6.3 per cent between fiscals 2023 and 2025. That would be lower than the 6.7 per cent average growth seen in the decade preceding the pandemic, but higher than the 5.8 per cent average in the three fiscals prior. Despite the growth, the Indian economy will suffer a permanent loss of 11 per cent of GDP…. Importantly, the dynamics of domestic demand and trade continue to be unfavourable for small businesses. Policy support, therefore, must continue for them and for the urban poor, who have borne the brunt of the pandemic,” said Dharmakirti Joshi, Chief Economist, Crisil.