India roars back to growth ahead of new financial year

People wearing protective masks at the Chhatrapati Shivaji Terminus railway station in Mumbai. India's gross domestic product (GDP) is likely to grow 12 per cent in 2021 as near-term prospects have turned favourable.
People wearing protective masks at the Chhatrapati Shivaji Terminus railway station in Mumbai. India's gross domestic product (GDP) is likely to grow 12 per cent in 2021 as near-term prospects have turned favourable.Courtesy: Reuters
Published on

Rating agencies signal robust spike in India's GDP growth as economy shakes off challenges from Covid.

With India’s recovery from the depths of the lockdown-induced recession last year swifter than expected, the stage is now set for the economy to switch back to the growth mode that the world’s largest democracy has been a benchmark for.

According to Moody's Analytics, India's gross domestic product (GDP) is likely to grow 12 per cent in 2021 as near-term prospects have turned favourable. The sustained increase in vaccination to the most at-risk people and the widening of the ambit for vaccination are not only being seen as near-term triggers for economic recovery but those measures should also allow restrictions to be eased significantly towards the end of 2021 and in 2022, the rating agency said.

OECD forecast

The projections from Moody’s follows a report from the Organisation for Economic Co-operation and Development (OECD) earlier this month, forecasting that the Indian economy will bounce back to grow at 12.6% in FY22, the highest among G20 countries. The OECD applauded the additional fiscal support provided by the government as one of the key reasons behind the swift recovery of the economy.

And in the latest survey, Fitch Ratings last week upgraded India’s growth projection for FY2022 to 12.8% over its previous estimate of 11% - based on a stronger statistical effect, a looser fiscal stance and better virus containment. “India’s second half of 2020 rebound also took GDP back above its pre-pandemic level,” the rating agency said in its latest Global Economic Outlook.

The projections from Moody’s follows a report from the Organisation for Economic Co-operation and Development (OECD) earlier this month, forecasting that the Indian economy will bounce back to grow at 12.6% in FY22, the highest among G20 countries.

“GDP surpassed its pre-pandemic level in 2020 Q4, growing 0.4% year-on-year (y-o-y), after contracting 7.3% y-o-y in the previous quarter. The rapid pace of expansion at the end of 2020 was powered by falling virus cases and the gradual rollback of restrictions across states and Union territories," it added.

According to Moody’s Analytics private consumption and non-residential investment will pick up over the next few quarters and strengthen domestic demand revival in 2021.
According to Moody’s Analytics private consumption and non-residential investment will pick up over the next few quarters and strengthen domestic demand revival in 2021.Courtesy: Reuters

Strong start for 2021 fiscal

The positive predictions for the Indian economy arrive just days ahead of the new financial year – with high-frequency indicators pointing to a strong start to the 2021 fiscal.

The manufacturing PMI remained elevated in February, while the pickup in mobility and a rise in the services PMI point to further gains in the services sector,” Fitch said in the report. “However, the recent flare-up in new virus cases in some states has prompted us to expect milder growth in the June quarter of FY21. Moreover, the global auto chip shortage could temporarily diminish Indian industrial production gains in the first half of 2021," it added on a note of caution.

Echoing similar sentiments, Moody’s Analytics said domestic and external demand have been improving since the easing of lockdown restrictions and added that private consumption and non-residential investment will pick up over the next few quarters and strengthen domestic demand revival in 2021.

Need for more fiscal support

While the agency does not see any additional rate cut by the Reserve Bank of India (RBI) this year, yet it said some additional fiscal support can be mobilised during the second half of the year, depending on the softness in domestic spending. "We expect the budget for fiscal 2021-2022 to drive the annual fiscal deficit to nearly 7 per cent of GDP. It includes additional expenditure on infrastructure development, and the associated benefits in the form of employment creation should accrue over the coming quarters," Moody’s said.

The quarterly financial performance of Indian companies corroborates the encouraging growth trends seen through the GDP number for the October-December quarter, with high frequency indicators suggest further expansion in manufacturing and services activity in the month of January and February.

The forecast by the whole gamut of rating agencies not only point to the strong underlying fundamentals of the Indian economy, but also the opportunities ahead for businesses and investors.

But economists have cautioned that the short-term fiscal future is not all smooth sailing.

“While 2020-21 was characterised by contraction in output, 2021-22 is likely to see high growth and sharp volatility as economies recover and financial markets struggle to shape new expectations and interest rates jump around,” said Ila Patnaik, an economist and a professor at National Institute of Public Finance and Policy.

A worker refill a vehicle by CNG (compressed natural gas) which is an eco-friendly alternative to gasoline at a CNG Refilling station. Higher fuel prices in India brought about by external factors could pose a risk to inflation. But the country is slowly coming to terms with the benefits of alternative to petrol and diesel.
A worker refill a vehicle by CNG (compressed natural gas) which is an eco-friendly alternative to gasoline at a CNG Refilling station. Higher fuel prices in India brought about by external factors could pose a risk to inflation. But the country is slowly coming to terms with the benefits of alternative to petrol and diesel.Courtesy: Reuters

Areas of caution

“Higher global fuel prices could pose a risk to the inflation trajectory in the coming months. Inflation for the month of February rose above 5 per cent, primarily driven by higher fuel prices. Persistent higher inflation could pose a challenge for the RBI to continue with its accommodative stance. The RBI may have to consider raising interest rates, which could adversely impact the nascent recovery seen in the recent months,” she said.

Those concerns apart, the quarterly financial performance of Indian companies corroborates the encouraging growth trends seen through the GDP number for the October-December quarter, with high frequency indicators suggest further expansion in manufacturing and services activity in the month of January and February.

A senior citizen being administered a vaccine. A sustained step in vaccination against rising a fresh new wave of infection will support India’s economy further.
A senior citizen being administered a vaccine. A sustained step in vaccination against rising a fresh new wave of infection will support India’s economy further. Courtesy: ANI

“The key highlight is a sharp recovery seen in the services sector. This sector was adversely impacted by the Covid shock. While manufacturing activity remained steady, services sector activity, measured by the IHS Purchasing Managers’ Index (PMI), grew at its fastest pace in a year in February,” Patnaik said. “The sharp increase in the index value was supported by an increase in new work intake. With improvement in business sentiment, and greater capacity utilisation, employment scenario is also expected to improve in the January-March quarter,” she added.

With the economy kick-started, a sustained step-up in vaccination efforts that’s underway across India will thus further support the growth recovery in the months to come.

Related Stories

No stories found.

Podcast

No stories found.

Defence bulletin

No stories found.

The power of the quad

No stories found.

Videos

No stories found.

Women Leaders

No stories found.
India Global Business
www.indiaglobalbusiness.com