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NEW DELHI : Fitch Solutions on Thursday marginally pared its 2022 household spending forecast for India to 7%, from 7.1% estimated in August, highlighting several risks, including elevated inflation, new covid-19 variants, and the fear of return of covid-related restrictions.

In its latest India Consumer Outlook, however, it has said that consumer spending will recover to its pre-pandemic level in 2022.

"Real household spending over 2022 will build on its recovery in 2021. We forecast household spending to grow by 7% over 2022, below the 8.8% estimated growth over 2021 as favourable base effects wear off. This will put real household spending at 77.6 trillion ($1 trillion) over 2022, recovering to above the 73.5 trillion ($980 billion) posted in 2019, the pre-covid-19 environment," Fitch Solutions, the affiliate of Fitch Ratings said.

"Consumer spending recovery will also be supported by improving covid-19 vaccination rates, despite India being still far from achieving herd immunity, with the theoretical minimum proportion of fully vaccinated individuals being 85%."

In 2020, consumer confidence in India took a hit and fell to a five-year low of 49.9 (September 2020) and 97.9 (May 2020) for the current situation index (CSI) and future expectations index (FEI) respectively, according to surveys conducted by the Reserve Bank of India.

Poor consumer demand hit credit growth as people postponed their non-essential spending. Both these indices remain relatively weak, but are showing first signs of a positive reversal.

In September, the CSI stood at 57.7, while the FEI stood at 107, an improvement from the 49 and 104 posted in July respectively. “However, both indicators are still below their 2019 levels (at 89.4 and 118 respectively), suggesting that consumer spending on big ticket items will likely be deferred until the economic and health situation in the country stabilizes," Fitch Solutions said.

Fitch Solutions said its forecast for a full recovery in real consumer spending growth in India in 2022 is in line with the Country Risk team's forecast that the domestic economy will grow by a real rate of 7.6% in 2022, recovering from the 7.3% contraction recorded in 2020 and 9% growth expected in 2021.

“The main driver of economic growth is the rebound in consumer spending as incomes rise along with rapid economic growth. With India's economy expected to fully recover in 2021, we believe that more conventional growth patterns will return in 2022. Economic growth will be underpinned by consumer spending, easing unemployment, and continued investments in the country's infrastructure sector, thus creating more jobs," it added.

In the first half of 2022, like in second half of 2021, inflationary pressures are going to rise in many countries globally as base effects, higher commodity prices and supply-chain challenges create localised shortages, Fitch Solutions said. "In India, we note that inflation has been ticking up, reaching a peak of 6.3% in June. Inflation has moderated over the remainder of the year, reaching 4.5% in October. However, our Country Risk team projects that inflation will end the year at 5.5%, moderating over 2022, reaching 4.5% by the end of year."

Fitch Solutions said while consumers are demanding products that they had little access to over the previous year with economies reopening, supply chain issues and bottlenecks are resulting in shortages, feeding through into supply-side inflation.

“The global semiconductor shortage will continue into 2022, putting the pressure on the supply of consumer goods associated with the consumer electronics and autos sector. The spread of the Delta variant is upending factory production in Asia, disrupting shipping and posing more shocks to the world economy. Similarly, manufacturers are facing shortages of key components and higher raw materials costs. While this is somewhat restricted to consumer goods, there is a high risk that this feeds through into more consumer services over the 2022 year," it added.

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