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NEW DELHI : Rating agency Icra Ltd on Monday revised upward its real GDP growth forecast for India to 9% for FY22 from 8.5%, citing better prospects for the second half of the financial year.

“The widening coverage of Covid-19 vaccines is likely to boost confidence, which will in turn re-energise demand for contact-intensive services, helping to revive the portions of the economy affected most by the pandemic. Moreover, the robust kharif harvest is likely to sustain the consumption demand from the farm sector. Additionally, the expected acceleration in Central Government spending after the withdrawal of the earlier cash management guidelines, will recharge this key driver of aggregate demand," Aditi Nayar, chief economist at Icra Ltd said.

However, Nayar cautioned that a potential third wave, and whether the existing vaccines are able to protect against any new variants that might emerge, remain key risks.

To be sure, ICRA is still at the lower rung of GDP forecasts for FY22. While the Reserve Bank of India and International Monetary Fund expect GDP to grow at 9.5%, Asian Development Bank last week projected 10% growth for FY22.

ICRA said if the average of 7.9 million doses per day recorded during 1-26 September can be sustained, nearly three-fourths of Indian adults could receive their second covid-19 vaccine shot by the end of 2021. "This should help boost demand for contact intensive services in Q4 FY22, although some services such as business travel may revert to their pre-covid levels with a longer lag," the rating agency said.

Icra said late sowing has helped to bring the kharif acreage nearly at par with last year's record area. "In line with this, the First Advance Estimates of crop production for FY22 signalled a robust rise in kharif output, barring coarse cereals and oilseeds, quelling the concerns raised by the uneven monsoon and episodes of flooding. Based on this, we have enhanced our forecast for the GVA growth in agriculture, forestry and fishing to 3% each in Q2 FY22 and Q3 FY22, from our earlier projection of a tepid 2% rise," Nayar said.

With continued healthy procurement, Icra expects farm sentiments to remain favourable, supporting economic activity. "The late surge in rainfall will replenish the groundwater levels and may mitigate the impact of the lower reservoir storage. However, availability of fertilisers has become a concern for the upcoming rabi season as systemic inventory levels are significantly below the historical levels. Rising rural vaccination coverage is likely to boost confidence for the non-farm portion of the rural economy, especially as the scarring caused by the high healthcare costs of the second wave eases," Nayar said.

The central government's spending had contracted by 4.7% in April-July and stood at 28.8% of the FY22 Budget Estimates. Icra expects higher government spending to boost growth in the second half of FY22, in contrast to the situation in Q1 FY22, when government consumption expenditure had trailed the year-ago levels. 

“The robust upturn in the GoI’s direct tax revenues and the awaited commencement of inflows from the National Monetisation Pipeline have improved the revenue visibility for the central government. This is likely to have contributed to the withdrawal of the extant cash management guidelines, which should set the stage for accelerated central government spending in second half of FY22. Visible traction in government spending will help unleash the animal spirits and drive a faster recovery in economic activity," Nayar added.

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