PremiumStronger-than-expected recovery of corporate earnings after the pandemic-related disruption, improved GST receipts, mobility trends showing driving in India has surpassed pre-pandemic levels, and several high-frequency indicators such as PMIs point to positive near-term prospects, S&P said
India’s economy is set to expand 10% in the year starting 1 April, aided by sustained farm sector growth, covid-19 vaccination and a bigger central government budget, S&P Global Ratings said on Tuesday.
Stronger-than-expected recovery of corporate earnings after the pandemic-related disruption, improved goods and services tax (GST) receipts, mobility trends showing driving in India has surpassed pre-pandemic levels, and several high-frequency indicators such as purchasing managers’ indices point to positive near-term prospects, S&P said.
An increase in commodity prices and a revival of domestic demand after the easing of lockdown have brought upside earnings surprises while changing consumer choices such as the preference for personal transport for health-safety reasons, have helped industries such as automobiles, S&P said.
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Separately, rating agency ICRA Ltd said in a forecast on Tuesday that leaving behind the devastating recession, gross domestic product (GDP) recorded a 0.7% growth in the December quarter from a 7.5% contraction in the September quarter.
“This pickup benefited from the continued unlocking of the economy, uptick in consumption during the festive season, as well as higher central government spending," Aditi Nayar, principal economist, ICRA Ltd, said in a statement.
Some experts shared the optimism. “I have been expecting growth recovery from the third quarter. In that sense, this is not a surprise to me. January merchandise exports data too showed sustained growth and we could expect better export growth in the subsequent months too. Private investment was a concern, but it has also started picking up. We should expect better fourth-quarter number than even what RBI has suggested," said N.R. Bhanumurthy, vice-chancellor of Dr B.R. Ambedkar School of Economics in Bengaluru.
RBI had projected a 0.1% growth in the third and a 0.7% growth in the fourth quarter of FY21.
S&P said that the higher-than-expected spending programme that finance minister Nirmala Sitharaman unveiled in the budget will support India’s growth recovery, which it said was critical for sustaining higher fiscal deficit—9.5% of GDP in the year to March.
India’s sovereign ratings—a bone of contention between the finance ministry and the rating agencies—will hinge on the pace of recovery. “We expect the speed of India’s post-crisis recovery to have important implications for the sovereign credit rating. This includes the sustainability of the government’s strained fiscal position," S&P said.
In spite of the growth rebound next year, the pandemic and the national lockdown means a permanent loss of output in comparison to the pre-pandemic trajectory. This, S&P said, suggested a long-term production deficit equivalent to about 10% of GDP.
S&P said nominal GDP will only return to its fiscal 2020 full-year output in fiscal 2022, even in the event that real GDP growth meets or modestly surpasses its 10% growth expectation. IMF chief economist Gita Gopinath had last month described the multilateral agency’s 11.5% FY22 growth forecast for India as largely mechanical, indicating the normalization of economic activities.
S&P’s forecast for FY22 is a notch below the 11% growth the Economic Survey has projected for FY22.
S&P said emergence of more contagious variants of the virus and chances of early withdrawal of global fiscal stimulus, however, pose some risks to India’s recovery. India needs many things to be right for its recovery to continue, including quick and thorough vaccination of most of its 1.4 billion people, S&P said.
The Modi administration is banking on higher capital spending, which will help in making durable infrastructure assets, while creating jobs and steering the economy out of the recession.
