eco TV Week

India: consolidation in progress


Economic activity has accelerated since June in line with the decline in the pandemic. In FY2021/2022,  economic growth should reach 9.5% according to RBI’s projections. However this seems to be too optimistic as, at the end of September, only 20% of the population was fully vaccinated.

Johanna MELKA

TRANSCRIPT // India: consolidation in progress : October 2021

The economic and health situation in India has slightly improved since June. However, the country remains vulnerable facing a third wave of pandemic. Only 20% of the population was fully vaccinated at the end of September 2021. It is hoped that, by the end of the year, 40% of the population will be vaccinated.

From an economic point of view, with the decline of the pandemic and the reduction of the health restrictions, economic activity has slightly rebounded as of the month of June. However, in August, the level of activity remained before the second wave of the virus.

The government and the central bank remain optimistic about growth prospects. They consider that growth over the whole fiscal year 2021-2022, that will end on March 31st, 2022, should reach 9.5%.

These forecasts are a little too optimistic.

Economic activity should be sustained by the dynamics of exports but also by a rebound in household consumption supported by a decline in the unemployment rate and a slight deceleration in inflation pressures. However, companies’ investments should remain low.

Business owners remain wary. And the capacity utilisation rates are low compared to their long-term average.

Moreover, the high increase in energy prices and the energy shortages that weigh on all countries, India in particular, could weigh on the Indian recovery.

Though public finances are still fragile, they have strengthened over the first five months of the current fiscal year, that is to say between April 2021 and August 2021.

The government should be able to reduce its fiscal deficit from 9.2% of GDP last year to 6.8% of GDP this year. They could even step up their level of ambition and review the deficit at 6.2% of GDP.

This consolidation of public finances over the first five months of the year was supported by a high increase in budget revenues.

Should this trend continue throughout the fiscal year, the revenues for the government could exceed 10% of GDP which has not happened for over three years.

In these conditions, the debt-to-GDP ratio might finally decrease having reached more than 88% last year. It would reduce the risk for India to see its sovereign rating downgraded by rating agencies.

View more videos Eco TV Week

On the Same Theme

India: a small fiscal consolidation 9/29/2021
India’s public finances remain fragile, though strengthening over the first four months of the current fiscal year (to 31 March 2022). The central government’s fiscal deficit hit a high of 9.2% of GDP at the end of the 2020-21 fiscal year from an average of 3.8% of GDP over the previous five years. Over the same period, public debt has steeply risen, and is estimated to have reached a high of 88% of GDP in March 2021. The rapid deterioration of the public finances is the result of increased public spending in response to the Covid-19 crisis, but is also due to an extremely low fiscal base (total government’s receipts only reached 8.6% of GDP even before the pandemic). Under such circumstances, one might have feared a deterioration of the India’s sovereign rating. To date, this prospect has receded slightly. For the first time since the 2011-12 fiscal year, the deficit only reached 21.4% of the full year target (6.8% of GDP) over the first four months of the current fiscal year. This good performance was the result in part of lower than expected spending, but more significantly of a substantial increase in receipts. At an annualised rate, these were equivalent to 9.2% of GDP, having averaged only 8.7% of GDP over the previous three years. Confirmation of this consolidation over the rest of the year would be fairly encouraging news.
India:up against a wall 7/23/2021
The Covid-19 crisis did not spare India, and like many of the emerging economies, the country’s economic and social situation has deteriorated sharply. Yet India’s situation had already begun to deteriorate well before the onset of the pandemic, which only accentuated the country’s weaknesses. The very sharp contraction in GDP triggered by the Covid-19 pandemic highlights the economy’s structural vulnerabilities, especially the large number of workers without social protection. With the nationwide lockdown in April and May 2020, 75 million Indians fell below the poverty line, and there is reason to fear that the second wave could have a similar impact. In fiscal year (FY) 2021/2022, GDP growth should rebound vigorously, although forecasts are likely to be revised downwards due to the expected contraction in FY Q1 (the second quarter of the current calendar year), following the outbreak of the second wave of the pandemic. In the medium term, growth might fall short of 6% unless there is a significant easing of the structural constraints that are restricting the employment of regular workers and private investment. If growth does not exceed 6%, the government would have to face not only a possible downgrade of its sovereign rating by the rating agencies, but also increasing social risk. 
Economic recovery threatened by the second pandemic wave 6/10/2021
The second pandemic wave could delay the economic recovery. The government’s fiscal tool is very tiny to sustain economic growth as rating agencies have a negative outlook on the sovereign rating.
Growth jumps to 0.4% in third quarter of the fiscal year 3/3/2021
In Q4 2020, the third quarter of the 2020/21 fiscal year to 31 March 2021, India officially came out of recession. Real GDP was 0.4% higher than in Q4 2019. The recovery has been driven by an increase in government investment and a rebuilding of business inventories. In contrast, consumer spending – the biggest component of GDP – fell, whilst inflationary pressures have eased since November. Activity in the services sector was still down by 1%, while the agricultural and construction sectors recorded an acceleration, as did manufacturing, albeit to a lesser extent. Economic indicators for January remain on the right track. Output in core industries recorded a positive growth for the second month in a row; goods freight accelerated, car sales increased strongly and unemployment dropped below its rate of a year ago (6.9% in February). However, the fourth consecutive monthly contraction in loans to companies offers little prospect of a recovery in private sector investment. Although a mechanical rebound in growth is expected in 2021/2022, stimulating private investment will be essential to boost medium-term growth and the level of employment without undermining the public finances.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1614 articles and 292 videos