Why ICRA sees double-digit expansion in India’s GDP in FY22

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Rating agency ICRA sees a record double-digit expansion of 10.1 per cent in India’s gross domestic product (GDP) in the financial year 2022. However, it cautioned that the value of GDP will mildly surpass the level that had been recorded in the financial year 2020.

It also expects a multi-speed recovery in the next financial year with the contact-intensive sectors, discretionary consumption and investment by the private sector trailing the rest of the economy, in the arduous march back to attaining, and sustaining, pre-Covid levels.

View on GDP

Aditi Nayar, Principal Economist, ICRA said, “After a 7.8 per cent pandemic-driven shrinkage in the ongoing fiscal, India’s real GDP is projected to record a growth of 10.1 per cent in FY2022. The seemingly-sharp expansion will be led by the continued normalisation in economic activities as the rollout of Covid-19 vaccines gathers traction, as well as the low base.”

The county’s GDP took a hit in FY21 as the Covid-19 pandemic severely hit the key manufacturing and services segments.

On monetary policy

The rating agency also expects the stance of the monetary policy to be changed to neutral from accommodative in the August 2021 policy review or later, after there is greater certainty on the durability of the awaited economic revival.

Inflation

ICRA also expects the headline CPI inflation to decline to 4.6 per cent in FY2022 from 6.4 per cent in FY2021, while exceeding the mid-point of the monetary policy committee’s (MPC’s) medium target of 4 per cent, for the third consecutive year. A favourable base would moderate the retail food inflation to an average of 4.7 per cent in FY2022 from 8 per cent in FY2021, despite the pressures from edible oils, and protein items such as pulses.

With demand expected to strengthen both domestically and globally, ICRA is apprehensive that the core-CPI inflation may remain relatively sticky, and display a limited correction to 4.4 per cent in FY2022 from 5.5 per cent in FY2021.

“With the CPI inflation expected to remain above the MPC’s 4 per cent target during FY2022, we expect an extended pause for the repo rate. The rating agency expects the stance of monetary policy to be changed to neutral from accommodative in the August 2021 policy review or later, only after there is greater certainty on the durability of the awaited economic revival. Simultaneously, the Reserve Bank of India (RBI) may initiate steps, in a calibrated manner, to reduce the magnitude of the systemic liquidity surplus,” ICRA said.