Why Did India's GDP Growth Forecast Shrink By Multiple Research

Rating agencies and the World Bank have forecasted the country's economic growth / Gross domestic product (GDP) growth of the FY 2022. Fitch Ratings, a globally renowned rating agency estimated the GDP growth to 10% which has been lowered by them. Fitch officially stated, "We further lowered India's GDP forecast for the fiscal year ending March 2022 (FY22) to 8.7% from 10.0% in June as a result of the severe second virus wave. In our view, however, the impact of the second wave was to delay rather than derail India's economic recovery. High-frequency indicators point to a strong rebound in 2Q FY22, as business activity has again returned to pre-pandemic levels."

In addition to that, earlier, the World Bank, and Moody's projected the country's economic growth. The World Bank earlier estimated an 8.3% and Moody's estimated a 9.3% GDP growth for the same fiscal. According to Fitch, India's investment-grade credit rating will be on a 'negative outlook'. The rating agency thinks that the 'negative outlook' reflects uncertainty over the debt trajectory following the sharp deterioration in India's public finances due to the pandemic shock. It added, "Wider fiscal deficits and government plans for only a gradual consolidation put greater onus on India's ability to return to high GDP growth over the medium term to lower the debt ratio."

Why was the GDP forecast pulled down?

Till the upcoming FY, the interest rate is expected to be the same as the economic growth and employment generation is not quite overwhelming. Manufacturing is growing along with income generation, but not to an extend when the economy can run without the additional liquidity infusion. Hence, the rating agencies and the World Bank cannot anticipate a very positive sign from India, now. The severe impact of Covid in the second wave was a huge hammer for the country's already sinking GDP growth. So, the GDP forecast was pulled down.

Additionally, according to a Reuters poll, "India's economic recovery from pandemic-related shut-downs is at risk of a further delay in the 6 months that are left of this fiscal year." The recent poll anticipated a 7.8%, 6.0%, and 5.8% for Q3, Q4, and Q1 2022 respectively, on year-on-year economic growth. These figures were higher in the July forecast. Reuters thinks India can see a 9.2% in this fiscal year, while in the upcoming FY GDP growth can be at 9.7%, 7.1%, 6.5%, and 6.4% for the 4 quarters respectively, averaging to 7.0%.

Economists are also expecting elevated inflation to hold or accelerate. Kunal Kundu of Societe Generale commented to Reuters, "While extremely accommodative monetary policy has prevented the economy from falling off a cliff, a continuation of this policy in the absence of appropriate fiscal support will barely move the needle in terms of the pace of recovery of lost growth potential."