India Ratings and Research (Ind-Ra) estimates the gross domestic product (GDP) growth will bounce back to 10.4% year on year (yoy) in FY22, primarily driven by the base effect. The estimate also shows that after recording negative growth during 9MFY21, GDP growth will finally turn positive at 0.3% yoy in 4QFY21. Although the recovery in FY22 on a yoy basis will be V-shaped, the size of the GDP will barely surpass the level attained in FY20 and will be 10.6% lower than the trend value. The impact of COVID-19 pandemic and lockdown on the economy, although subsiding, will continue to delay the normalisation of economic activities in the contact-intensive sectors till the mass vaccination/herd immunity becomes a reality.

In the FY22 union budget, the government setting aside its fiscal conservatism decided to provide the much-needed support to the demand side of the economy, which had been missing in the Atmanirbhar package announced earlier. As a result, Ind-Ra expects the government final consumption expenditure to grow 10.1% yoy in FY22. Although the private final consumption expenditure was witnessing a slowdown even before the imposition of COVID-19 induced lockdown, it is expected to grow by 11.2% in FY22 (FY21: negative 13.4%), led by essentials (pharma, healthcare and telecom), followed by non-discretionary consumer goods, infrastructure (chemicals, oil & gas, IT, sugar and agri-commodities), industrial goods and cyclical sectors (power, iron & steel, logistics, cement, construction, automobiles and automobile ancillaries). Yet, Ind-Ra's estimates shows that the private final consumption expenditure in FY22 will be 14.2% less than the trend level. Ind-Ra expects investments as measured by gross fixed capital formation to grow at 9.4% yoy in FY22, ably supported by government capex which is budgeted to grow at 26.2% yoy in FY22. Despite this renewed focus by government on capex, the size of gross fixed capital formation in FY22 will still be 26.3% lower than the trend level.

Ind-Ra projects the agricultural gross value added to grow 3% yoy in FY22 (average during FY14-FY21: 3.6%). This is based on the expectation of a normal and spatially well-distributed rainfall in 2021. Although the second advanced estimate of production of food grains for FY21 is still not out, Ind-Ra expects the Rabi harvest of 2021 to be good. The area under Rabi sowing at 651.9 lakh hectare by 15 January 2021 is 1.6% yoy higher. The industrial output as captured by Index of Industrial Production continues to be volatile, and select segments of services sector such as hotels, leisure/travel/tourism, sports, entertainment are still at some distance away from seeing any visible traction. Ind-Ra believes them to still witness growth in FY22 mainly due to the base effect. Ind-Ra expects industrial and services sector to grow at 11.5% and 11.4% yoy, respectively, in FY22.

On the monetary policy front, the RBI through various policy measures and liquidity injection has been quite successful in preserving the financial stability of the economy. Ind-Ra expects the retail and wholesale inflation to come in at 4.3% and 2.8%, respectively, in FY22. As the RBI’s guidance on retail inflation is 4.6% to 5.2% in 1HFY22, Ind-Ra expects the regulator to keep its policy stance accommodative and policy rate in a pause mode at least in the near term. However, with the moratorium period and restructuring window now closed, banks may see a rise in delinquency in coming months, putting pressure on their balance sheet. Therefore, the announcement of recapitalisation of public sector banks to the tune of Rs 200 billion in the FY22 budget will help them in shoring up their capital base.The fiscal arithmetic of the FY22 budget is more convincing than earlier years. Ind-Ra therefore believes fiscal deficit of  6.8% of GDP in FY22 is achievable. However, like FY21, this number hinges critically on the government achieving disinvestment target of Rs 1.75 trillion in FY22.

Current account surplus of FY21 will give way to the current account deficit (CAD) in FY22, but the evolving domestic and global demand conditions will continue to keep CAD in a comfortable zone. Ind-Ra expects CAD to come in at USD10.3 billion (0.4% of GDP) in FY22. Capital flows are estimated to decline to USD59.9 billion in FY22 from USD65.1 billion in FY21. However, Ind-Ra expects the net addition into the forex reserve to be USD50.9 billion due to the lower CAD. This may put pressure on the Indian rupee to appreciate; but, the RBI’s intervention and global dynamics are expected to act in a reverse direction, leading to the rupee weakening by 3.3% yoy in FY22. This will translate into the rupee averaging 76.69/USD in FY22 as against 74.26/USD in FY21.