Icra sees GDP up by 10.1% YoY in FY22, but value just a tad ahead of FY20

Rating agency expects monetary policy stance to change to neutral from accommodative in August 2021 policy review or later

Icra has projected the economy to grow by double digits year-on-year, at 10.1 per cent in the next financial year, but cautions that the value of gross domestic product (GDP) will only mildly surpass the 2019-20 level. India's economy is expected to contract by 7.7 per cent this financial year as per official advance estimates, but Icra pegged the GDP fall at 7.8 per cent. 

The rating agency expects the stance of the monetary policy to change 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. 

Aditi Nayar, principal economist at Icra, said, "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."

Nayar said Icra expected a multi-speed recovery in FY22, with 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.

"On a sobering note, we project the aggregate value of GDP in real terms in FY22, to be only mildly higher than the level recorded in FY20,” she said.

Icra projected headline retail price inflation to drop to 4.6 per cent in FY22 from 6.4 per cent in FY21, while exceeding the mid-point of the monetary policy committee’s (MPC’s) medium target of four per cent for the third consecutive year. 

A favourable base would moderate retail food inflation to an average 4.7 per cent the next financial year from eight per cent expected in the current financial year despite pressure from edible oils, and protein items such as pulses. 

Additionally, Icra anticipated that the economic recovery will exert a divergent impact on the twin deficits, with a decline in the fiscal deficit, and a reversion of the current account to a deficit in FY22 from the surplus expected in the current financial year. 

“As the revenue shock ebbs, we see India’s general government (Centre plus states) fiscal deficit moderating to 8.5 per cent of GDP in FY22 from 12-12.5 per cent of GDP likely this year. However, with imports seen reviving in tune with anticipated recovery in domestic demand, the current account balance is forecast to slip back into a modest deficit of $15-20 billion (0.6 per cent of GDP) in FY22 from a surplus of $35-40 billion in FY21,” Nayar added.