India likely to grow 13.7% next year; fiscal position weak: Moody's

Indian affiliate Icra expects considerable rebound in economic growth in FY22 on the back of higher central govt spending, pick-up in consumption

The Indian economy is expected to grow 13.7 per cent in the financial year 2021-22 (FY22), registering a strong rebound from a 7 per cent contraction this fiscal year, said Moody’s on Thursday, adding the country’s fiscal position would remain weak in 2021, posing a key credit challenge.
 
Moody’s had in November last year projected the economy to contract 10.6 per cent in FY21 and return to growth of 10.8 per cent in FY22.
 
The upgrade in growth forecast comes on the back of normalisation of activity and growing confidence in the market with the rollout of Covid-19 vaccine.
 
On fiscal consolidation, the global rating agency said the prospects remain weak, particularly given the government’s mixed track record of implementing revenue-raising measures.
 
Meanwhile, ICRA, Moody's Indian affiliate, said it expects a considerable rebound in India's economic growth in FY22 on the back of higher central government spending, and a pick-up, albeit uneven, in consumption.
 
Overall, ICRA projects real GDP to grow 10.5 per cent in FY22 and nominal GDP to expand 14.5 per cent as the pandemic recedes.
 
Moody's said the central government's fiscal deficit for FY21 and FY22 should be lower than projected. This is on the back of stronger revenue generation in the fourth quarter of FY21 and higher nominal GDP growth in FY22.
 
"Still, wide fiscal deficits combined with lower real and nominal GDP growth over the medium term will constrain the government's ability to reduce its debt burden," said Gene Fang, an associate managing director at Moody's.
 
Referring to fiscal consolidation, Moody’s said the government has not provided an explicit medium-term fiscal consolidation road map. But, according to the Budget (for 2021-22) it targets a fiscal deficit of 4.5 per cent of GDP by FY26. This amounts to an average annual deficit reduction of about 0.5 per cent of GDP over four years.
 
The rating agency said given India's very high debt burden, this gradual pace of consolidation will prevent material strengthening in the government's fiscal position over the medium term. The scenario could be different if nominal GDP growth picks up sustainably to reach much higher rates than historically recorded.
 
An economic recovery in underway in India, but the consumption recovery remains uneven.
 
ICRA said the recent economic data signals a broadening of the economic rebound in the third quarter. The most-tracked indicators in Q3FY21 showed improvements from the year-ago period. Data for the current quarter also suggests a stable economic momentum.
 
Meanwhile, near-term prospects for the agricultural sector are bright, in ICRA's assessment, with many regions recording healthy precipitation and reservoir levels, increasing acreage of rabi crops and healthy procurement trends.
 

Distressed NBFC assets to stay elevated: ICRA
 
The distressed assets of non-banking financial companies (NBFCs) will grow in the second half of FY21 and stay elevated through FY22 as several key segments, including auto and small businesses, remain vulnerable, according to ICRA. However, their capital position, which is adequate, will support their risk profiles. The capital position would also mitigate the impact of moderate growth, increased competitive intensity and elevated credit costs on their earnings in FY22.