Real GDP growth likely to be 8.7% in FY22: Motilal Oswal Financial Services

Motilal Oswal Financial Services has projected real GDP growth of 8.7 per cent in FY22, down from 11.1 per cent it had forecast earlier.

However, it revised up the FY23 forecast from 4 per cent to 5.4 per cent.

The company said that the recent surge in industrial metals and agricultural commodities is likely to have a much larger impact on the wholesale price index (WPI) over the consumer price index (CPI).

Although the GDP deflator is still more closely linked with WPI, the policy instrument for the Reserve Bank of India (RBI) is CPI.

"Thus while higher WPI-based inflation will drive nominal GDP growth higher, it will not present any additional concerns regarding the monetary policy."

CPI inflation is expected to ease to 5.7 per cent in FY22 from 6.2 per cent in FY21. Average inflation of 6 per cent in two years reduces the possibility to ease any further.

Motilal Oswal thus expects the RBI to shift from its accommodative stance to neutral by the year-end.

At the same time, it said, the government may not only marginally over-achieve its FY22 fiscal deficit target but also meet its spending target. There are three notable trends in FY22 so far.

One: the RBI has announced higher dividends to the government by Rs 40,000 crore. Two, an additional fertiliser subsidy of Rs 14,008 crore has been announced. And three, the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) valued at Rs 90,00 crore has been extended to seven months up to November.

Additionally, the government is very likely to spend more on the MGNREGA programme in FY22.

Motilal Oswal said the central government's fiscal deficit could remain unchanged at Rs 15.1 lakh crore (or 6.6 per cent of GDP due to a higher denominator nominal GDP in FY22.

However, total spend could also be the same at Budget estimate level -- implying a decline of 0.8 per cent year-on-year in FY22 due to higher-than-targeted total spending in FY21.