The Asian Development Bank on April 28, 2021, projected that the gross domestic product (GDP) of India will rebound strongly by 11% in the Financial year 2021 ending on March 31, 2022.
The projected growth will be because of the continued economic recovery boosted by the vaccine rollout, increased public investment, and a surge in domestic demand. The forecast by ADB assumes that the COVID-19 vaccines are deployed extensively all over the country and that the second wave of the pandemic is contained.
ADB, in its latest flagship economic publication, Asian Development Outlook (ADO) 2021, projects the economic growth of India to moderate to 7% in FY 2022 as the base effects disappear. The Indian economy is expected to have contracted by 8% in FY2020 in line with the second advance estimate of the government.
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India’s economic activity to continue its recovery:
According to Takeo Konishi, ADB Country Director for India, the Indian economy faced its worst contraction in FY 2020 because of the pandemic outbreak.
With the ongoing vaccination drive and large government stimulus, India’s economic activity will continue its recovery started from the third quarter of Financial Year 2020. It will rebound strongly in the current financial year with an increase in domestic demand, particularly in the urban services.
Konishi added that the Indian Government’s boost to the public investment through its incentives for manufacturing, infrastructure push, and continued support to increase rural incomes will support the country’s accelerated recovery.
What measures by the government will help in an economic recovery?
• The economic activity of India will continue to recover with the help of the government’s measures including the large stimulus package in FY2020 as well as an increase in the capital expenditure budget in FY 2021.
• Increased expenditure by the Indian Government on water, health care, and sanitation will strengthen the nation’s resilience against future pandemics.
• Private investment has been expected to pick up as well as the accommodative credit conditions. Domestic demand is also expected to remain the main driver of growth.
• A faster vaccine rollout will help in increasing the urban demand or the services while the rural demand will be boosted by the government’s support to farmers and agricultural growth.
• The agricultural sector will be further boosted by the forecast of a normal monsoon and the bumper harvest of the summer crops.
• Push to the manufacturing sector by the Indian Government through the production-linked incentive scheme will further expand domestic production and will help integrate domestic manufacturing with global supply chains.
Inflation projected to be moderate in FY2021 and FY2022
The Asian Development Bank has projected inflation in India, after rising to 6.2% in FY2020, to be moderate to 5.2% in FY 2021 as the supply chain recovery and good harvest contain domestic food inflation.
Inflation has been expected to further ease up to 4.8% in Financial Year 2022 on the moderating domestic demand s the economy returns to normal. As per Asian Development Outlook, this will help the central bank in maintaining an accommodative stance by ensuring ample liquidity as well as keeping the long-term interest rates from rising.
Downside risks that can impact the recovery:
According to ADB, an uncertain pandemic trajectory with a prolonged second wave of Coronavirus pandemic despite the vaccination push can affect India’s economic normalization.
However, the forecast by ADB, expects the economic impact of the second wave to be relatively low compared to the first wave in line with the global experience.
Other downside risks to the economic recovery include the further tightening of global financial conditions on the fast recovery in the developed nations, which will further apply pressure on India’s market interest rates.