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3QCY21 – India’s quarterly economic outlook

Government spending could be higher-than-budgeted in FY22

* As expected, the economic impact of the second COVID wave is about 2.1% of GDP in FY22F, about a fifth of 10-11% output loss from the first COVID wave in FY21. When the Government of India (GoI) published its 1QFY22 real GDP data at the end of Aug’21, the limited impact of the second COVID wave was confirmed. With such a small adverse economic impact, the share of pent-up demand in the economic recovery in 2HFY22 will also be limited. Accordingly, we keep our nominal/real GDP growth forecasts largely unchanged for FY22/FY23, lower than market consensus.

* With moderate economic recovery, we are also less worried about inflationary pressures. Based on the recent month’s data, we have revised down our inflation forecast for FY22/FY23. However, it is expected to remain ~5%. As stated in Jun’21 QEO, we expect the Reserve Bank of India (RBI) to signal the end of monetary easing by Dec’21.

* Notwithstanding the weak economic growth, government receipts have been remarkable in the first four months of FY22 (Apr-Jul’21), while total spending has declined. We expect it to change in 2HFY22F. Our estimates suggest that government spending could be higher than budgeted in FY22F, implying that the fiscal deficit may remain unchanged at INR15t. Even then, because of higher-than-budgeted growth in nominal GDP (16.2% v/s 12.9%), fiscal deficit could be 6.5% of GDP, instead of the target of 6.8% of GDP in FY22F.

* As we mentioned in our previous QEO note as well, India’s external situation remains extremely comfortable. Accordingly, we keep our USD:INR pair unchanged for FY22. However, with the expectation of continuation of strong foreign capital flows, we have revised up our INR forecast for FY23.

Changes in economic forecasts since Jun’21 Real/nominal GDP: GDP growth forecasts have been kept broadly unchanged at 8.8%/9.9% for FY22F/FY23F. It also means that our projections continue to remain lower than the market consensus, especially for FY23 (Exhibit 1).

CPI inflation and interest rates: Based on the recent months’ data and our expectation of moderate economic recovery, we have revised down our CPI-based inflation forecasts to 5.2%/5.1% for FY22F/FY23F. As mentioned earlier, we believe the RBI will start communicating/discussing the normalization of monetary policy by Dec’21, although the repo rate hike may not happen before mid-CY22.

Fiscal deficit: Notwithstanding the second COVID wave, government receipts have been remarkable in the first four months of FY22. Our estimates suggest that government spending could be higher than budgeted in FY22F, implying that the fiscal deficit may remain unchanged at INR15t. Even then, because of higher-thanbudgeted growth in nominal GDP (16.2% v/s 12.9%), fiscal deficit could be 6.5% of GDP, instead of the target of 6.8% of GDP in FY22F.

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