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India’s economic forecast: Recovery back on track for 2021

Indian economy forecast 2021
Where is India heading?

Despite the impact from the second wave of the Covid-19 pandemic, the Indian economy forecast for 2021 doesn’t look that grim. Various sectors are showing promising growth from the pent-up demand, writes Shibani Sircar Kurian, EVP and Head of Equity Research, Kotak Mahindra Asset Management Company, in this guest commentary. 

The Indian economy has been through a roller coaster ride since the beginning of the pandemic in March 2020. Just when it appeared that the outlook was normalizing, we were hit by the giant second Covid wave. However, while the second wave brought in its wake significant human and emotional impact and took its toll on our healthcare infrastructure, the localized lockdowns helped in producing a lesser impact on the economy as a whole as compared to the first wave.

On the Covid-19 front, we have seen a rapid decline from the peak in May 2020 and currently recording daily new cases at 40k-45k/ day in July 2021.  

Beyond Covid, the economy is back on track

The economy, after a brief slowdown in May 2021, has restarted well in June and July 2021. The high-frequency economic indicators that we track show that the business resumption levels are back to the pre-Covid levels. This is a sharp and almost a V-shaped recovery from the lows of May 2021 unlike the more gradual recovery seen in 2020. It is clear that the economic impact of the second wave is much less than the first wave, given the state-wide lockdowns even while the brunt of the impact has been borne by the unorganized segment.

In most states, manufacturing and construction activities were open though they were regulated to adhere to Covid norms. Further, unlike in the first wave, few contact services such as retail trade and restaurant services in all cities/towns were open through the delivery and e-commerce platforms. Activities were better prepared for a lockdown in the second wave unlike in the first wave when most of the activities were trying to realign to the sudden lockdowns.  

Wholesale and retail much less impacted 

From a consumption and manufacturing activity perspective, Goods and Services Tax (GST) collections and e-way bill generation held up well indicating that wholesale and retail channels were much less impacted. The June 2021 GST revenues (collected in July) were higher than in May as economic activity picked up following the easing of state-wide restrictions. E-way bills generated continued to pick up in July 2021. The government’s tax revenues till June remained steady and higher than last year due to the relatively muted impact of lockdowns on activity levels. 

The Indian economy overall has fared better than expected initially (at least at the start of the pandemic in March-April 2020). The deep contraction in GVA (Gross Value Added) growth in Q1FY21 of (-)24.4% recovered to 1.6% growth in 4QFY21. FY21 GVA growth was at (-)7.3%. With the advent of the second wave, consensus estimates for FY22 real GDP growth estimates have moderated.

Currently, the consensus, expects that the economy would likely grow by 9-9.5% in FY22E, thereby putting the size of the economy at a similar level as in FY20. The pent-up demand after the second wave will be muted as activities continued to a great extent during the lockdowns.

However, firms and consumers were better prepared to deal with the lockdowns. Data seems to suggest that the manufacturing sector is close to the pre-Covid levels while services are yet to reach pre-Covid levels.  

Corporate profitability has been the positive surprise element during the pandemic. The clear trend that has emerged is that of the big becoming bigger and consolidation being visible across industries. Despite a Covid situation, the overall corporate profits to GDP ratio improved from a low of 1.6% to 2.6% in FY21.

While it is possible that the pace of earnings upgrades moderates from here on, especially with the impact of the second wave, the expectations for FY22 Nifty corporate earnings remain robust with the consensus building in ~30% growth in earnings in FY22E.

In H2FY22, we expect earnings recovery across most sectors amid favorable base effects and certain sector-specific tailwinds. Most sectors are expected to report strong growth led primarily by domestic cyclical such as cement, metals, and banks.

Fiscal situation to remain under control

On the policy front, both fiscal and monetary, the focus continues to remain on the revival of growth. With a healthy run rate of receipts (tax collections), we expect that the fiscal situation will likely remain under control with the possibility of higher than budgeted tax collections which could help in offsetting part of the shortfall on disinvestments (if any). The expenditure focuses this time around remains to push a more sustainable investment-led GDP growth.  

We do believe that the infrastructure segment could see revival over the next 2-3 year period. While the headline capacity utilization levels are still muted which indicates that fresh private sector capital expenditures (CAPEX) is still some time away, we note that capacity utilization levels in a few sectors such as cement and metals are reaching their peak which bodes well for fresh CAPEX. The public sector CAPEX would in the near term however be the key driver of growth. Household CAPEX too appears to be improving as evidenced in better trends in the real estate sector.

Better affordability, record low interest rates, and a favorable policy environment are likely to remain the key drivers of real estate revival. Most importantly, the corporate sector continues to deleverage and strengthen its balance sheet and this is seen in companies across market capitalization with improvement in Net Debt/ EBITDA ratios.

Monetary policy is also expected to remain accommodative despite fears of inflation until and unless the growth revival becomes sustainable in nature. The importance of growth over inflation in the near term is visible in the commentary from the central bank. The RBI has indicated its stance of ensuring liquidity remains ample in the system even while policy rates stay on hold for the near term.  

In 2HFY22, if the vaccination pace picks up and most of the adult population receives at least one dose, services should see rapid recovery. At present, the pace of vaccinations at ~3.5-3.8mn doses a day needs to accelerate. We believe that with the supply-side constraints starting to normalize, the pace of daily vaccinations should move up. Notably, the pace of vaccination in the larger cities and metros has been higher which bodes well for the normalization of demand. 53% of the 45+ category has been vaccinated with at least one dose and 47% of Tier-I city residents have had at least one shot (15% both doses).

Overall, while goods have seen normalization, travel, tourism, hospitality, entertainment, and retail trade still lag behind considerably. These segments should see the next leg of normalization provided further Covid waves are not to the same extent as last time and vaccination progresses well. Consumer discretionary should see gradual revival as the economy goes back to pre-Covid levels.  

Top factors affecting Indian economy forecast 2021

Finally, we expect that the outlook for the economy in 2HFY22 and FY23 will be shaped by (1) the impact of any further Covid waves and (2) vaccination progress. Base case consensus expects FY23 GDP growth at ~6-6.5% after 9-9.5% growth in FY22.

This assumes that the services sector will pick up in 2HFY22 and continue onto H1FY23 as consumers grow more confident in engaging in normal activities as a greater proportion of the population is vaccinated. Faster vaccination will also increase the chances of more localized restrictions rather than state/district-wide lockdowns in case there is the emergence of another Covid wave.

Further, the evidence from countries with a larger portion of their populations vaccinated shows a lower incidence of hospitalization. Hence, as they say, fingers crossed and hope for the best but be prepared for any eventuality.


Shibani Sircar Kurian,
Shibani Sircar Kurian

EVP and Head of Equity Research
Kotak Mahindra Asset Management Company

Shibani Sircar Kurian manages 3 funds of Kotak Mahindra Mutual Fund. She has a total experience of 19 years in the Indian equity markets of which almost more than 11 years have been with Kotak Mahindra Asset Management Company Limited.