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How quickly can India’s GDP revert back to its pre-pandemic levels?

India economy outlook 2022
How will India's economic recovery pan out in 2022?

With the Covid-19 pandemic-led economic disruption and divergence in performance across sectors, India’s economic recovery outlook is likely to turn cautious for the first quarter of 2022. However, economic damage from the current outbreak is forecasted to be far less compared to the first two waves of infections, writes Priyanka Kishore, Head of India and South East Asia Macro and Investor Services at Oxford Economics. We talked to her about India’s economic performance and the investment outlook in 2022.

AsiaFundManagers.com: India has been hit hard by the Covid-19 pandemic. Where does the Indian economy stand now, 2 years into the pandemic? 

Priyanka Kishore: Just looking at the headline figures, the speed of India’s economic rebound has been impressive. GDP was back at a pre-pandemic level in Q1 2021, before it was battered again by the second wave. This is not an outcome many had anticipated after the severe 2020 lockdown.  

Having said that, the aggregate belies the true state of the recovery. The gains are not broad-based and the data clearly shows the divergence in performance across sectors, for example, large corporates vs. smaller businesses, formal vs. informal workers. As such, the weaker sections of the society, that were hit harder by the pandemic to begin with, continue to lag the overall economic recovery.  

From here, the pace of the recovery for India will depend to a large degree on how these sections fare, as this has important implications for consumption, production and investment. Given the substantial labour market scarring, OE is sceptical that India’s GDP will revert back to its pre-pandemic forecast even 5-10 years down the line. In fact, we forecast the gap to be substantially wide at 7-8%. 

AsiaFundManagers.com: What is the Indian government doing to support economic growth?  

Priyanka Kishore: The government has made substantial efforts to accelerate the vaccination drive, after an extremely slow start. Following the surge in first doses in Q3 last year, more than 80% of the population in India is likely to be fully vaccinated by the middle of 2022. This bodes well for consumption and growth outlook and should particularly benefit high contact services industries. 

However, India’s direct fiscal response to the pandemic has been quite muted, amounting to less than 5% of GDP. Instead, the government has focused on higher infrastructure spending. The FY22 budget (April 2021-March 2022) earmarked $74 bn for capital expenditure, a 26% increase over the previous year, and proposed to raise its share in GDP to the highest level in over a decade. While this has catalysed investment in the short term and underpinned the rapid growth rebound from the pandemic lows, this has failed to address the unevenness of the recovery that requires broader spending allocations. 

AsiaFundManagers.com: Where do you see the main shifts or drivers that are needed to support a recovery in 2022? 

Priyanka Kishore: A review of fiscal priorities is paramount in our opinion. The government has doubled down on shrinking the fiscal deficit to lower concerns around India’s sovereign credit rating. But the case for more targeted support, without compromising on capex spending, is strong. This will not only enable a more inclusive recovery but also bolster the overall growth rate. Of course, this will mean a substantial slowdown in the pace of fiscal consolidation in the short term. But our modelling shows that a well-designed fiscal package can help limit the loss in output over the medium term while conveying a credible consolidation path to the rating agencies. 

In addition, more fiscal support will allow the RBI to focus on lowering inflation risks. Amid a waning fiscal impulse, the central bank has been on the hook to nurture the fragile recovery. This has kept monetary policy substantially accommodative, even as consumer inflation has been sticky and elevated through the pandemic. The central bank has highlighted the wide output gap and lack of demand-side pressures as a reason for its actions. But household inflation expectations have been rising and could eventually result in more cyclical pressures on the actual inflation trajectory as well, especially as the output gap continues to narrow. Hence, it is important to manage these expectations before they become more entrenched and result in a wage-inflation loop.

AsiaFundManagers.com: What are your projections on India’s economic growth in 2022?

Priyanka Kishore: Global evidence so far suggests that the Omicron coronavirus variant is more benign compared to its predecessors and is unlikely to lead to a substantial increase in stress on healthcare systems. Still, the rapid rise in India’s daily Covid cases and the test positivity rate is bound to have a negative impact on sentiment and mobility. We also think restriction will tighten further across states in the near future. This has caused us to become more cautious about the Q1 outlook. 

However, we expect far less economic damage from the current outbreak compared to the first two waves of infections, as the economy has adjusted to be more resilient to Covid-related disruptions. We also look for more sustained re-openings and a durable recovery Q2 onwards, as a substantial section of the population is fully vaccinated. We have therefore recently nudged up our 2022 GDP growth forecast to 7.9% from 7.8%.

AsiaFundManagers.com: What is your investment outlook for India and in which sectors do you see the biggest investment opportunities?

Priyanka Kishore: The rapid capex recovery from the 2020 lows has sparked hopes that India’s investment malaise is nearing an end. The decline in the share of investment in GDP has been a concern for almost a decade, pushing down India’s potential growth to 6.6% in 2012-2019, from 7.2% in 2004-2011. But our nuanced analysis of the underlying trends indicates that the investment rate is close to peaking. 

The capex pick-up has largely been driven by public spending so far. But fiscal constraints and credit rating concerns limit the scope for the government to continue bolstering overall investment trends forever. This requires greater private-sector participation and the conditions for that are not completely in place yet. Legacy issues such as low-capacity utilisation and balance sheet stresses are still a concern, especially for SMEs.  

This is not to say that there are no investment opportunities. Impending structural shifts, such as digitisation and decarbonisation, present immense opportunities. Studies peg the investment bill for India to become net-zero by 2070 at around $200 bn per year in the 2020s and 2030s. Currently, India spends less than $100 bn annually on energy investment. These investments are unlikely to be realised without a significant contribution from the private sector. 

However, international experience shows that big structural changes within a sector do not necessarily result in higher capex spending overall. New investment shifts are often accompanied by lower investment in losing sectors. Financing these investments also poses a challenge. In the end, India’s falling savings rate is a constraint on investment. In the absence of structural reforms to raise the savings rate, the investment rate is likely to settle permanently lower in the long run. 

AsiaFundManagers.com: Thank you very much for the interview.


Priyanka Kishore
Priyanka Kishore, Oxford Economics

Head of India and South East Asia Macro and Investor Services
Oxford Economics

Priyanka Kishore currently leads Oxford Economics’ Singapore Global Macro Services team and is responsible for overseeing the firm’s South and South East Asia research. She has more than a decade’s experience in macroeconomic research and forecasting across emerging markets, with a special focus on India and ASEAN since 2006.