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India GDP growth forecast and other key takeaways from UN report

by 5paisa Research Team 14/01/2022

India’s economic recovery is on a “solid path” but the pace of growth could slow in the next two fiscal years while high oil prices and coal shortages could make the situation worse, a United Nations report has said.

According to the United Nations World Economic Situation and Prospects (WESP) 2022, the global economic recovery is facing significant headwinds amid new waves of COVID-19 infections, persistent labour market challenges, lingering supply-chain challenges and rising inflationary pressures. Global output is projected to grow by only 4% in the calendar year 2022 and 3.5% in 2023, down from 5.5% in 2021, the report said.

In South Asia, the economic recovery continues to gain momentum amid contained COVID-19 infections and higher mobility, robust remittance inflows and broadly supportive macroeconomic policy stances.

After an estimated expansion of 7.4% in the calendar year 2021, regional GDP is projected to expand at a more moderate pace of 5.9% in 2022 as base effects gradually disappear. The recovery, however, is still fragile, uneven and subject to pandemic-related uncertainties and downside risks, the UN agency warned.

Pointing out that the pandemic pushed an estimated 30 million more people into extreme poverty in 2020, the report said policymakers need to maintain essential support for the recovery and job creation.

India forecast: Key takeaways

The report also provided growth estimates for India and highlighted the main challenges.

amid rapid vaccination progress, less stringent social restrictions and still supportive fiscal and monetary stances.

It said that India’s GDP is projected to expand 6.5% in 2022-23 and 5.9% in the following fiscal year. This is down from 8.4% in 2021-22 but still far better than the 10.6% contraction in 2020-21.

The UN agency said that robust export growth and public investments underpin economic activity, but high oil prices and coal shortages could put the brakes on economic activity in the near term.

It will remain crucial to encourage private investment to support inclusive growth beyond the recovery. India has taken an important step by committing to 50% of its energy mix coming from renewable sources by 2030 and to reaching net-zero emissions by 2070, the report said.

Fiscal policy space

The report said that, while still vulnerable, India is in a better position to navigate financial turbulence compared to its situation during the “taper tantrum” episode after the 2008-2009 global financial crisis. This is due to a stronger external position and measures to minimize risks to bank balance sheets.

In the medium term, scarring effects from higher public and private debt or permanent impacts on labour markets could reduce potential growth and prospects for poverty reduction, the agency warned.

In India, fiscal deficit is projected to decline gradually. At the same time, policy priorities have shifted towards capital expenditure. Pressures for fiscal consolidation will likely increase. However, amid elevated social needs, a still fragile recovery and lagging employment, it is imperative to avoid premature consolidation, the agency said.

Inflation

In India, inflation is expected to decelerate throughout 2022, continuing a trend observed since the second half of 2021 when relatively restrained food prices compensated for higher oil prices.

A sudden and renewed rise in food inflation, however, due to unpredictable weather, broader supply disruptions and higher agricultural prices, could undermine food security, reduce real incomes and increase hunger across the region.

Monetary policy

The UN agency noted that monetary policies remain accommodative with interest rates close to record lows and liquidity measures still in place. Yet the monetary cycle is gradually shifting as global financial conditions tighten and the recovery gains steam, it said.

The Reserve Bank of India has begun to taper liquidity by increasing the volume of reverse repo operations and the cash reserve ratio. The central bank is expected to raise interest rates throughout 2022, the UN agency said.

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