India’s Economy May Grow at 12% in 2021: Moody’s Analytics

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New Delhi: India’s economy is likely to grow by 12 per cent in 2021 following a 7.1 per cent contraction last year, as near-term prospects have turned more favourable, Moody’s Analytics said. A stronger than expected December quarter GDP growth of 0.4 per cent following a 7.5 per cent contraction in the previous three months has turned India’s near-term prospects more favourable, it said.

Domestic and external demand has been on the mend since the easing of restrictions, which has led to improved manufacturing output in recent months. “We expect private consumption and nonresidential investment to materially pick up over the next few quarters and strengthen the domestic demand revival in 2021,” it said.

Moody’s saw real GDPgrowth of 12 per cent in the 2021 calendar year, partially due to a low base-year comparison. “This forecast is equivalent to real GDP, in level terms, growing by 4.4 per cent above pre-COVID-19 levels (as of March 2020) by the end of 2021, or equivalently, by 5.7 per cent above the GDP level in December 2020 by the end of 2021,” it said.

It said monetary and fiscal policy settings will remain conducive to growth. “We do not expect any additional rate cuts this year below the current 4 per cent at which the benchmark repurchase rate is being maintained,” it said. It saw some additional fiscal support being mobilised during the second half of the year, depending on the softness in domestic spending.

Direct forms of fiscal support such as income tax cuts, however, are less likely in the current setting. “We expect the budget for fiscal 2021-2022 to drive the annual fiscal deficit to nearly 7 per cent of GDP,” it said. “It includes additional expenditure on infrastructure development, and the associated benefits in the form of employment creation should accrue over the coming quarters.” Core inflation is likely to see a more controlled rise in 2021, although food-price or fuel-driven inflation can become a recurring factor, weighing on household disposable income.

Moody’s Analytics said a strengthening second wave of COVID-19 remains the key risk to recovery in 2021. “The good news is that the resurgence appears to be limited to just a few states, which should increase the chances of containing the spread at an early stage,” it said. “Our baseline forecasts assume that state governments are likely to adopt a targeted approach through limited-duration curfews and shutdowns if the situation deteriorates rather than large-scale shutdowns of the kind seen during the first wave.” Vaccinations hold the key to sustaining domestic recovery.Total vaccinations crossed the 35 million mark on March 16.

“However, the various logistical constraints and thesheer scale of implementation could negatively impact the pace of inoculations in the months ahead and eventually the timing of achieving herd immunity,” it said. “Our March baseline forecast assumes that herd immunity is unlikely to be reached before the end of 2022.” .

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Most economies not to return to pre-pandemic activity levels until 2022: Moody’s

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Moody’s said it expects a slow and bumpy global recovery and uncertainty around the macroeconomic outlook remains much higher than usual.

Moody’s Investors Service on Thursday said the credit downturn arising out of COVID-19 will be short-lived but most economies will not return to pre-pandemic activity levels until 2022.

In the year since the World Health Organisation (WHO) declared COVID-19 a pandemic on March 11, 2020, the virus has disrupted the global economy and triggered a credit downturn accompanied by a spike in bond defaults.

“The credit challenges arising from COVID-19 have been substantial, but the credit downturn likely will be relatively short-lived. Risks remain more significant for the sectors most vulnerable to restrictions on their normal activities,” Moody’s said in a global report in coronavirus.

Stating that most economies will not return to pre-pandemic activity levels until 2022, Moody’s said it expects a slow and bumpy global recovery and uncertainty around the macroeconomic outlook remains much higher than usual.

Policy actions will continue to support economic activity and financial markets after the pandemic has eased, it added. Policymakers will continue to support economic activity long after the pandemic has faded, in some cases for years, Moody’s said. Moody’s expects the incidence and prevalence of the pandemic to gradually decline over the course of this year, as vaccination numbers rise. In turn, this will allow governments to gradually ease lockdown measures.

However, a residual level of COVID-19 likely will persist over time, raising the prospect of global pockets of risk in regions where vaccination progress is slow, and of localised outbreaks.

“In addition, new mutations that increase the virulence or spread of the virus pose a key risk to efforts to normalise conditions. Rather than eliminating the virus, we expect to ‘learn to live with it’ at low case rates,” it added.

The rating agency said it took several rating actions in response to the credit consequences of the pandemic and does not expect to conduct another wholesale review of credit ratings this year unless there is a significant shock to the global economy or to financial markets, or a shock resulting from a dramatic change in the trajectory of the virus.

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Budget Tilted Towards Supporting Growth; FY22 Fiscal Deficit Target of 6.8% Realistic: Moody’s

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India’s Budget is tilted towards supporting growth and the fiscal deficit target of 6.8 per cent for 2021-22 is realistic, Moody’s Investors Service said on Thursday. With regard to India’s finances, Moody’s said weak fiscal position will remain a key credit challenge in 2021.

It said the government’s fiscal deficit for 2020-21 and 2021-22 should be lower than projected, supported by stronger revenue generation in ongoing March quarter and higher nominal GDP growth in the next fiscal year. “India Budget tends to tilt a little bit in favour of support for growth. The deficit in Budget for FY’22 was above what we expected, but nevertheless we think that the deficit target is a realistic one.

“The government has incorporated a conservative assumption of nominal GDP growth and we think most revenue assumptions conservative, with the possible exception of monetisation expectations pegged in Budget,” Moody’s Associate Managing Director (Sovereign Risk) Gene Fang said. Wide fiscal deficits combined with lower real and nominal GDP growth over the medium term will constrain the government’s ability to reduce its debt burden, Fang said in an online conference organised by Moody’s and its affiliate ICRA on ‘India Credit Outlook 2021’.

Moody’s said the prospects for fiscal consolidation remain weak particularly given the government’s mixed track record of implementing revenue-raising measures. Although the government has not provided an explicit medium-term fiscal consolidation road map, the budget targets a fiscal deficit of 4.5 per cent of GDP by fiscal 2025-26, which amounts to an average annual deficit reduction of about 0.5 per cent of GDP over four years, it added.

“Given India’s very high debt burden, this gradual pace of consolidation will prevent any material strengthening in the government’s fiscal position over the medium term, unless nominal GDP growth picks up sustainably to reach much higher rates than historically recorded,” it added. India has exceeded its fiscal deficit target of 3.5 per cent in the current fiscal year by a wide margin due to higher spendings to stimulate the economy amid the pandemic.

The fiscal deficit – the excess of government expenditure over its revenues – has been pegged at 9.5 per cent of the GDP in the current fiscal year, as per the revised estimate. For 2021-22, the deficit has been put at 6.8 per cent of the GDP, which will be further lowered to 4.5 per cent by 2025-26.



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