In interaction with Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research

Speaking with DSIJ,  Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research indicates that the near to medium-term domestic growth prospects have strengthened significantly amidst the progress on COVID vaccination, improved mobility, robust rural demand, supportive fiscal and monetary policy environment and a V-shaped global recovery. Following is the detailed interview -

Q1. What is your outlook on Indian economy vs global economy? 

The latest GDP data for Q3FY21 validated that the Indian economy has finally exited the recession after two-quarters of output contraction during the disruptive lockdown period. We believe that the near to medium-term domestic growth prospects have strengthened significantly amidst the progress on COVID vaccination, improved mobility, robust rural demand, supportive fiscal and monetary policy environment and a V-shaped global recovery. Acuité estimates FY22 GDP expansion at a record 11.0 per cent, which is expected to find support in a favourable base in H1 (given the severe output contraction last year) and a more meaningful recovery in services in H2. The fresh wave in COVID-19 infections in some states and the risks of additional lockdowns along with rising commodity prices could, nevertheless, pose downside risks and will remain monitorable. 

Regarding the global outlook, Organisation for Economic Co-operation & Development (OECD) has revised up its global growth forecast amidst the deployment of vaccines and the huge US $1.9 trillion stimulus programme. For 2021, it expects world GDP to expand by 5.6 per cent and further by 4.0 per cent in 2022. For the US, OECD more than doubled its growth projection to 6.5 per cent for 2021. The recent weeks have also seen the resurgence of the reflation theme in the global financial markets. The continued progress on vaccine administration, especially in the US & the UK, higher headline inflation and prospects of its further rise amidst improving growth, have pushed up global bond yields. The current increase in inflation comes on the back of rising global crude prices (up to over 100 per cent on an annualised basis), which are expected to linger at least through Q1-21 on the back of rising demand and some production cuts. 

Q2.  What are the key risks to economic recovery at this juncture? 

Over the past few weeks, India has witnessed resurgence in COVID infections, albeit it is currently limited to a few states. Counter containment measures as such have been currently restricted to select areas or states. Nevertheless, a faster than anticipated rise in caseload can again trigger more broad-based restrictive measures, which can weigh down on the pace of recovery. We believe the trade-off between mobility and COVID-19 cases may continue to remain a recurrent theme in 2021 until vaccination attains critical mass.  

The global commodity prices continue to ascend upwards, led by crude oil. An anticipated recovery in global demand amidst vaccine introduction and OPEC’s renewed commitment to supply cuts has seen India crude basket firm up by close to 8 per cent in March 2021 alone. This adds to the near 40 per cent rise seen over November 2020 to February 2021. 

Core inflation (excluding food & fuel items such as petrol, diesel), reflecting underlying demand conditions in the economy, hardened to a near 2-year high of 5.36 per cent YoY in February 2021 from 4.90 per cent in January 2021. This is also a risk factor and needs to be kept under watch as inflationary pressures may build up as the economy moves towards fast normalisation in the backdrop of ongoing vaccination and an increase in commodity prices.   

Q3.  What is your outlook on inflation? Do you think inflation will derail economic growth? 

Despite the acceleration in price pressures through higher retail fuel prices, we note that the average CPI inflation is currently tracking at 4.9 per cent, below RBI’s forecast of 5.2 per cent for Q4FY21. In addition, record Rabi sowing also provides comfort as it is likely to keep food price pressures somewhat under check in the coming summer months. Going forward, beyond the near-term, the south-west monsoon outturn, strength of demand recovery, the pace of supply restoration, and trajectory of commodity particularly oil prices would determine the overall inflation trajectory. Also, any government action on cut in fuel taxes may also help to stabilise the retail fuel prices and thereby, the inflation sentiments. Assuming a normal monsoon, strong V-shaped recovery in growth and range-bound commodity prices vis-à-vis current levels, we continue to expect headline inflation to be largely moderate averaging at 5.0 per cent levels in FY22 from an estimated level of 6.2 per cent in FY21. 

We believe that inflation levels between 4.0 per cent-6.0 per cent would not really be detrimental to economic revival. Moderate inflation is also a reflection of healthy demand in the economy when supply bottlenecks have been addressed.      

Q4.  What more do you expect from government in terms of policies to propel economic recovery and then growth on a long-term basis? 

Union Budget 2021 has taken several fiscal measures to support the ongoing economic revival including a step-up in capital expenditure. Encouragingly, FYTD (Apr-Jan) growth in capital expenditure has more-than-doubled from the levels seen in the corresponding period in FY20. Since the beginning of H2 FY21, growth in government expenditure has picked up perceptibly. This possibly stems from the recent comforting trend observed in tax collections as well as the need to support the economy amidst gradual phasing of lockdown restrictions. 

Further, the production-linked incentive (PLI) programme announced by the government for select sectors is likely to kickstart private sector investments over the medium-term. Some of the steps for financial sector reforms such as the proposed disinvestment in public sector banks, creation of a stressed asset management company to manage legacy bad assets and incorporation of a new developmental finance institution (DFI) should support both public and private investment in infrastructure assets.