We expect growth to gain momentum in 2H FY22 on cyclical tailwinds including pent-up demand (especially after more people are vaccinated), favourable external demand and higher government spending
Economic activity improved by an average 16.8% quarter-on-quarter sequentially in the September quarter on progressive re-opening of the economy post the second covid-19 wave after contracting 11% QoQ in the June quarter, according to the UBS-India Activity indicator.
Economic Indicators
“Even for the first fortnight of October, the activity indicator is up 1.8% MoM. Mobility indicators (Google foot traffic, traffic congestion in cities, Apple driving index) are back to their pre-pandemic levels. The economic indicators also improved (electricity demand, e-way bill generation, vehicle registration, etc.) during this period,” UBS said in a report on Monday.
Economic Recovery
UBS has projected the Indian economy to grow at 9.5% in FY22. “We expect growth to gain momentum in 2H FY22 on cyclical tailwinds including pent-up demand (especially after more people are vaccinated), favourable external demand (goods exports are c25% above the pre-pandemic level, FYTD) and higher government spending (likely towards capex). That said, we will be closely watching the recent supply-side disruptions, including high global commodity prices, especially oil and domestic coal shortages, which could weigh on India’s fragile economic recovery,” it added.
Developing Economy
Unlike developed economies, where a much higher proportion of people work in the formal sector and maintain their income levels during the pandemic, UBS said in a developing economy such as India, 83% of the labour force is employed in the unorganised sector, with only 17% in the formal sector. “The pandemic has adversely affected the employment and income levels of informal sector workers (largely in the nonagricultural sector in rural areas and the high-contact services sector in urban areas),” it said.
Boosting Revenue
UBS has estimated the consolidated fiscal deficit of both centre and states to narrow to 9.8% of GDP. “For the central government, we estimate a lower fiscal deficit of 6.3% of GDP in FY22 (vs. 6.8% as per the budget estimate [BE]) on a cyclical economic recovery boosting revenue collections and the roll-back of pandemic-related relief measures. In contrast, the states may miss the BE of 3.2% of GDP by 30bp (UBSe) on a likely shortfall in state GST collections,” it added.
Centre’s Capex
In the FY22 union budget, the central government announced a strong capex push of 2.5% of GDP, the highest since FY08. The states also expect increased capex to 3% of GDP in FY22, according to the finances of 28 states. The fiscal performance in the first five months of FY22 (April-Aug) indicates states’ capex has almost doubled vs. last year and is up 12% vs. the pre-pandemic period. The centre’s capex has increased 28% YoY, in line with the budget estimates of 30%.
UBS said India’s public debt levels remain elevated, at 86% of GDP in FY22 (vs. 88.5% in FY21). “Among global emerging markets, UBS estimates India will have the highest public debt to GDP ratio in 2021. Our estimates indicate nominal GDP needs to grow at least 10% YoY to help stabilise public debt at the current level before it can be reduced,” it added. (livemint)
