CARE Ratings has cut its FY2022 GDP forecast for the fourth time this fiscal, revising it from 9.2 per cent to 8.8-9.0 per cent as demand has been set back by both consumption and investment.

The main drivers of the economy would be agriculture and industry, according to the credit rating agency’s ‘Economic Outlook for 2021-22’.

The agency noted that business, as seen ex-post, has been better equipped to face the Covid-19 related lockdown and while activity did reduce across the country as well as sectors, the impact was less severe.

“The reverse migration which took place in large numbers last year was of a lower magnitude this time. SMEs were again under pressure in this phase, but as they were operating at less than normal potential, were not pushed back that severely.

“Therefore, while our projections on growth have come down significantly from March, the drop is less damaging this time,” said a team of economists led by Chief Economist Madan Sabnavis in the report.

Revised estimates

CARE Ratings’ initial estimate of FY22 was 11.2 per cent (in March 2021). In April, the agency revised its GDP projections downwards twice -- to 10.7 per cent on April 5 and to 10.2 per cent on April 21. On May 12, the GDP projection was cut to 9.2 per cent.

The agency’s sectoral GDP projection for FY22 for agriculture is 3.4 per cent (3.6 per cent in FY21); industry (9.4 per cent in FY22 against -7 per cent in FY21); and services (8.2 per cent against -8.4 per cent).

CARE Ratings’ economists observed that services will not be able to reach its potential even at 8.2 per cent growth as the second lockdown has affected sectors like hotels and restaurants, tourism, retail malls and entertainment in particular.

Malaise on the demand side

The economists believe that while a lot has been done on the supply side by both the RBI and the government (the June 2021 relief cum stimulus programme), the malaise is on the demand side, which has been a problem even before the pandemic.

“Demand has been set back by both consumption and investment, which has to be reversed. Consumption will be driven by employment generation and here we have to see broad-based growth.

“The services sector has already witnessed loss of jobs last year which has not been restored in 2021 given the second lockdown,” the agency said.

Employment generation has been rapid in case of BFSI (Banking, Financial Services and Insurance) and IT (Information Technology) which is more at the upper income end, it added.

Rural areas

CARE Ratings emphasised that “a critical factor this time will be the spending pattern of the rural households. The monsoon forecast is good and ideally a stable kharif harvest should bode well for rural incomes”.

“It is still not certain as to what has been the impact of the pandemic on rural India this time. The emerging picture has been rather mixed.”

The agency said the ability and willingness to spend during the post-harvest festival season will depend on the disposable surplus income that is generated after adjusting for healthcare expenses in the last few months and this would be a differentiator for overall demand and consumption in the country.

There could be some-pent up demand which surfaces this time too from urban India, but it may just about maintain the level of last year and not really breakthrough, it added.

“It has been noticed that savings have been rising in these uncertain times and while the government has announced higher Dearness Allowance for its employees, it would need to be seen as to how much is spent on consumption this time over.

“Higher consumption should stimulate investments. The crux will be investment which has a multiplier effect on demand and investment,” the economists said.

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