India's path to economic recovery will be stronger: Economists

Economists expect global economic activity to return to normality in fiscal Q2 and India to grow in fiscal 2021/22, with government stimulus packages expecting to contribute

India's path to economic recovery will be stronger than previously thought as fiscal expansion and vaccine hopes help the country heal from COVID-19, a Reuters poll of economists showed.

The world's second-most populous country has begun a huge vaccination drive and a steep fall in new coronavirus cases over the past few months is supporting a recovery in Asia's third-largest economy.

The finance minister has indicated that spending would not be curtailed to narrow the deficit. But markets have their comfort levels, and the government may need to manage not just its own purse but also market expectations.

Alongside that, nearly 60% of respondents, 18 of 31, who responded to an additional question in the Jan. 13-25 poll said India's federal budget, due on Feb. 1, would help a significant economic recovery in financial year 2021/22 and has already sent stocks to record highs.

"We expect global economic activity to return to normality in fiscal Q2 and India to grow in fiscal 2021/22, with government stimulus packages expecting to contribute," said Hugo Erken, head of international economics at Rabobank.

"There is a strong sentiment the budget will aim to continue expenditure as growth is the only way India can come out of recent setbacks."

The poll of over 50 economists showed the economy would grow 9.5% next fiscal year - the highest since polling began for the year in March 2020 - after contracting 8.0% in the current fiscal year.

It was expected to grow 6.0% in fiscal year 2022/23. The poll predicted the economy would grow 21.1%, 9.1%, 5.9% and 5.5% in each quarter of the 2021/22 fiscal year, largely upgraded from a poll taken two months ago.

But when asked how long it would take for the economy to recover to its pre-COVID-19 level, 26 of 32 respondents said it would take up to two years, including six analysts said longer than that. Twelve analysts said within a year.

"There is a lack of fiscal space to boost growth sufficiently and India is unlikely to reach its pre-COVID-19 levels any time soon despite policy support," said Sher Mehta, director at Virtuoso Economics.

"Economic momentum will struggle to gain traction as there are fears of stagflation and the possible end of monetary policy easing."

The Reserve Bank of India, which has slashed its main repo rate by 115 basis points since March 2020 to cushion the shock from the coronavirus crisis, was expected to keep its benchmark lending rate at 4.0% through at least 2023.

That was a shift in expectations from a survey taken two months back when a 25 basis point cut to 3.75% was predicted in the April-June period.

Will borrow more

India's government will focus on fiscal expansion in next week's budget and revise its borrowing target higher for the 2021/22 fiscal year, prompted by the expected economic slowdown and weak jobs growth, according to the latest poll.

Government borrowing has ballooned due to pandemic spending while revenues have severely dampened.

The median forecast showed the government would revise its fiscal deficit target for next fiscal year up to 5.5% from 3.3% of gross domestic product.

Around 55% of economists, 18 of 33, who answered an additional question about the focus of the budget said it would be more on fiscal expansion than prudence.