Moody's raises GDP growth forecast to 9.5% for 2022

Challenges for upcoming fiscal

• Elevated commodity prices

• Demand-supply imbalances

• Inflation pressures

• Volatile financial markets

• Geopolitical tensions

• Worsening of the pandemic

• Repeated supply shocks

• Overly tight monetary policy

Economic recovery from the first and second Covid waves in 2020 and 2021 has been stronger than expected. GST collection, retail activity and PMI index suggest solid momentum, stated Moody's

New Delhi: Moody's Investors Service on Thursday raised India's growth forecast to 9.5 per cent for the calendar year 2022 and to 8.4 per cent for the coming fiscal beginning April 1, even as it flagged high oil prices and supply distortions as a drag on growth. Stating that the economic recovery from the first and second Covid wave in 2020 and 2021, respectively has been stronger than expected, Moody's said Goods and Services Tax (GST) collection, retail activity and Purchasing Managers' Index (PMI) suggest solid momentum. "We have raised our 2022 calendar year growth forecast for India to 9.5 per cent from 7 per cent, and maintained our forecast for 5.5 per cent growth in 2023. This translates into 8.4 per cent and 6.5 per cent in fiscal years 2022-23 and 2023-24, respectively," Moody's said in an update to its Global macroeconomic outlook 2022-23.

The speed of the recovery from the first lockdown-led contraction in the June quarter of 2020 and subsequently in the June quarter of 2021 during the Delta wave was stronger than expected. In November last year, Moody's had forecast India's economy to expand 7.9 per cent in the 2022-23 fiscal beginning April 1. As per official estimates, Indian economy is estimated to grow at 9.2 per cent in the current fiscal ending March 31. Moody's said, "the economy is estimated to have surpassed the pre-Covid level of GDP by more than 5 per cent in the last quarter of 2021. Sales tax collection, retail activity and PMIs suggest solid momentum. However, high oil prices and supply distortions remain a drag on growth," it said. Moody's said as is the case in many other countries, the recovery is lagging in contact-intensive services sectors, but it should pick up as the Omicron wave subsides. With most remaining restrictions now being lifted with the improvement in the Covid situation, including the reopening of schools and colleges for in-person instruction across various states, the country is on its way to normalcy.

"Our 9.5 per cent growth forecast for 2022 assumes relatively restrained sequential growth rates; thus, there is upside potential to the growth rate. We estimate the carry-over from a strong finish to 2021 will add 6-7 per cent to this year's annual growth," it said. In 2021 calendar year, Moody's estimates India's economic expansion at 8.1 per cent, against a 7.1 per cent contraction in 2020- the year marred by Covid-induced lockdown. Moody's said the 2022 union budget prioritises growth, with a 36 per cent increase in allocation to capital expenditure to 2.9 per cent of GDP for the fiscal year 2022-23, which the government hopes will crowd in private investment. With the RBI leaving interest rates unchanged at its February meeting, monetary policy remains supportive. "We expect the RBI to begin tightening liquidity measures and raise the repo rate in the second half of this year, provided that growth momentum continues to improve," Moody's said. With regard to global economy, Moody's said the global economy is transitioning toward more stable growth, bolstered by improvement in the Covid-19 health situation.

"The current economic cycle is remarkable in the swiftness with which activity has been restored in most major economies. But declining fiscal support, tighter monetary policy and waning pent-up demand will weigh on growth momentum in most countries," the report states. Stating that transition to a post-pandemic world will take shape this year, Moody's expects the G-20 economies collectively to expand 4.3 per cent in 2022, down from 5.9 per cent in 2021 yet still above long-term trend growth. "The first half of 2022 will be challenging. Elevated commodity prices, demand-supply imbalances, inflation pressures, volatile financial markets and geopolitical tensions will make for a challenging backdrop," it said. Risks to growth outlook include a potential worsening of the pandemic, repeated supply shocks, overly tight monetary policy. The escalation of the Russia-Ukraine situation poses risks to energy market stability and raises the prospect of potentially more severe sanctions on Russia, it said. "Although we expect the rapid rise in inflation in recent months to subside, the steep and broad-based increase in prices is eroding household purchasing power and could weaken the recovery," said Madhavi Bokil, Senior Vice President/CSR at Moody's Investor Services and one of the authors of the report.