Motilal Oswal pegs real GDP growth at 8.7% for FY22
Source: IRIS | 18 Jun, 2021, 04.42PM
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According to EcoScope report from Motilal Oswal Financial Services, projected real GDP growth of 8.7% in FY22, down from 11.1% expected earlier. However, Motilal Oswal Financial Services has revised up the FY23 forecasts from 4% earlier to 5.4% now. It is interesting to note that nominal GDP growth forecast has actually been raised moderately for FY22 and FY23. This is primarily because the GDP deflator has been revised up to 6.5%/4.5% for FY22/FY23 (from 3.7%/3.8% earlier).
According to the report, the recent surge in industrial metals and agricultural commodities is likely to have a much larger impact on WPI over CPI. Although the GDP deflator is still more closely linked with WPI, the policy instrument for the RBI is CPI. Therefore, while higher WPI-based inflation would drive nominal GDP growth higher, this would not present any additional concerns regarding the monetary policy. CPI inflation is expected to ease to 5.7% in FY22 from 6.2% in FY21. Average inflation of 6% in two years reduces the possibility to ease any further. Therefore, MOFS expects the MPC to shift from the ‘accommodative’ stance to ‘neutral’ by the year-end.
Weaker real GDP and higher inflation to support nominal GDP in FY22
Due to the ferocious second COVID wave, GDP growth forecasts have been revised down. Compared with MOFS Mar’21 forecast of ~30% YoY, the firm now expects real GDP growth of 21% YoY in 1QFY22, with some downward revision in 2QFY22 as well. However, as COVID cases have dropped sharply in Jun’21, some pent-up demand may be visible in 2HFY22 and 1HFY23. Consequently, while new projected real GDP growth is 8.7% for FY22, down from 11.1% expected earlier (in Mar’21), FY23 forecasts have been revised up to 5.4% now (from 4% earlier).
Government likely to meet its FY22 fiscal deficit and spending targets
The government may not only marginally overachieve its FY22 fiscal deficit target but also meet its spending target. There are three notable trends in FY22 thus far: 1) the RBI has announced higher dividends to the government by INR400b, 2) an additional fertilizer subsidy of INR148b has been announced, and 3) the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), valued at INR900b, has been extended to seven months up to Nov’21. Additionally, the government is very likely to spend more on the MGNREGA program (v/s BE of INR730b) in FY22.
Overall, MOFS calculations suggest that notwithstanding weak economic activity, the government would be able to meet its receipt target for FY22, in turn enabling it to meet the spending target as well. While the central government fiscal deficit could remain unchanged at INR15.1t (or 6.6% of GDP due to a higher denominator, nominal GDP) in FY22, the total spend could also be the same at the BE level - implying decline of 0.8% YoY in FY22 due to higher-than-targeted total spending in FY21.
INR to remain stable provided there is no global shock
India’s foreign exchange reserves (FXR) have exceeded USD 600 billion for the first time in early Jun’21. India is now the fifth largest holder of FXR in the world - after China, Japan, Switzerland, and Russia. In fact, the difference between India and Russia is less than USD 200 million, putting India in the running to become the fourth largest holder of FXR soon.
The INR has moved from over 75/USD in mid-Apr’21 to 73 in the past few weeks. As India’s external situation remains extremely comfortable, higher inflation in the US may make the global markets jittery, creating a weakening bias in the INR. Thus, the INR may see some weakness in the very near term and end the year at around 74.5/USD. MOFS revised the USDINR marginally upwards to average 73.8 in FY22.
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