Skip to main content
2021 a year of hope & promise: India economy growth prospects seem to be improving in medium-term
December 24, 2020 at 8:00 AM
square 2021 outlook.png

While 2020 saw India economy facing a sharp blow in the April-June quarter, the Indian economy is certainly recovering at a faster pace. Most high-frequency indicators are looking positive although at a slightly slower pace than in recent months and easy financial conditions, unlocking of the economy and recent Government measures are likely to lead to better 2021.

The RBI’s latest bulletin stated, more evidence to show that the Indian economy is pulling out of COVID-19's deep abyss and the economy is reflating at a pace that beats most predictions. Bounce back may be stronger in Q4 if the current momentum is maintained and while business sentiments have moved to a recovery path overall sentiments are yet to reach pre-pandemic levels.

India economic growth has averaged 6.5% to 7% for the last 30 years, and post the sharp slump that we have seen in the economy due to the pandemic, growth prospects seem to be improving in the medium term. Neelkanth Mishra of Credit Suisse says, “after a few years of downgrades to India’s medium-term growth outlook, we now have reasons to upgrade.

The easing of monetary conditions reverses the tightness of 2015-18, the large Balance of Payment surpluses that have driven this also provide macroeconomic space for a stimulus, the multi-year real estate cycle is no longer a drag, and most importantly, we believe the pro-growth turn in India’s industrial policy can add 1.7% to GDP by FY27, or about 0.3-0.5% a year. The impact of corporate tax cuts and labour law reforms should help too.”

Sonal Varma of Nomura has an above-consensus growth forecast for China and India, the two largest economies of Asia. Nomura is positive on the cyclical growth outlook for India after two years of being negative. Despite structural balance sheet issues and growth hiccups in the first half, Varma says, easy financial conditions, a synchronised global recovery and vaccinations support above-consensus GDP growth outturn of 9.9% in 2021.

Inflation should moderate but remain above the RBI’s 4% target, prompting a gradual policy normalization. Varma expects a gradual withdrawal of liquidity (in Q1/Q2 of 2021), shift to a neutral stance, followed by higher policy rates in early 2022 and does not expect RBI to cut rates in 2021.

we foresee a two-track recovery with exports, manufacturing Capex and pockets of real estate leading, whereas services, government Capex and leveraged consumption lagging in India, said Kapil Gupta of Edelweiss.

Kapil forecasts India GDP to rebound to 7-8% YoY in FY22, after 6-7% contraction in FY21 and expects FY22 inflation trajectory to be much more benign than FY21 which should facilitate another 25-50bps rate cut before a long pause. While upsized fiscal support can broaden the recovery, premature rise in real rates in the US could jeopardise global reflation.  

Subscribe to our newsletter
Let's keep in touch!

Stay updated on our news and events! Sign up to receive our newsletter.