S&P Global projects Indian economy to grow at 9.5% in FY22

Rating agency, S&P Global has projected the Indian economy to grow at 9.5% in FY22 with economic recovery expected to be less steep compared with the bounce in late 2020 and early 2021. It stated that the COVID-19 pandemic could worsen structural deficits and indebtedness of Indian state governments.

India’s stronger growth than peer countries has been a key factor underpinning the sustainability of states’ fiscal personal. S&P expects the country’s economic growth to remain above average over the next few years. “The rebound in the economy in FY2021-22 will feed into the states’ revenues, which we estimate will increase by an average of 17% annually over FY21-23.” It highlighted that even as the economy reopens, households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending.

S&P believes it will be hard for the state governments to rapidly scale down elevated expenditures induced by COVID-19. “The pandemic has led to increased spending on healthcare, social safety and digital infrastructure. We therefore, project balance after capital accounts deficit to average 30% of revenues over 2019-2023.”

The rating agency said the extraordinary support from the central government and the Reserve Bank of India will remain a key pillar for states’ fiscal framework and performance. The central bank has helped states with their funding needs and in navigating the uncertainties of COVID-19. S&P added that a significant risk for the fiscal framework and performance of Indian states will be the Rs 3 trillion power sector reforms, which was announced in the FY21-22 budget. “While details of the proposed reform are not known yet, meaningful state participation is likely. The significant linkages between the power distribution companies and states have led to the indebtedness of the discoms shifting to states.”

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It also stated that permanent damage to private and public sector balance sheets will constraint growth over the next couple of years. Further pandemic waves are a risk to the outlook given that only about 15% of the population has received at least one vaccine dose so far, although vaccine supplies are expected to be ramped up.