Crédito y Caución forecasts that India's Gross Domestic Product (GDP) will register strong growth of around 8% in 2022, in a context where lower interest rates, increased public spending, and boosted vaccination rates are favoring domestic consumption.
However, the credit insurer warns of downside risks to the country's economic outlook, mainly due to the current spread of new coronavirus variants. At the end of 2021, only 64% of India's adult population was fully vaccinated. In the coming months, the country's economic growth momentum will depend on its ability to curb the spread of the virus and vaccinate the remaining population.
Crédito y Caución forecasts that domestic consumption will grow by 10% this year if, by the end of the second quarter, approximately 80% of the population is fully vaccinated. Investment will grow by about 7% this year. However, the industrial capacity utilization rate, 20 points below the optimum level, calls into question the sustainability of this investment momentum. Still weak corporate balance sheets and Indian financial institutions could lead to a slowdown in investment growth.
Difficult post-pandemic period
India's public finances have deteriorated with the pandemic. The budget deficit will reach approximately 7% of GDP in the 2021-22 fiscal year. Crédito y Caución predicts that, starting in March, the country will begin a gradual fiscal consolidation that will reduce the deficit to 6% for the next fiscal year.
Public debt will remain around 60% of GDP. Rising global energy prices and ongoing supply disruptions are driving inflation, so a moderate increase in interest rates is expected throughout the year. This monetary tightening in 2022 could hinder companies' ability to repay.
The Indian banking sector remains under pressure due to the high volume of non-performing assets resulting from the adverse impact of the pandemic. These are concentrated in state-owned banks, which represent more than 70% of the national banking sector. However, public support is mitigating the country's financial risks.
