India’s FY22 Growth to be Fastest in the World: OECD

India’s gross domestic product growth is expected to rebound sharply to 12.6% in FY22, making it the fastest-growing economy in the world, the Organization for Economic Co-operation and Development said in its interim economic outlook report. It said Covid-19 vaccine production in the country is “super encouraging”, but deployment speed will be crucial for recovery.

Rating agency Crisil said in a separate report that it expected India’s GDP growth to rebound to 11% in FY22, after an estimated 8% contraction in FY21, on the back of four drivers – people learning to live with the new normal, flattening of the Covid-19 affliction curve, rollout of vaccinations and investment-focused government spending.

China is forecast to grow by 7.8% in FY22 by the Paris-based OECD. It expects India’s GDP to contract 7.4% in FY21, against the December 2020 projection of 9.9% shrinkage, thanks to strong fiscal and quasi-fiscal measures and recovery in manufacturing and construction. The projection is more positive than the Indian government’s own estimate of an 8% contraction in GDP growth for FY21.

This was revised from an earlier estimate of 7.7% contraction.

“In India we revised (upwards) to a large extent based on very good numbers towards the end of the year (as) Indian performance was much better than we expected at that time,” OECD chief economist Laurence Boone said. “Now they also have to proceed with faster vaccination which they have started to do,” she noted. The OECD maintained that additional fiscal support would help recovery in Japan and India.

It expects India’s GDP to grow at 5.4% FY23, owing to the faster rebound of several large emerging market economies.

Crisil said India’s medium-term growth hinged on kick-starting the investment cycle.

“There are early positive signs, powered by government spending such as through the national infrastructure pipeline, demand-driven capex, and the Centre’s production-linked incentive scheme,” said Crisil managing director Ashu Suyash.

Crisil expects GDP growth to average 6.3% between FY23 and FY25, which would be lower than the 6.7% average in the decade preceding the pandemic, but higher than the 5.8% average in the three fiscal years prior to it.

Activity had risen above pre-pandemic levels in China, India and Turkey, the OECD said.

The most prominent downside risk that may affect recovery would be the speed of vaccine production and deployment not being fast enough to stop transmission of the virus, especially if mutations will mean requiring new or modified jabs.

A slower-than-expected vaccine rollout was an immediate concern that could dampen spending in emerging and developing economies.

OECD’s Boone said India’s vaccine production was “super encouraging” as it would help in bringing inoculation closer to people, which is most critical in the distribution phase. She backed more licensing and technology transfer.

“If we are at war with the virus then we need to put vaccine production on a war footing, provide the necessary resources and speed up deployment across the world,” she said.

The speed of economic recovery will depend on the progress of vaccine deployment across all countries. Faster progress will enable restrictions to be lifted more quickly and enhance confidence and spending. Slow progress and the emergence of new virus mutations resistant to existing vaccines will result in a weaker recovery, bigger job losses and more business failures. “If we don’t get enough people vaccinated quickly enough to allow restrictions to be lifted, the recovery will be slower and we will undermine the benefits of fiscal stimulus,” Boone said.

Advanced economies, as well as vaccine suppliers such as China, India and Russia, also face potential risks from the spread of new mutations and the re-imposition of containment measures from the latter half of 2021. But there’s less near-term uncertainty about vaccine production and deployment, which is likely to be completed during 2021, the report added.

Price worries have begun to surface as headline inflation remains high in some emerging-market economies, in part due to a spurt in commodity prices and past currency depreciation, the OECD said.

“Higher commodity prices will also raise inflation in net commodity importers, such as India and Turkey, relative to commodity exporters,” it said, flagging rising prices of food, metals and oil – having rebounded to 2019 levels – besides higher input costs due to supply shortages of semiconductors and shipping.

OECD projected global GDP growth at 5.5% in 2021 and 4% in 2022, with global output rising above the pre-pandemic level by mid-2021.

However, if the downside risks prevail, global GDP growth could be lowered by close to 1 percentage point in 2021 and 1.25 percentage point in 2022, respectively, taking it to 4.5% and 2.75%, respectively. It cautioned that output would remain below the pre-crisis path for an extended period, raising the chances of long-lasting costs from the pandemic.

OECD said premature tightening of fiscal policy must be avoided. Fiscal policy support should be contingent on the state of the economy and the pace of vaccinations.

The current accommodative monetary policy stance should be maintained and allow temporary overshooting of headline inflation, provided underlying price pressures remain well contained, with macro-prudential policies deployed where necessary to ensure financial stability.

It backed continuation of income support for households and companies until vaccination allows a significant easing of restraints on face-to-face activities. Income support should be refocused to help people and companies with grants and equity rather than debt.

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