Will India regain lost strength in 2021? These factors may still weigh on economic growth

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November 17, 2020 12:47 PM

Apart from the trend in COVID-19 cases, uncertainty stemming from faster tightening of domestic financial conditions, higher-than-expected stressed asset creation, and slower recapitalisation of PSU banks are likely to weigh on the growth trend.

coronavirus lockdown, economic recovery, real GDP, upside risks, morgan stanleyIndia's growth outlook has upside risks too, particularly evolving from the spread of coronavirus and the availability of the vaccine.

India’s economy is all set to recover from the losses caused by the coronavirus pandemic; however, there are a few roadblocks that may make the process slow. It is expected that India’s GDP will grow at 9.8 per cent on-year in 2021, after contracting 5.7 per cent on-year in 2020, said a report by Morgan Stanley. “We estimate the economy to have recovered to the pre-pandemic level of output in 4Q CY20,” it added. However, the growth outlook has upside risks too, particularly evolving from the spread of coronavirus and the availability of the vaccine. 

The resurgence in COVID-19 cases domestically or globally may lead to stricter lockdown measures and thus increased risk-aversion will potentially weigh on the growth outlook. Apart from the trend in COVID-19 cases, uncertainty stemming from faster tightening of domestic financial conditions, higher-than-expected stressed asset creation, and slower recapitalisation of PSU banks are likely to weigh on the growth trend, the report underlined. 

On the external front, risks could also emerge from a slowdown in global growth, changes in commodity prices, and swings in capital flows. Also, given the back-drop of sticky inflation and a continued recovery in growth, it is expected that RBI may hold rates until 3Q CY21 and the discussion will shift towards the sustainability of the growth recovery, inflation risks, and the monetary policy reaction. 

The cyclical growth strength is expected to be supported by a still accommodative monetary policy stance, recovery in external demand, and the government’s spending directed towards rural and infrastructure areas. A steady improvement in private sector demand is also likely as the coronavirus caseload gradually dissipates. 

Meanwhile, India’s real GDP is likely to contract by 6 per cent in the quarter ending September 2020, and grow by 3.5 per cent in the quarter ending December 2020. Further, it is expected to expand by 4.2 per cent and 27.9 per cent in the next two quarters.

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