10 minute read 26 Aug 2021
India's growth prospect

Reassessing India’s growth prospects — what story do latest GDP projections tell?

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

10 minute read 26 Aug 2021
Related topics Tax COVID-19

India’s FY22 GDP projections indicate strengthening of growth momentum after COVID’s second wave.

Both the IMF and the RBI have projected the GDP growth rate of India to recover to 9.5% in FY22. Some of the high frequency indicators which have become available show a strengthening of the growth momentum after the adverse impact of COVID’s second wave in the initial months of the fiscal year. PMI manufacturing recovered to 55.3 in July 2021 from an eleven-month low of 48.1 in June 2021. PMI services contracted at a slower pace in July 2021 with its level at 45.4 as compared to 41.2 in June 2021. Passenger vehicle sales improved to 2.6 lakh units in July 2021, up from 2.3 lakh units in June 2021. Growth in power consumption improved to a three-month high of 9.9% in July 2021 from 8.4% in June 2021. GST collections picked up to INR1,16,393 crore in July 2021 from INR92,849 crore in June 2021. Merchandise exports growth (y-o-y) remained high at 49.8% in July 2021 due partly to favorable base effects. Compared to July 2019 levels, exports grew by 34.5% reflecting pickup in external demand.

Post COVID’s second wave: reassessment of India’s economic outlook

The IMF, in its July 2021 Update of the World Economic Outlook, has brought down India’s FY22 GDP growth forecast to 9.5% from its earlier projection of 12.5% in April 2021. The IMF’s growth projections in April 2021 had not considered the impact of COVID’s second wave. The RBI, in its August 2021 monetary policy review, also estimated India’s growth at 9.5% for FY22, the same as its original forecast in June 2021.

With this level of real GDP growth, the cumulated effect of two years of COVID has led to an erosion of India’s real GDP such that at the end of 2021, real GDP would exceed the level in 2019 by only 1.5%. India may still emerge in the negative territory if the economy is not able to show a benchmark real GDP growth of at least 7.8%[1]. Such an eventuality may arise if COVID’s third or subsequent waves turn out to be unduly strong. However, since India has invested in shoring up its health infrastructure after the second wave and there is considerable progress in the pace of vaccination, such an eventuality may not arise.

The IMF, in its July 2021 forecasts has also given its revised assessment of government deficit and debt relative to GDP for 2021 (FY22 for India). The general government fiscal deficit to GDP ratio for India forecasted at (-)11.3% is the third highest among major advanced and emerging market economies, after the US and the UK. As per Center’s FY22 budget, center’s fiscal deficit is estimated at 6.8%. This implies that states’ fiscal deficit is being estimated at 4.5% of GDP. India’s combined debt to GDP ratio has been forecasted at 90.1% of GDP at the end of FY22 which is 3.5% points higher than the earlier estimate of 86.6%.

Comparative global growth and fiscal prospects  

Table 1 gives IMF’s growth projections for 2021 and 2022 for ten selected large economies as well as the overall global economy. Comparing IMF’s July 2021 forecasts with those of April 2021, it is seen that the growth prospects for 2021 are revised downwards for only three of the ten selected economies namely, Japan, India and China. In 2022 also, three countries show a lower growth than that projected in April 2021, but these countries are different from those in this group in 2021. These countries are the UK, Brazil and Russia. This latter downward revision may reflect the anticipation of the impact of incomplete coverage of vaccination in these countries and/or resurgence of COVID cases due to new variants. Some of the upward revisions for 2021 growth in the July 2021 update vis.-a-vis. the April 2021 forecasts may reflect some delayed loading of stimulus as well as IMF’s assessment of the impact of the pace of opening up of these economies.

IMF forecasts of real GDP growth (%): 2021 and 2022

As a result of changes the IMF has also revised the debt-GDP ratio forecasts for 2021. For the US, it is estimated as 134.5% of GDP at the end of 2021 which is exceeded only by Italy at 157.8% and Japan at 256.5% (Table 2). Considering the overall global picture, the expectation is that fiscal stimulus is likely to be moderated as the year progresses. As a result, global debt-GDP ratio has been marginally revised downward to 98.8% at the end of 2021.

Table 2: general government debt at end 2021 as a percentage of GDP: IMF forecasts

Comparing stimuli: fiscal and liquidity

As a response to the COVID-19 pandemic, nearly all countries have announced stimulus measures. The IMF classifies fiscal support into different categories depending on their implications for public finances in the near term and beyond. Direct fiscal stimulus refers to additional spending and forgone revenue. The impact of these measures is immediately reflected in government’s budget deficit and debt. Liquidity support includes: a) below the line measures which include equity injections, loans, and asset purchase, b) government guarantees, and c) quasi-fiscal operations such as non-commercial activity of public corporations on behalf of the government. These measures may have little or no upfront impact on the fiscal deficit unless they have a concessional component, but they can increase debt.

Considering the period from January 2020 to June 2021, direct fiscal stimulus relative to GDP for AEs has been much higher at 17.3% as compared to just 4.1% for EMDEs. Amongst selected AEs, the highest direct fiscal stimulus relative to GDP has been for the US at 25.4%, followed by Japan at 16.5% and the UK at 16.2%. India’s direct fiscal stimulus at 3.5% of GDP has been the lowest amongst selected countries and is also below the EMDE average at 4.1%.

Chart 1: direct fiscal stimulus as a % of GDP

Quantified liquidity support measures relative to GDP for AEs at 11.4% has also been higher than that for EMDEs at 2.6%. Amongst selected AEs, while Japan, Germany and the UK have provided significant liquidity support, the US has not relied heavily on this category of stimulus. India’s liquidity support relative to GDP at 5.2% is higher as compared to the EMDE average at 2.6%. India has relied relatively more on liquidity support measures as compared to direct stimulus measures as is the case with Japan, Germany and the UK also.

Chart 2: liquidity support as a % of GDP

Emerging fiscal prospects in India: central government

As per the CGA, center’s gross tax revenues (GTR) showed an unprecedented growth of 97.1% in 1QFY22. However, it largely reflects a strong base effect because in 1QFY21, there was a contraction in center’s GTR of (-)32.6%. Center’s tax revenues in 1Q as percentage of the full year BE for FY22 is 24.0% which is much higher than the corresponding percentages in recent years covering FY17 to FY21. This reflects that the recovery in center’s gross tax revenues in 1QFY22 may lead to an upward revision in the budget estimates for this fiscal year in due course. For non-tax revenues, it is notable that the dividend that the central government receives from the RBI has been substantially raised in terms of its magnitude. RBI’s dividend to the central government in FY22 at INR99,122 crore looks quite high although it reflects the effect of a change in the RBI’s accounting year from July-June to April-March and RBI paid the dividend of the nine months of the previous year in 1QFY22. The Ministry of Finance in collaboration with the NITI Aayog has recently released the guidelines and the detailed program relating to the National Monetisation Pipeline (NMP) which is estimated to garner INR6 lakh crore over the period from FY22 to FY25. In FY22, the estimated amount is INR0.88 lakh crore[2].”

On the whole, the revenue side of center’s budget reflects positive prospects and in all likelihood, revenue receipts in FY22 may improve upon the budget estimates by a tangible margin. As this trend becomes more evident, the central government will have a choice to use the additional revenues for supporting the economy by increasing expenditures over and above the budgeted amounts. Alternatively, the central government may choose to reduce the fiscal deficit below the budgeted magnitude. Given the need to strengthen the growth momentum, the first option may be considered desirable.

With respect to expenditures, there has been an emphasis on frontloading capital expenditure while delaying revenue expenditures. Capital expenditure grew by 26.3% in 1QFY22 while revenue expenditure showed a contraction of (-)2.4%. As a percentage of the annual budgeted expenditure, center’s revenue and capital expenditures in 1QFY22 do not appear out of line with the corresponding ratios relative to actuals in recent years.

Conclusion: fiscal prospects and reforms in India

Both the IMF and the RBI have projected India’s real GDP growth to recover to 9.5% in FY22. Some of the high frequency indicators for the period up to July 2021 also confirm a strong ongoing recovery in the Indian economy. The fiscal situation appears to be comfortable based on trends for the first three months of FY22. If these trends continue, these may open options for the government to further strengthen the growth momentum of the economy.

Looking at the need for rebooting the economy after COVID’s deleterious effects in FY21 and partially in 1QFY22, the policymakers would now need to focus on strategic growth initiatives to provide a solid foundation for a robust medium-term growth. For this purpose, it is important to catch up with the progress made so far in regard to the earlier planned National Infrastructure Pipeline (NIP) which may have been partially derailed due to COVID. It is time now to take stock of the status of investment in NIP and identify sectors characterized by deficient investment measured against the original NIP targets. The recently launched NMP is also being aligned to the NIP to supplement its financing. With center’s revenue receipts likely to be more than the budgeted magnitudes, the government may have the option later in the year, to either lower the fiscal deficit or increase the expenditures as compared to the budgeted magnitudes. It may be desirable to go for strengthening demand by increasing government expenditure so as to lay a sound foundation for medium-term growth. This would require sustained emphasis on building up infrastructure including that for the health sector.   


If the current upward trend in center’s revenue receipts continues, it may open up options for the government to further strengthen the growth momentum of the Indian economy.

About this article

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

Related topics Tax COVID-19