India could well be the fastest growing Asian economy in calendar year 2021 (CY21) if Nomura’s forecasts are to be believed. The foreign research and brokerage house expects the Indian economy, measured by gross domestic product (GDP), to grow at 9.9 percent in 2021, dwarfing China (GDP growth in 2021 is pegged at 9 percent) and Singapore (at 7.5%). during this time.
Nomura has turned positive about India’s cyclical outlook for 2021 and believes the country is on the cusp of a cyclical recovery. The change in stance comes after almost two years (end of 2018), when it turned negative for India’s growth.
“We project that GDP growth will remain in negative territory in the first quarter of 2020 (- 1.2%), it will rebound to 32.4% in the second quarter based on basic effects, before decreasing to 10.2% in the third quarter and 4.6% in the fourth quarter. Overall, we expect GDP growth to average 9.9% in 2021 versus -7.1% in 2020, and 11.9% in the fiscal year 22 (year ending March 2022) versus -8.2% in fiscal year 21, “wrote Sonal Varma, India’s managing director and chief economist. in Nomura in a December 8 report titled Asia 2021 Outlook, co-authored with Aurodeep Nandi.
A more pronounced than expected rebound in the Indian economy in the second quarter has taken most analysts by surprise. Fitch Ratings, for example, now expects GDP to contract by 9.4 percent in the current financial year, nearly 1 percentage point (pp) from the 10.5 percent forecast in September 2020.
Given the uncertainty surrounding the Covid-19 vaccine, Nomura expects the Reserve Bank of India (RBI) to maintain an accommodative stance in the first half of calendar year 2021 (H1-2021) and a gradual withdrawal of liquidity in the first / second trimester. (Q1 / Q2) of 2021, change to a neutral stance in Q2 / Q3CY21, followed by higher policy rates in early 2022. Inflation is expected to average around 5.5% in the first half of 2020, before from decreasing to 4.1% in the second half.
Key risks
However, the fastest growing tag in 2021 will come with its own challenges. A key concern in 2021 and beyond, Nomura said, is the implication of the K-shaped recovery seen so far. A slower pace of recovery in the informal sector, they argue, implies cyclical recovery perhaps a jobless recovery and can lead to lower per capita income, higher inequality, pressure for more populist government spending, and social tensions. .
It also warns against structural balance sheet challenges, particularly high NPLs in the financial sector, restricted fiscal space, and a business sector focused more on deleveraging than capital spending.
“Due to the lack of job creation, the durability of the cycle could be on shaky ground. By 2021, however, we believe risks are leaning towards a bullish surprise in both growth and inflation, relative to consensus. and the RBI projections, “Varma and Nandi said.
An increase in infection cases due to overcrowding during recent festivals; fading of repressed demand after initial reflex; fiscal drag from spending compression in the first quarter, as the government struggles to keep the deficit under control; and weaker growth in Europe and the United States due to the pandemic are the four risks he cites that could trigger a slowdown in economic growth in the future.
On a macro level, Nomura expects global growth to rebound from negative 3.7 percent in 2020 to 5.6 percent in 2021, with growth in the first half of 2020 averaging around 7.8 percent. year-on-year percent (due to base effect).
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