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The Omicron Threat to India’s FY22 Growth Outlook

The Omicron Threat to India’s FY22 Growth Outlook

Economists have pegged India's full-year growth rate at 9-10 per cent, with the pace likely to weaken in the second half

A Honda car manufacturing plant in Manesar -- Photograph by Rajwant Rawat A Honda car manufacturing plant in Manesar -- Photograph by Rajwant Rawat

India’s economy recovered to the pre-pandemic level in the second quarter of FY22 in absolute terms. However, the discovery of the Omicron variant of the coronavirus has got economists worried. They think the mutant variant of the virus poses a threat to the double-digit growth outlook for the fiscal year.

With a GDP growth rate of 8.4 per cent, India emerged as the fastest growing economy in the September quarter, led by a spike in government spending and pick-up in private investment supported by wide vaccination coverage. It was the fourth straight quarter of expansion, albeit on a low base. India’s GDP contracted 7.4 per cent in the September quarter last year, as per data from the National Statistical Office. While the Q2 GDP surpassed the pre-Covid level of 2019-20 by 0.3 per cent, the economy in the first half of 2021-22 was still 4.4 per cent lower than the corresponding period of FY20.

Economists have pegged the full-year growth rate at 9-10 per cent, with the pace likely to weaken in the second half on the back of a higher base effect and fears of another Covid-19 wave. While the services sector posted a modest pick-up, manufacturing activity remained subdued in the September quarter amid sub-optimal recovery in demand before the festive season. “Although the healthy GDP growth numbers are mainly due to the base effect, it indicates that the economy is recovering quickly post Covid 2.0,” says Sunil Kumar Sinha, Principal Economist, India Ratings and Research. “However, we believe that economic recovery will require both fiscal and monetary policy support in the near term to ensure that recovery continues despite the threat posed by the new Omicron variant.”

Manufacturing posted a 5.5 per cent year-on-year growth in the September quarter compared with 49.2 per cent growth in the June quarter. It was 4 per cent higher than the 2019-20 levels. Overall, the services sector posted 10.17 per cent growth compared with 11.4 per growth in the first quarter, and 11.4 per cent contraction in the year-ago period. “The main fear is the imposition of restrictions by the government due to the new Covid-19 strain. We maintain a growth projection of 9.1 per cent for the year,” says Madan Sabnavis, Chief Economist, CARE Ratings.

Gross fixed capital formation, a proxy for private investment, grew 11 per cent in the second quarter and also surpassed the 2019-20 levels by 1.5 per cent. The private final consumption expenditure, signifying demand in the economy, grew 8.6 per cent annually in Q2, but was 3.5 per cent lower than the 2019-20 levels.

With the announcement of investments worth Rs 8.6 lakh crore in the first seven months of FY22, compared with Rs 11 lakh crore reported in the entire last fiscal, the intent of investment looks encouraging, says Soumya Kanti Ghosh, Chief Economic Advisor, SBI Research. “With the private sector contributing around 67 per cent of this, that is, Rs 5.80 lakh crore, it seems private investment revival is on the horizon,” he says.