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Into the light, but with overcast skies

India’s economy is poised to accelerate in the next two years, but risks to sustained growth remain. All eyes are now on the upcoming budget to address them.

India’s economy maintained the rebound momentum in the July–September quarter (Q2) of FY2021–22. GDP grew at 8.4% year over year (YoY) in Q2 FY2021–22, which is lower than what we projected in our previous forecast, but is fairly broad-based.1 Growth was driven by strong exports, thanks to the global economic recovery, and domestic private investment as businesses ramped up production to meet festive demand (figure 1). Investment has maintained a steady pace of growth in the past two quarters after declining for over a year, which indicates that the capital expenditure cycle is starting to gain pace.

Consumption demand, which has been a concern as the pandemic dented consumer finances and confidence, grew by 8.6% YoY. However, consumer spending lagged substantially from the pre–COVID-19 levels, suggesting that pandemic uncertainties are weighing on consumers’ confidence and ability to spend.

Government investments, too, witnessed a slowdown this quarter, suggesting that the government may be pulling back from spending so as to consolidate its expenses. India currently has the highest fiscal deficit among its peer nations and debt is at an all-time high. With the economy gradually coming out of the pandemic’s shadow and showing signs of a steady recovery, pent-up demand will likely sustain the growth momentum. This indicates there is probably lesser need for a stimulus package from the government. Besides, the government would like to build its capacity to respond to future adversities in case they arise. It would like to have the flexibility to use fiscal policy to support the economy without triggering financial imbalance and fear among investors.

Sector-wise analysis suggests that manufacturing and construction have fared well and seen a sustained rebound thanks to reduced mobility restrictions and pick-up in demand. That said, revival in the services sector has remained modest.

In light of this promising economic revival, we have updated our forecast for this and the next two fiscal years. We are upbeat about the economic outlook, although we do acknowledge certain downside risks to growth. 

What will contribute to the rapid bounce?


Our latest projections suggest that the economy will grow somewhere between 8.7% and 9.4% in FY2021–22. Growth will likely remain stronger in the following years as well, with the economy possibly growing 9% in FY2022–23 and 7.5% in the year after. See the sidebar, “Assumptions behind the two scenarios of economic projections,” for details about these projections.

Several reasons support our bullish outlook:

  • Accelerated rates of vaccination and substantially reduced mobility restrictions have improved consumer confidence. Currently, close to 85% of the adult population has been inoculated with at least one shot, and vaccination approval for the younger population (age group 2–14 years) is at the doorstep.2 That said, the possibility of newer variants of the virus reducing the efficacy of vaccines remains significant. According to the World Health Organization (WHO), preliminary evidence suggests Omicron comes with an increased risk of reinfection.3 At the time of writing this article, the number of cases are rising sharply.
  • The upper-middle or higher-income households that have been relatively less affected by the pandemic and are sitting on excess savings are yearning to get back to normalcy. With improved consumer confidence to move about and socialize, there is a burst of pent-up spending as people are beginning to travel and return to movie theatres, hotels, and restaurants.4
  • Once demand kicks in from one section of the population, it will likely result in a virtuous cycle as businesses will have to ramp up spending (in labor and capital) to meet the demand. This will boost employment and income for those who were financially hit during the pandemic. Furthermore, as job prospects improve, laborers who migrated out of urban centers in the first wave of infections in 2020 will likely return from their hometowns in search of better income prospects. Rural demand will continue to hold up in the meantime as sentiments improve.
  • The pandemic has increased the pace of digitization with businesses ramping up their online presence to survive. This trend is likely to continue even after the pandemic is over and will aid in improving the efficiency and productivity of labor and capital. Telecommuting, e-commerce, hybrid workplaces, and digitization are expected to evolve rapidly, reshaping consumer preferences and, therefore, business operations.

Assumptions behind the two scenarios of economic projections

We created two scenarios to discuss the economic trajectory India might take in the coming years. The first scenario is an optimistic one, of which we see a higher probability. We expect pent-up demand to pick up at a rapid pace in the next few quarters as the number of infections drops and more people get vaccinated. Higher demand results in a stronger capital-spending cycle with larger asset creation. Besides, the impact of higher spending on infrastructure, government schemes (such as production-linked incentives and self-reliance) and digitization will start kicking in from 2023, leading to stronger externalities, higher productivity, and greater efficiencies—all leading to accelerated economic growth. High demand and supply, along with strong exports, will give the government the space to gradually consolidate its position over the next few years. Asset monetization and stronger capital inflows will further aid the government in reducing its expenses and improving the fiscal deficit. The current account deteriorates due to higher demand for imports, but strong exports keep a check on the deficit. Lower oil prices globally keep the oil import bill under control.

In our second scenario, a more pessimistic one, we see downside risks, such as rapidly mutating virus and reduced effectiveness of vaccination leading to intermittent local lockdowns. Furthermore, muted demand, supply chain inefficiencies, and poor business confidence will cause sporadic and unsustainable growth spurts over the next two years. Despite the low economic activity, we expect inflation to remain in the upper range of the RBI’s inflation target range (because of supply disruptions and lockdowns). This could result in stagflation in the years ahead. Low demand for oil and falling oil prices globally aid in improving the current account balance.

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Mind the risks


The recovery, nonetheless, is unlikely to be smooth and equal—some sectors and segments of the population will see a relatively gradual recovery than others. Several factors could potentially set back growth prospects.

A surge in infections: One of the biggest concerns that economists have had while making economic projections is the possible surge in infections and the consequent return of mobility restrictions. In fact, with new variants coming to the fore, several countries are reimposing restrictions. The fact that Israel, one of the earliest nations to fully vaccinate its population, is at the threshold of a national emergency is a reminder that the pandemic-related uncertainties are far from over.5 Several Indian states are imposing local restrictions, but the impact on mobility has been limited so far.

Inflation—the biggest risk: Recent spikes in inflation have concerned policymakers in the United States and European Union, where a strong rally in demand has been met with supply constraints because of global supply chain disruptions and shortages. India will also likely experience a similar trend once pent-up demand rises faster than supply. We expect prices to rise rapidly over the next two years. We also expect demand for goods to rise faster than services considering social distancing practices may continue for some more time. Therefore, inflation will be driven by rising goods prices as it is difficult to quickly ramp up the supply of goods.

While the recent decline in prices may be transitory, policymakers may have to be prepared for a higher rise in prices for a prolonged period.

  • Global supply chain disruptions and travel restrictions will continue for a while with the ebb and flow of the pandemic, resulting in shortages of critical components and increased travel costs at least till the next year. All these will result in higher global inflation (as is seen in several industrial countries) and will feed into domestic prices through imports.
  • Crude oil prices have been steadily rising and are currently hovering around US$80 per barrel. High commodity prices will put pressure on production costs, which will feed into inflation.
  • Risks of capital outflows after the asset-purchase tapering in the United States and possible reversal of monetary policy stance could result in depreciation of the Indian rupee against all major reserve currencies of the world. That said, as we observed in our previous report, India is probably better prepared to handle such pressures as its fundamentals are in a much better shape.6 If required, the Reserve Bank of India (RBI) will likely step in to curtail volatility in the currency, and strong foreign reserves will also help.
  • Domestic investments in India have been low for over a year now. This may have dented the ability of businesses to ramp up production to meet the surge in demand, triggering demand-pull inflation.

Labor market conundrum: Job creation has been an Achilles’ heel for India, and the pandemic has created a highly fragmented job market. According to a report by the Centre for Monitoring Indian Economy (CMIE), demand for information technology and information technology–enabled services professionals from larger companies is on the rise.7 Wages in this sector have seen double-digit growth, up nearly 25% in recent months (figure 4). However, this segment of the working population accounts for only 0.5% of the total employed population.

On the other hand, the mismatch between the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act and person-days generated suggests a stress on rural employment, with a large number of casual workers looking for jobs under the scheme.8 Self-employment in the economy has increased. People who could not find acceptable jobs are doing something on their own to earn a living, many of them turning into entrepreneurs.

In the years ahead, businesses are expected to adopt labor-saving technologies. This will create more demand for efficiency and knowledge, further skewing opportunities in favor of people with means.

Financial contagion: In our earlier publications, we discussed the risks associated with asset-purchase tapering and the possible reversal of monetary policy stance across developed countries. The other possible financial risk can emanate from China, which has seen financial troubles brewing in a few state-owned and real estate companies. These can have a knock-on effect on the country’s economy and may spill over to the global financial system due to China’s deep financial integration with the rest of the world. Risk aversion could lead to capital outflows from emerging markets, including India.

Finally, India’s domestic financial sector is gradually getting back on its feet after remaining resilient through the pandemic. However, there remain significant pressures; the new norms by the RBI to bring the nonbank financial company (NBFC) asset classification norms at par with the banks could raise their nonperforming assets and impact profitability due to higher provisioning.9 Banks that have NBFC portfolios will also likely be affected and may reduce their willingness to lend, thereby impacting credit growth.

What to expect from the budget FY2022-23?


The government will likely focus on consolidating its fiscal balance to build its firepower should growth drivers fail to sustain the momentum in the future. The government spending in the first half of this fiscal year suggests that the government is already mending its balance sheet. The government must focus its resources on capital investment, for example, on physical infrastructure, skill-building, and improving public health and other social infrastructure, as the country learns to live with the pandemic. These expenses should be financed through sustained efforts toward monetization of assets and attracting investments. Well-executed projects, such as the construction of national highways, have demonstrated a strong ability to attract investments from global and domestic institutional investors. Similar commitments and implementations must be followed in other infrastructure projects, at both center and state levels.10

The other area of focus must be enabling the ecosystem around job, income, and demand creation. India is a domestic demand–driven economy and needs demand to sustainably pick up for a strong recovery. That will require more jobs and employment opportunities so as to fatten consumers’ wallets. Since micro-, small-, and medium-scale enterprises (MSMEs) are India’s largest job creators, the government will have to identify their pain areas, and devise a solution that helps them become a part of “Aatmanirbhar Bharat.” Furthermore, the government should emphasize reviving the MSMEs by providing targeted credit support.

The government should also emphasize exports and investments. It must focus on short- as well as long-term measures to boost exports and encourage foreign direct investment in sectors where India has a competitive advantage, as identified by Deloitte.11 These measures have been discussed in detail in our previous report.12

With new variants of the virus spreading fast, the government will be cautious and likely adopt a calibrated response through intermittent regionalized mobility restrictions. That will ensure that future variants may not derail economic activities significantly. India’s attractiveness as an investment and alternate manufacturing destination will buttress growth in a few industries. However, the ebb and flow of the pandemic may prevent the economy to rebound quickly as some sectors, such as hospitality, will take a longer time to revive. The upcoming budget, therefore, needs to support the economy, specifically in a few badly affected sectors, so that the economy can pave its way through these uncertainties and chart a path of promising outlook and inclusive growth.


Deloitte Global Economist Network


The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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  1. Press Information Bureau, “Update on COVID-19 vaccine availability in states/UTs ,” press release, December 18, 2021.

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  2. World Health Organization, “Interim statement on COVID-19 vaccination for children and adolescents ,” November 24, 2021.

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  3. Donato P. Mancini and Oliver Barnes, “New Omicron coronavirus variant is ‘of concern’, says WHO ,” Financial Times , November 27, 2021.

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  4. Google Mobility Index around areas categorized as “Retail and recreation,” “parks,” and “transit stations” is above the pre–COVID-19 levels. Also, Deloitte’s Consumer Behavior Survey suggests consumers’ higher willingness to spend on travel and entertainment. 

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  5. Ibid.

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  6. Rumki Majumdar, India’s resilience: Can the country endure taper tantrum 2.0?, Deloitte Insights, November 10, 2021.

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  7. Mahesh Vyas, “An IT & ITES labour conundrum ,” CMIE, October 25, 2021.

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  8. MGNREGE website .

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  9. Mayur Shetty, “RBI’s new norms may lead to surge in NBFC bad loans ,” Times of India , November 15, 2021.

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  10. PTI, “NHAI raises over Rs 5,000 crore through InvIT: Gadkari ,” Times of India , November 3, 2021.

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  11. S. Anjani Kumar et al., “India’s FDI opportunity ,” Deloitte, September 2021.

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  12. Rumki Majumdar, “Go beyond borders to grow beyond borders ,” Deloitte, September 2021; Kumar et al., “India’s FDI opportunity .”

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Cover image by: Jaime Austin

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