The World Bank said increasing pace of vaccinations will determine India’s economic prospects this year and beyond while leaving the growth projection for the country unchanged at 8.3% from its June forecast.

It flagged higher than expected inflation and slow recovery of the informal sector as the main risks to consumer spending.

The Production-Linked Incentives scheme to boost manufacturing and a planned increase in public investment should support domestic demand.

The trajectory of the pandemic will cloud the outlook in the near-term until herd immunity is achieved. Growth is projected to stabilize around 7% FY23 onwards, helped by recent structural reforms to ease supply-side constraints, and increased infrastructure investment, as per the bank’s South Asia report released today.

However, the degree of asset-quality deterioration from the pandemic-shock is unclear and may pose downside risks to the outlook, it said.

The latest South Asia Economic Focus entitled ‘Shifting Gears: Digitization and Services-Led Development’ cautioned that the persistently high inflation could also put pressure on the RBI’s accommodative monetary policy stance.

“India’s economy, South Asia’s largest, is expected to grow by 8.3% in the fiscal year 2021-22, aided by an increase in public investment and incentives to boost manufacturing,” the report released Thursday said.

The report projects the region to grow by 7.1% in 2021 and 2022.

The report has prescribed a growth range of 7.5% to 12.5% and it maintains that following the deadly ‘second wave’, growth in FY22 was expected to be closer to the lower bound of the range.

Asked about the reason behind no revision from the June forecast in wake of sharp recovery seen in some indicators, Hans Timmer, World Bank Chief Economist for the South Asia Region, said that most recent data had been taken into account.

“This report is really up to date. We finalised it a few days ago and we monitor high-frequency data daily. Growth forecast that you are seeing is our best guess given all the recent information that came to us,” Timmer said in a select interaction. He said the strong rebound seen recently as also weakening seen after the second wave reflected in the growth update.

“The pace of vaccination, which is increasing, will determine economic prospects this year and beyond. Successful implementation of agriculture and labour reforms would boost medium-term growth, while weakened household and firm balance sheets may constrain it,” it said.

Growth recovered during the second half of FY21, driven primarily by investment and supported by ‘unlocking’ of the economy and targeted fiscal, monetary and regulatory measures, it added.

It said GDP growth of 20.1 % year-on-year in Q1FY22 was driven by a significant base effect, strong export growth and limited damage to domestic demand.

The current account is expected to turn into a deficit in FY22, albeit less than in the years prior to the pandemic. The fiscal deficit is projected to shrink in FY22 as revenues recover and pandemic-related support winds down. Still, it will remain above 10% of GDP in FY22, driven by a rise in capital spending.