The country's economy had contracted by 7.3 per cent in fiscal 2020-21.
The agency said the outlook for the Indian economy on almost all counts in FY22 would look seemingly better than FY21 on account of the negative base effect.
Services sector will not be able to reach its potential even at 8.2 per cent growth as the second lockdown has affected sectors like hotels and restaurants, tourism, retail malls and entertainment in particular, it said.
While a lot has been done on the supply side by both the RBI and the government, the malaise is on the demand side which has been a problem even before the pandemic, Care Ratings pointed out.
A critical factor this time will be the spending pattern of the rural households, the report said, adding that the monsoon forecast is good and ideally a stable Kharif harvest should bode well for rural incomes.
There could be some pent up demand which surfaces this time too from urban India, but it may just about maintain the level of last year and not really be a breakthrough.
"Higher consumption should stimulate investments. The crux will be an investment which has a multiplier effect on demand and investment," it said.
The report also said the fiscal deficit for FY22 is projected between Rs 17.38 lakh crore to Rs 17.68 lakh crore.