India’s medium-term growth to slow down to around 6.5% after initial rebound, says Fitch Ratings
The ratings company said that India’s economy was currently in a recovery phase, which will be supported by the roll out of coronavirus vaccines.
United States-based credit rating agency Fitch Agency on Wednesday said that India’s growth will slow down to about 6.5% per year between the financial year 2023-’26 following an initial rebound in 2021-’22.
“A combination of supply-side scarring and demand-side constraints – such as the weak state of the financial sector – will keep the level of Gross Domestic Product well below its pre-pandemic path,” Fitch said.
The ratings agency said that India’s recession, caused by the coronavirus pandemic, was among the most severe globally, because of a strict lockdown and limited direct fiscal support. Currently, it said India’s economy was in a recovery phase, which will be supported by the roll out of the coronavirus vaccines. “We expect GDP to expand by 11.0% in FY22 after falling by 9.4% in FY21,” the commentary on the Indian economy said.
In December, Fitch Ratings had revised the country’s Gross Domestic Product for the financial year 2020-’21, expecting it to contract by 9.4%, instead of its September estimate of a 10.5% contraction.
The ratings company, however, said that it expects India’s medium-term recovery to be slow. “Supply-side potential growth will be reduced by a slowdown in the rate of capital accumulation – investment has recently fallen sharply and is likely to see only a subdued recovery,” it said, adding that this will factor in on the labour productivity.
Fitch projected the supply-side potential Gross Domestic product growth between 2021-’26 to drop to 5.1% per year as against the company’s pre-pandemic projection of 7% per annum.
“Our historical analysis of India’s growth performance highlights the key role played by a high investment rate in driving growth in labour productivity and GDP per capita over the last fifteen years,” it said. “But investment has fallen sharply over the last year and the need to repair corporate balance sheets and firm closures will weigh on the pace of recovery.”
It said that credit supply amidst a weak financial system was acting as a deterrent to investment in India. The company pointed out that the banking sector was hit by the pandemic due to weak asset quality and limited capital reserves, and predicted that lending activity would remain subdued.
“The economy should be able to grow somewhat faster than estimated supply-side potential over the medium term following the unprecedented downturn in FY21,” Fitch said. “But our projection for the medium-term recovery path – at around 6.5% p.a. over FY23 to FY26 – would leave GDP well below its pre-pandemic trend.”
The Indian economy saw its worst contraction in decades, with the Gross Domestic Product shrinking by a record 23.9%, in the April to June quarter and reflected the severe impact of the coronavirus-induced lockdown. India’s GDP growth rate contracted by 7.5% for the second quarter (July-September). With this, the country’s economy slipped into a technical recessionary phase for the first time ever – when its GDP growth is negative or declining for two consecutive quarters or more.
Since the pandemic shut businesses in March, unemployment in the country has also surged sharply. On August 18, a report by the Centre for Monitoring Indian Economy said nearly 50 lakh salaried persons lost their jobs in July as a result of a partial lockdown.