Fitch: India’s GDP growth may lose momentum after initial recovery

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The Indian economy is expected to sharply rebound in FY22 after the coronavirus pandemic battered the economy for most parts of FY21. The country’s growth in 2021-22 is expected to rebound to 11 percent in comparison to an expected full-year contraction of 7.7 percent. But even after the sharp rebound in the next fiscal year, the country’s economy may not be out of the woods, according to Fitch Ratings.

The ratings agency has predicted that the economy will suffer lasting consequences from the coronavirus crisis and that growth will slow to around 6.5 percent a year over FY23-FY26.

“A combination of supply-side scarring and demand-side constraints – such as the weak state of the financial sector will keep the level of GDP well below its pre-pandemic path,” Fitch said in a note on the Indian economy.

The ratings agency said that the recession due to the coronavirus crisis in India has been one of the most severe in the world due to the stringent nationwide lockdown and lack of direct fiscal support.

It added that the economy is currently in a recovery phase and will grow further amid mass vaccinations against Covid-19 over the next few months. However, it predicts GDP growth to lose momentum after the initial recovery in 2021-22.

Fitch has said that the medium-term recovers will be slow and added that supply-side potential growth will be reduced by a slowdown of capital accumulation. “Investment has recently fallen sharply and is likely to see only a subdued recovery,” it added.

The ratings agency said that the lack of investment and capital accumulation will weigh on labour productivity. It lowered its projection of supply-side potential GDP growth for the six-year period from FY21 to FY26 to 5.1 percent per annum in comparison to the pre-pandemic projection of 7 percent.

“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 15 years. 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.

Fitch further pointed out that constrained credit supply and a fragile financial system will make matters worse for India. It explained that the banking sector in the country is going through a crisis. The RBI has already issued a warning about the possibility of rising bad loans at banks and financial institutions by September 2021.

“The economy should be able to grow somewhat faster than estimated supply-side potential over the medium term following the unprecedented downturn in FY21. But our projection for the medium-term recovery path at around 6.5 percent per annum over FY23 to FY26 would leave GDP well below its pre-pandemic trend,” it said.

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