NEW DELHI, SEPTEMBER 8: Fitch Ratings on Tuesday said that it expects the Indian economy to contract by a massive 10.5% in the fiscal year ending March 2021 (FY21) versus its earlier estimates of 5% during the same period.
“We have slashed our GDP forecast for this fiscal year to -10.5%, a huge revision of -5pp (percentage points) compared to the June GEO. We expect the shortfall of activity relative to our pre-virus forecast to be 16% by early 2022,” it said in its September update of Global Economic Outlook (GEO).
India’s GDP shrank by a staggering 24% year-on-year amid the imposition of one of the most stringent global nationwide lockdown.
“GDP should rebound strongly in 3Q20 (October-December) amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven,” Fitch said.
The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3-20. Still-depressed levels of imports, 2-wheeler sales and capital goods production indicate a muted recovery in domestic spending, the rating agency said.
“New cases of the Coronavirus continue to increase, forcing some States and Union Territories to re-tighten restrictions… The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” Fitch said.
“The severe fall in activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers. Furthermore, high inflation has added strains to household income,” Fitch said.
Also, a looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers.
It further said that “supply-chain disruptions and excise duties increases have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, an easing in supply-chain disruptions and a good monsoon.”
After revising the GDP for India, the rating agency projected that country’s GDP growth is likely to be (-) 9.6% in July-September, (-) 4.8% in October-December and 4% in January-March quarter this fiscal.
For the next fiscal, Fitch estimated Indian economy to grow 11%, while for 2022-21 growth would be 6%.
Separately, India Ratings and Research, the India arm of Fitch Ratings, on Tuesday revised India’s GDP growth forecast to (-) 11.8%, from (-) 5.3% earlier.
Fitch said the pandemic has become more prevalent in emerging market countries excluding China as the year has progressed. Brazil, Russia and India now have some of the highest Coronavirus caseloads in the world.
“India imposed one of the most stringent lockdowns worldwide in 2Q20 and domestic demand fell massively. Limited fiscal support, fragilities in the financial system, and a continued rise in virus cases hamper a rapid normalisation in activity.
“The double-digit growth rate we expect for 2021-2022 simply reflects the low base in 2020 we do not expect GDP to return to pre-virus levels until 1Q22 (January-March. 2022),” Fitch said.