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Economy: India recovering, to clock 11% GDP growth in FY22, says Fitch

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New Delhi: India’s real Gross Domestic Product (GDP) is expected to expand by 11 percent in the financial year 2021-22 after falling by 9.4 percent in the current fiscal as the recovery phase continues, supported by the rollout of vaccines in the upcoming days, Fitch Ratings, one of the three biggest credit rating agencies in the world, said.

It said India’s coronavirus-induced recession has been among the most severe in the world, amid a stringent lockdown and limited direct fiscal support. The Indian economy will suffer lasting damage from the COVID-19 pandemic and, after an initially strong rebound in FY22, growth will slow to around 6.5 percent a year over FY23-FY26, it maintained, according to media reports.

“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.”

India’s economy had been losing momentum even before the COVID-19 crisis. The rate of GDP growth sank to a more than ten-year low of 4.2 percent in 2019, down from 6.1 percent the previous year, Fitch said.

GDP in the April-June 2020 period was 23.9 percent below its 2019 level, indicating that nearly a quarter of the country’s economic activity was wiped out during the prolonged nationwide lockdown because of the drying up of domestic as well as global demand.

Also, a 7.5 percent decline in GDP in the second quarter (July-September 2020) pushed Asia’s third-largest economy into an unprecedented recession.

Fitch pointed out that the medium-term recovery will 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.”

This will weigh on labor productivity, lowering its projection of supply-side potential GDP growth for the six-year period FY21 to FY26 to 5.1 percent per annum compared to a 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 labor 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.

Constrained credit supply amid a fragile financial system is another headwind for investment, Fitch said.

The banking sector entered the crisis with generally weak asset quality and limited capital buffers. Appetite for lending will be subdued, particularly as credit-guarantee and forbearance measures rolled out in the crisis start unwinding.

“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,” Fitch added.

 

(VP)