Fitch Ratings raises India’s GDP forecast, expects it to contract 9.4%

Fitch Ratings raises India’s GDP forecast, expects it to contract 9.4%

Credit rating agency Fitch Ratings has raised India’s GDP forecast and now expects it to contract 9.4 per cent in the current fiscal year to March 2021. The rating agency had earlier predicted India’s annual GDP to contract 10.5 per cent.

The revised forecast comes on the back of a sharper rebound in the second quarter. In its Global Economic Outlook, Fitch said the coronavirus-induced recession has inflicted severe economic damage and added that India needs to repair balance sheets and dedicate plans focused on long-term recovery.

“We now expect GDP to contract 9.4 per cent in the fiscal year to end March 2021 (FY21) (+1.1 percentage point), followed by +11 per cent growth (unchanged) and +6.3 per cent growth (+0.3pp) in the following years,” the rating agency said.

Fitch’s softer annual GDP contraction prediction came after official figures indicated a few weeks ago that India’s GDP contracted 7.5 per cent in the second quarter — much better than what was being expected.

The fresh projection by the rating agency compares to a GDP growth of 4.2 per cent in April 2019-20 and 6.7 per cent annual expansion between 2015 and 2019.

Earlier in September, the rating agency has sharply lowered India’s growth forecast and predicting an annual GDP contraction of 10.5 per cent in 2020-21. However, Fitch now says that Indian economy staged a sharper recovery in July-September quarter as GDP contraction softened from 23.9 per cent in the first quarter to 7.5 per cent.

“The rebound in activity was especially sharp in the manufacturing sector: output reached its pre-pandemic level in 3Q20 (July-September), and the manufacturing PMI hints at further gains,” it said.

While manufacturing has recovered sharply due to higher demand for some goods, the rebound in services sector activity remains a worry as Covid-19 protocols continue to hamper such businesses.

“The outlook is brighter owing to an expected rollout of various vaccines in 2021. India has pre-ordered 1.6 billion doses including 500 million doses of the Oxford/AstraZenecavaccine. Distribution should allow a faster-than-expected easing of social-distancing restrictions and boost sentiment,” it said.

“The need to repair balance sheets, increased caution about long-term planning, and firm closures will limit investment demand. Furthermore, increased financial-sector weakness – amid deteriorating asset quality – will hold back credit provision,” the rating agency added.

It also underlined the challenges for India’s financial sector after the recent failure of Lakshmi Vilas Bank — the third such failure in the past 16 months. The health of the financial sector remains vital for India’s economic recovery and the current outlook does not look good, according to many experts.

On inflation, Fitch said it may decelerate rapidly on favourable base effects and easing of supply disruptions. Inflation has remained persistently high for months now.

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