Fitch now expects lower GDP contraction in India at 9.4{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} for FY21

A sharper-than-expected rebound by India’s economy in the second quarter has prompted Fitch Ratings to lower its projections for GDP contraction to 9.4 per cent in the current financial year from 10.5 per cent forecast earlier.

However, the agency warned against weak investment demand with Covid-19 affecting the economy and asset quality in the financial sector deteriorating and holding back credit growth.

Even as India pre-ordered 1.6 billion vaccine doses, it does not seem that the majority of people would get them even in 12 months, Fitch apprehended. It also said regional lockdowns are likely for few more months as virus is still spreading.

In its Global Economic Outlook, Fitch said, “We now expect GDP to contract 9.4 per cent in FY21 followed by an 11 per cent growth and 6.3 per cent growth in the following years,” the rating agency said.

The projections for FY21 compare to a GDP growth of 4.2 per cent in 2019-20 and 6.7 per cent annual expansion between 2015 and 2019.

While the projections for FY22 remained unchanged, those for the next year was raised by 0.3 percentage points.

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It said the coronavirus recession has inflicted severe economic scarring and the country needs to repair balance sheets and increase caution about long-term planning.

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“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 said.

The failure of another bank (Lakshmi Vilas Bank) in recent weeks – the third failure in the past 16 months – underlines the challenges in the financial sector.

In September, Fitch had sharply lowered its forecast for India’s gross domestic product (GDP) to a contraction of 10.5 per cent in current fiscal 2020-21 (FY21) versus its previous estimate of 5 per cent contraction.

On Tuesday, Fitch said the Indian economy staged a sharper rebound in the July-September quarter from the coronavirus-induced recession. GDP fell 7.5 per cent year-on-year, up from -23.9 per cent in the April-June quarter.

“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 adding that manufacturing is buoyed by strong demand for autos and pharmaceutical products, in particular.

The rebound in the services sector was more muted amid continued social distancing, with containment measures scaled back only gradually.

“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/AstraZeneca vaccine. Distribution should allow a faster-than-expected easing of social-distancing restrictions and boost sentiment,” it said.

However, it seems likely that the vaccine rollout over the next 12 months will not reach the majority of the people given the huge logistical and distribution challenges in a heavily populated country like India, Fitch said.

Regional shutdowns are likely in the next few months while the virus is still spreading.

Consumer prices have continued to accelerate in recent months, buoyed by lingering supply disruptions.

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This, Fitch said, has deterred the Reserve Bank of India (RBI) from resuming its easing cycle.

“We think inflation has now peaked and should start to decelerate rapidly on favourable base effects and an easing of supply disruptions. This should provide room for the RBI to cut interest rates in 2021,” it said.

Fitch saw consumer price inflation at 4.9 per cent in the current fiscal, which would ease to 3.5 per cent in the next.

For the global economy, it projected a less severe decline in GDP at -3.7 per cent in 2020 compared to -4.4 per cent in the September projection.

It also revised up its annual world GDP growth forecast for 2021, but only modestly, to 5.3 per cent (from 5.2 per cent), as the deteriorating outlook in the very near term partially offsets a stronger outlook from the sector half of the year.

“We are now significantly more optimistic for 2022, as we assume vaccine rollout will facilitate a material easing in social distancing,” it said.