India's GDP to contract by 9.4% in FY21, says Fitch
India's GDP will contract by 9.4% in the current fiscal year, Fitch Ratings said in its latest Global Economic Outlook on Tuesday. The rating agency's latest forecast has been raised from an earlier projection of -10.5% GDP growth. Fitch also projected that the global economic recovery will strengthen from mid-2021 when vaccines against COVID-19 are rolled out and physical distancing norms can be relaxed.
Indian economy staged 'sharper rebound' in July-September quarter
Fitch said, "We now expect GDP to contract 9.4% in the fiscal year to end March 2021 (FY21) (+1.1 percentage point), followed by +11% growth (unchanged) and +6.3% growth (+0.3pp) in the following years." The agency said that the Indian economy staged a sharper rebound in the July-September quarter from the coronavirus-induced recession. GDP fell 7.5% year-on-year, up from -23.9% in the April-June quarter.
GDP forecast raised from -10.5% in September
Fitch has raised its GDP forecast from its previous projection of -10.5% in September, which was a sharp decline versus its earlier projection of 5% contraction. The latest projections compare to a GDP growth of 4.2% in the last fiscal year (2019-2020).
'Economic rebound especially sharp in manufacturing sector'
The report said, "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." In particular, strong demand for autos and pharmaceutical products has buoyed manufacturing, it said. Relatively, the rebound in the services sector was muted as physical distancing norms continue to be enforced.
Economic outlook brighter with anticipated vaccine roll-out
The economic outlook is brighter with the expected roll-out of various COVID-19 vaccines. "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," the report said. However, the vaccine may not reach everyone over the next year and regional shutdowns are likely in the next few months.
Coronavirus recession inflicted severe economic scarring
The agency 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." In recent months, consumer prices have continued to accelerate due to lingering supply disruptions, which has deterred the Reserve Bank of India (RBI) from resuming its easing cycle.
'Failure of another bank underlines financial sector's challenges'
The failure of another bank in recent weeks—the third failure in the past 16 months—underlines the challenges in the financial sector, the report said. In November, the government had approved the merger of crisis-hit Lakshmi Vilas Bank (LVB) with DBS Bank India Ltd (DBIL).
Inflation peaked; rapid deceleration expected
The report further said that inflation has peaked and "should start to decelerate rapidly on favorable base effects and an easing of supply disruptions." "This should provide room for the RBI to cut interest rates in 2021," it said. Consumer price inflation was estimated at 4.9% in the current financial year, which could ease to 3.5% in the next fiscal.
Global GDP to contract 3.7%
Fitch projected a less severe 3.7% contraction in global GDP, compared to the -4.4% projection in September. The annual global GDP growth forecast has been revised to 5.3% from 5.2%. "We are now significantly more optimistic for 2022, as we assume vaccine roll-out will facilitate a material easing in social distancing," the report went on to add.
