Fitch Ratings on Tuesday slashed its FY21 gross domestic product (GDP) forecast for India to a contraction of 10.5% from a contraction of 5% estimated in June holding that limited fiscal support, fragilities in the financial system and a continued rise in virus cases hamper a rapid normalisation in activity.
India Ratings, the India arm of Fitch, however, is more pessimistic about the Indian economy. In a report released on Tuesday, India Ratings revised downward its FY21 GDP estimate for India to a decline of 11.8% from a contraction of 5.3% estimated earlier. The latest estimates by Fitch and India Ratings are among the worst predictions for the Indian economy for the current financial year, which may make it the deepest contraction so far in India’s history. The previous lowest was a GDP contraction of 5.2% in FY80.
In its latest Global Economic Outlook for calendar year 2020, Fitch revised upward its GDP estimate for the world to a contraction of 4.4% from a contraction of 4.6% estimated in June, as it revised upward its growth estimates for the US (0.6%) and China (2%). Fitch said its global GDP estimate for 2020 is weighed down by deeper contractions expected in India, Eurozone and the UK.
The rating agency said India’s GDP should rebound strongly in September quarter amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven. “The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in 3Q20 (September quarter). Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending,” it added.
India’s GDP fell by 23.9% in June quarter as it imposed one of the most stringent lockdowns worldwide leading to supply disruptions, massive job losses and massive decline in domestic demand. The rating agency also confirmed that India was the worst performer in the June quarter among G20 countries.
Fitch said multiple challenges are holding back the recovery in India, both in the short and medium term. “New cases of the coronavirus continue to increase, forcing some states and union territories to re-tighten restrictions, though these localised containment measures are generally less stringent than in March-April. The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” it added.
The severe fall in activity has also damaged household and corporate incomes and balance sheets, amid limited fiscal support, the rating agency said. “A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers,” it added.
Fitch said recent spurt in inflation has added strains to household income. “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,” it added.
