India’s economy will suffer lasting damage from the coronavirus crisis and after an initial strong rebound in FY22 (fiscal year ending March 2022), growth will slow to around 6.5% per year over fiscal years 23 to 26, Fitch Ratings said Thursday.
“A combination of scars on the supply side and constraints on the demand side – such as weakness in the financial sector – will keep the level of GDP well below its pre-pandemic trajectory,” he said. in a commentary on the Indian economy.
Fitch said India’s coronavirus-induced recession was one of the worst in the world, amid a tight lockdown and limited direct budget support.
The economy is now in a recovery phase which will be further supported by the deployment of vaccines in the coming months.
“We expect gross domestic product (GDP) to grow 11 percent in FY 22 (April 2021 to March 2022) after falling 9.4 percent in FY 21 (April 2020 to March 2021) “, he said.
The Indian economy had lost momentum even before the shock of the COVID-19 crisis. The GDP growth rate fell to a more than ten-year low of 4.2% in 2019, from 6.1% the year before.
The pandemic bought a human and economic catastrophe for India, with nearly 1.5 lakh deaths. Although deaths per million are significantly lower than in Europe and the United States, the economic impact has been much more severe.
GDP from April to June was 23.9% below its 2019 level, indicating that nearly a quarter of the country’s economic activity has been wiped out by the drying up of global demand and the collapse in domestic demand that accompanied the series of strict national lockdowns.
In addition, a 7.5% drop in GDP in the following quarter pushed Asia’s third-largest economy into an unprecedented recession.
Fitch said the medium-term recovery will be slow. “Potential growth on the supply side will be reduced by a slowdown in the rate of capital accumulation – investment has recently fallen sharply and is expected to recover only moderately.”
This, he said, will weigh on labor productivity, lowering his projection of potential GDP growth on the supply side for the six-year period FY21 to FY26 to 5.1% per year from our 7% pre-pandemic projection.
“Our historical analysis of India’s growth performance highlights the key role that a high rate of investment has played in boosting labor productivity growth and GDP per capita over the past 15 years. But investment has fallen sharply over the past year and the need to restore business balance sheets and business closures will weigh on the pace of recovery, ”he said.
Another barrier to investment is the limited supply of credit in a fragile financial system.
The banking sector entered the crisis with generally low asset quality and limited capital buffers. The appetite for loans will be moderate, especially as the credit guarantee and forbearance measures put in place during the crisis begin to unravel.
“The economy should be able to grow a little faster than estimated potential on the supply side over the medium term after the unprecedented slowdown in FY21. But our projections for the recovery path in the medium term – at around 6.5% per year for fiscal years 23 to 26 – would leave GDP well below its pre-pandemic trend, ”he said.