Fitch raises India’s mid-term potential growth rate to 6.2%

  • The rating agency also lowered estimates for China in its report on 10 emerging markets issued on Monday

Gulveen Aulakh
Updated7 Nov 2023, 12:13 AM IST
India's medium-term potential growth estimates has been upgraded by 70 basis points from 5.5% to 6.2% by Fitch Ratings.
India’s medium-term potential growth estimates has been upgraded by 70 basis points from 5.5% to 6.2% by Fitch Ratings.(REUTERS)

Fitch Ratings has raised its mid-term potential growth estimate for India by 0.7 percentage points to 6.2% for 2019-2027, citing higher employment, larger working-age population and increased labour productivity expected during the period.

The rating agency also lowered estimates for China in its report on 10 emerging markets (EMs) issued on Monday.

“We have made large upgrades to India and Mexico, with the latter benefitting from a much better outlook for the capital to labour ratio. India’s estimate is higher at 6.2% from 5.5% and Mexico’s at 2.0% from 1.4 %,” Fitch said. India’s estimate of 5.5% is for the 2013-2022 period.

“In India’s case, potential growth has increased by 0.7 percentage points to 6.2% given an improvement in the employment rate and a modest increase in the working-age population forecast. India’s labour productivity forecast is also higher,” it added. India’s projected labour supply growth is also lower relative to 2019 given the expected negative growth in participation rate. While the participation rate has recovered from its pandemic slump, it remains significantly below levels recorded in the early 2000s, partly as the employment rate among women remains very low, the report added.

The agency also made shock level adjustments to the estimated level of potential GDP in 2020 and 2021 for Mexico, South Africa, India and Indonesia, with downward adjustments to the level of potential GDP by a cumulative 7% for both India and Indonesia.

Fitch made upward revisions to Brazil, Mexico, Indonesia, Poland and Turkiye relative to its previous estimates, primarily due to the swift recovery in labour force participation rates following sharp declines in 2020.

The agency added that the latest estimates remained below its pre-pandemic potential growth projections for all the 10 EMs (EM10) except Brazil and Poland, partly reflecting a widespread deterioration in EM10 demographic trends over time.

“But it also highlights the legacy of economic disruptions from the pandemic. GDP fell in all the EM10 except China and Turkiye in 2020, with very steep declines in India, Mexico and South Africa. Even after subsequent recoveries, GDP in 2022 was generally still far below levels implied by extrapolating pre-pandemic trends, particularly in India, Indonesia and Mexico,” the agency noted.

In contrast, it made downward revisions to growth estimates of other countries including China which was reduced to 4.6 percent from 5.3 percent, and Russia, which is estimated at 0.8 percent growth instead of 1.6 percent earlier. Estimates were lowered for South Korea to 2.1 percent from 2.3 percent and for South Africa as well, which is expected to grow at 1 from the earlier 1.2 percent.

“China’s growth has slowed sharply in recent years and prospects for capital deepening have deteriorated as the property slump weighs heavily on the investment outlook. The labour supply outlook is also weakening, reflecting demographics and falls in the labour force participation rate,” the agency noted.

Fitch added that the latest estimates remained below its pre-pandemic potential growth projections for all 10 emerging markets, other than Brazil and Poland, which were reflective of widespread deterioration in the demographic trends over time. However, they also highlighted the legacy of economic disruptions from the pandemic. “GDP fell in all the EM10 except China and Turkiye in 2020, with very steep declines in India, Mexico and South Africa. Even after subsequent recoveries, GDP in 2022 was generally still far below levels implied by extrapolating prepandemic trends, particularly in India, Indonesia and Mexico,” the agency said.

The report however noted that most of the 10 emerging market economies now look to suffer a “permanent loss of output” to varying degrees relative to pre-pandemic expectations despite these strong recoveries. It showcased that India, Indonesia, Mexico and South Africa fared the worst in 2022 as per the gap between the pre-pandemic potential GDP path forecast and actual GDP in 2022, with their economies 10.8 per cent, 8.4 per cent, 7.2 per cent and 5.1 per cent smaller, respectively, than they would have been in the absence of the pandemic shock.

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First Published:7 Nov 2023, 12:13 AM IST
HomeEconomyFitch raises India’s mid-term potential growth rate to 6.2%

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