Fitch slashes India’s GDP growth outlook for FY212 min read . Updated: 20 Mar 2020, 11:11 PM IST
- Ratings agency cuts fiscal year 2021 growth forecast from 5.6% to 5.1%
- Fitch joins a chorus of agencies that have made similar observations in recent days
Fitch Ratings on Friday slashes its growth forecast for India from 5.6% to 5.1% for 2020-21, as Covid-19 hit Indian manufacturers after supply chain disruptions in China.
Fitch joins a chorus of international agencies that have made similar observations in recent days. Standard and Poor’s (S&P) on Wednesday had slashed its 2020 growth projection for India from 5.7% to 5.2% as it feared that the Asia Pacific region may slide into a recession, with countries enforcing lock-downs to contain the pandemic.
Moody’s and the Organisation for Economic Cooperation and Development (OECD) have cut their 2020 growth projections for India to 5.3% and 5.1%, respectively.
Fitch said although the number of confirmed COVID-19 cases in India was still low in comparison to the size of its population, it was picking up. This scenario assumes the number of people affected will keep rising in the coming weeks, but that the outbreak will remain contained.
The rating agency said the downside risks to this scenario is that consumer and business sentiment will be hurt, as local governments roll out measures, including the closure of schools, cinemas and theatres, to contain the spread of the virus. “While India’s linkages with China (e.g. trade and tourism) are modest, manufacturers in India are heavily reliant on key Chinese intermediate inputs—especially of electronics (60%) and machinery and equipment (47%). Supply-chain disruptions are expected to hit business investment and exports."
Fitch said difficulties facing the Indian economy have been exacerbated by the collapse of Yes Bank. “Frailties in the financial system will further undermine sentiment and domestic spending. The overall financial system remains burdened with weak balance sheets, which will limit any upside to credit and growth despite policymakers’ efforts in recent months to ease stresses," it added.
While the Reserve Bank of India (RBI), after an emergency meeting held earlier this month, announced measures, including more long-term repo operations, to shore up liquidity in money markets, the rating agency said it expects the central bank to take additional measures, which may include a cut in the policy rate to 4.5% before the end of the year.
Crisil Ltd in a research note said India’s growth will be impacted through reduced demand for exports, given the slowdown in global growth and supply chain disruptions. “The supply disruptions are expected to play out through non-availability of raw materials and intermediate inputs," it added.
Domestically, too, there is mounting evidence that both services and industrial sectors will face the heat in the coming months, Crisil said. “Social distancing measures and cut in discretionary spending are beginning to hit economic activity, particularly in transport and hospitality," it added.
Crisil said credit quality pressures on India Inc, which have been rising because of the economic slowdown and consumption slump are set to intensify with the Covid-19 pandemic. “As revenue streams of firms get impacted, employment, particularly of daily wagers and temporary workers, will be in the firing line. Anecdotal evidence suggests hit to services such as restaurants, transport (including air and ground), entertainment/film industry, tours and travel, retailing and sports events, which could intensify if the crisis worsens leading to prolonged lockdowns."