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Home >News >India >Virus-led recession will leave economy scarred, says Fitch
Vaccines may not fully restore health of the economy in the next five years (AFP)
Vaccines may not fully restore health of the economy in the next five years (AFP)

Virus-led recession will leave economy scarred, says Fitch

  • Fitch has projected potential growth to average 5.1% per year over 2020-2025
  • The ratings agency said several reforms passed by Parliament in response to the pandemic such as labour and farm reforms could lift medium-term growth prospects

The ongoing pandemic-induced recession will leave lasting scars on the Indian economy and even a roll-out of a vaccine is unlikely to fully restore the economy to health over the next five years, Fitch Ratings said on Thursday, while lowering its estimate of potential growth to 5.1% on an average over 2020 to 2025, from 7% before the pandemic.

The rating agency said even though the government has pre-ordered 1.6 billion doses of vaccine, including 500 million doses of the Oxford-AstraZeneca vaccine, it seems likely that the vaccine roll-out over the next 12 months will not reach the majority of the population considering the huge logistical and distribution challenges.

“The roll-out of the vaccine will require unprecedented cooperation among manufacturers, governments, cargo operators and ground workers. Against this backdrop, regional shutdowns are possible in the next few months. A key downside risk to our scenario is a significantly slower roll-out of the vaccine than we expect," it added.

“Potential growth should be very low in the aftermath of the crisis (2021-2022), at around 4.5%, but it will pick up to close to 6% in subsequent years (2023-2025)," Fitch said.

Potential growth is the rate of growth that an economy can sustain over a medium term without generating excess inflation. It is different from real gross domestic product (GDP) growth of any particular year. Fitch said India will bounce back to grow at 11% in FY22 after contracting 9.4% in FY21, but will be range-bound at 6.3-6.6% till FY26.

The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years with the National Statistical Office assuming 0.6% growth between October 2020 and March 2021.

The primary growth damper is expected to be lower investment as the pandemic is set to weigh on capital expenditure for some years, feeding directly to a slower pace of capital deepening. “Uncertainty over demand, the desire to expand cash buffers and to repair balance sheets, as well as limited bank supply of credit will hold back investment. Changes in work and shopping patterns related to social distancing could also restrain investment in commercial real estate," Fitch said.

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