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Photo: Bloomberg
Photo: Bloomberg

Indian economy may see its worst contraction in FY21 at 10.5%: Fitch

  • 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

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 coronavirus cases hamper rapid normalization 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 FY21 predictions for the Indian economy, which may make it the deepest contraction so far in its 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 the September quarter amid a re-opening of the economy. However, there are signs that the recovery has been sluggish and uneven, it said. “The Purchasing Managers’ Index 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 said.

India’s GDP fell by 23.9% in the June quarter as it imposed one of the most stringent lockdowns worldwide leading to supply disruptions, massive job losses, and a sharp decline in domestic demand. The rating agency also confirmed that India was the worst performer in the June quarter among G20 countries.

Multiple challenges are holding back the recovery in India, both in the short and medium term, Fitch said.

“New cases of the coronavirus continue to increase, forcing some states and Union territories to re-impose restrictions, though these localised containment measures are generally less stringent than they were in March-April. The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity," the rating agency said.

The severe fall in activity has also damaged household and corporate incomes and balance sheets, amid limited fiscal support, Fitch said.

“A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers," it said.

The recent spurt in inflation has added strain to household income, Fitch said. “Supply-chain disruptions and increases in excise duty 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 said.

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