London (UK): The Indian economy will suffer lasting damage from coronavirus crisis and after an initial strong rebound in fiscal year ending March 2022, the growth will slow to around 6.5 per cent a year over FY23 to FY26, according to Fitch Ratings.
A combination of supply-side scarring and demand-side constraints — like the weak state of financial sector — will keep the level of GDP well below its pre-pandemic path, it said.
India’s coronavirus-induced recession has been among the most severe in the world amid a stringent lockdown and limited direct fiscal support.
The economy is now in a recovery phase that will be further supported by the rollout of vaccines in the next months and GDP is expected to expand by 11 per cent in FY22 after falling by 9.4 per cent in FY21.
“However, we expect the medium-term recovery to be slow. Supply-side potential growth will be reduced by a slowdown in the rate of capital accumulation. Investment has recently fallen sharply and is likely to see only a subdued recovery,” said Fitch.
This will weigh on labor productivity and our projection of supply-side potential GDP growth for the six-year period FY21 to FY26 has been lowered to 5.1 percent per annum compared to a pre-pandemic projection of 7 percent per annum.
The historical analysis of India’s growth performance highlights the key role played by a high investment rate in driving growth in labor productivity and GDP per capita over the last 15 years.
“But investment has fallen sharply over the last year and the need to repair corporate balance sheets and firm closures will weigh on the pace of recovery,” said Fitch.
Constrained credit supply amid a fragile financial system is another headwind for investment. The banking sector entered the crisis with generally weak asset quality and limited capital buffers.
Appetite for lending will be subdued, particularly as credit-guarantee and forbearance measures rolled out in the crisis start to be unwound.
The economy should be able to grow somewhat faster than the estimated supply-side potential over the medium term following an unprecedented downturn in FY21.
“But our projection for the medium-term recovery path — at around 6.5 percent per annum over FY23 to FY26 — will leave GDP well below its pre-pandemic trend.” — ANI