Fitch Ratings forecasts Indian economy to contract 10.5% in FY21

New Delhi:  Fitch Ratings on Tuesday lowered its forecast for India’s gross domestic product (GDP) growth for the current fiscal year (FY21) and projected a massive 10.5 per cent contraction.

India recorded one of the sharpest gross domestic product (GDP) contractions in the world in April-June.

Multiple challenges are holding back the recovery both in the short and medium-term, it said in its latest Global Economic Outlook. New cases of the coronavirus continue to increase, forcing some states and union territories to re-tighten restrictions, though these localised containment measures are generally less stringent than in March and April.

India’s GDP shrank by a staggering 24 per cent year-on-year amid the imposition of one of the most stringent global nationwide lockdown.

“The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” said Fitch.

The severe fall in activity has also damaged household and corporate incomes and balance sheets amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers.

Besides, said Fitch, high inflation has added strains to household income. Supply-chain disruptions and excise duties increases 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.”

Fitch said the GDP should rebound strongly in Q3 2020 amid a re-opening of the economy but there are signs that the recovery has been sluggish and uneven.

The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending.

In Q2, India recorded one of the sharpest GDP contractions in the world. GDP shrank a staggering 24 per cent year-on-year — almost double Fitch’s expectation embedded in the June Global Economic Outlook — amid the imposition of one of the most stringent global nationwide lockdowns.

All demand components except government consumption fell massively in the quarter. Private consumption lost more than 27 per cent quarter-on-quarter while investment slumped by 43 per cent.