Indian economy to contract 10.5% in FY21: Fitch

In Q1, India's GDP shrank by a staggering 24 per cent year-on-year amid the imposition of a stringent nationwide lockdown.

Fitch Ratings on Tuesday slashed India's FY21 growth projection to (-) 10.5 per cent, from (-) 5 per cent estimated earlier, saying the continued spread of the virus and imposition of sporadic shutdowns across the country has disrupted economic activity.

In the first quarter of current fiscal India's gross domestic product (GDP) contracted by a massive 23.9 per cent.

Fitch said India recorded one of the sharpest GDP contractions in the world in the April-June quarter, but noted that growth should rebound strongly in the July-September period amid re-opening of the economy.

However, there are signs that the recovery has been sluggish and uneven, it said.

In its September update of Global Economic Outlook (GEO), Fitch said, the deepest recessions were in India, the UK and Spain, countries that saw particularly large shocks in daily mobility data on visits to retail and recreation venues, and where lockdowns were stringent and long-lasting throughout 2Q20 (April-June).

It said multiple challenges are holding back growth recovery, both in the short and medium term.

"New cases of the coronavirus continue to increase, forcing some states and union territories to re-tighten restrictions... The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity," Fitch said.

It further noted that the severe fall in activity has also damaged household and corporate incomes and balance sheets, amid limited fiscal support.

Also a looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers.

Furthermore, high inflation has added strains to household income and supply-chain disruption and excise duties increases have caused prices to rise.

It projected inflation to slow amid weak underlying demand, easing supply-chain disruption and a good monsoon.

"We have slashed our GDP forecast for this fiscal year to - 10.5 per cent, a huge revision of - 5pp (percentage points) compared to the June GEO.

“We expect the shortfall of activity relative to our pre-virus forecast to be 16 per cent by early 2022," Fitch said.

GDP growth is likely to be (-) 9.6 per cent in July-September, (-) 4.8 per cent in October-December and 4 per cent in January-March quarter this fiscal, as per Fitch projections.

For the next fiscal, Fitch estimated Indian economy to grow 11 per cent, while for 2022-21 growth would be 6 per cent.

Separately, India Ratings and Research, the India arm of Fitch Ratings, on Tuesday revised India's GDP growth forecast to (-) 11.8 per cent, from (-) 5.3 per cent earlier.

Fitch said the pandemic has become more prevalent in emerging market countries excluding China as the year has progressed.

Brazil, Russia and India now have some of the highest coronavirus caseloads in the world.

In another report, Morgan Stanley projected a contraction of 5 per cent in the Indian economy in calendar year 2020 from 4.9 per cent in 2019.

The economy will, however, bounce to 9.5 per cent growth in 2021, it said, predicting that a V-shaped recovery in the global economy was playing out faster than originally thought.

"By 2Q21, a global synchronous recovery should take hold, with all engines of the global economy registering strong growth," it said.

"Risks to our view include a potential aggressive lockdown in the winter and uncertainty about fiscal policy."

India Ratings projected fiscal deficit expanding to 8.2 per cent of GDP in FY21, from 4.6 per cent in the previous fiscal.

"India imposed one of the most stringent lockdowns worldwide in 2Q20 and domestic demand fell massively.

“Limited fiscal support, fragilities in the financial system, and a continued rise in virus cases hamper a rapid normalisation in activity.

"The double-digit growth rate we expect for 2021-2022 simply reflects the low base in 2020 - we do not expect GDP to return to pre-virus levels until 1Q22 (January-March 2022)," Fitch said.