India's Economic Contraction Gets Narrower In Fitch Rating's Report

Global credit rating agency Fitch raised its FY21 GDP growth forecast for India by predicting a narrower economic contraction of (-) 9.4 per cent from an earlier predicted fall of (-) 10.5 per cent

"We now expect GDP to contract 9.4 per cent in fiscal year to end March 2021, followed by (+) 11 per cent and (+) 6.3 per cent in the following years," Fitch Ratings said in its latest Global Economic Outlook (GEO) for December.

"The coronavirus recession has nevertheless inflicted severe economic scarring. The need to repair balance sheets, increased caution about long-term planning, and firm closures will limit investment demand."

Furthermore, it pointed out that increased financial-sector weakness - amid deteriorating asset quality - will hold back credit provision.

"The failure of another bank in recent weeks - the third failure in the past 16 months - underlines the challenges in the financial sector," the December GEO said.

Recently, India recorded a faster than anticipated economic recovery.

The country's GDP contracted 7.5 per cent in the July-September period, as the economy rebounded from a record slump of 23.9 per cent in the previous quarter due to slowdown caused by the coronavirus pandemic.

"The Indian economy staged a sharper rebound in 3Q20 from the coronavirus-induced recession than we expected in our September GEO. GDP fell 7.5 per cent yoy (September GEO: (-) 9.6 per cent), up from (-) 23.9 per cent in 2Q20."

"The rebound in activity was especially sharp in the manufacturing sector: output reached its pre-pandemic level in 3Q20, and the manufacturing PMI hints at further gains. Manufacturing is buoyed by strong demand for autos and pharmaceutical products, in particular."

According to the rating agency, the rebound in the services sector was more muted amid continued social distancing, with containment measures scaled back only gradually.

"The outlook is brighter owing to an expected rollout of various vaccines in 2021. India has pre-ordered 1.6 billion doses including 500 million doses of the Oxford/AstraZeneca vaccine."

"Distribution should allow a faster-than-expected easing of social-distancing restrictions and boost sentiment."

However, it pointed out the likelihood that the vaccine rollout over the next 12 months will not reach the majority of the people given the huge logistical and distribution challenges in a heavily populated country like India.

"Regional shutdowns are likely in the next few months while the virus is still spreading."