The Indian economy will suffer lasting damage from the coronavirus crisis, with growth slowing down after an initial strong rebound next fiscal, Fitch Ratings said on Thursday, forecasting the GDP at well below its pre-pandemic levels even after the crisis has passed.
In a report titled 'India Set for Slow Medium-Term Recovery', Fitch said after an initial strong rebound in the fiscal year beginning April 2021, growth will slow to around 6.5 per cent a year over FY23-FY26 (April 2022 to March 2026).
India's coronavirus-induced recession has been among the most severe in the world, amid a stringent lockdown and limited direct fiscal support, it said.
The Indian economy had been losing momentum even ahead of the shock delivered by the COVID-19 crisis. The rate of GDP growth sank to a more than the ten-year low of 4.2 per cent in 2019, down from 6.1 per cent in the previous year.
The pandemic brought a human and economic catastrophe for India, with over 1.5 lakh deaths. Though the deaths per million are significantly lower than in Europe and the US, the economic impact had been much more severe.
The GDP in April-June was 23.9 per cent below its 2019 level, indicating that nearly a quarter of the country's economic activity was wiped out by the drying up of global demand and the collapse of domestic demand that accompanied the series of strict national lockdowns.
Further, a 7.5 per cent decline in GDP in the following quarter pushed Asia's third-largest economy into an unprecedented recession.
The economy is now in a recovery phase that will be further supported by the rollout of vaccines in the next months.
"We expect the gross domestic product (GDP) to expand by 11 per cent in FY22 (April 2021 to March 2022) after falling by 9.4 per cent in FY21 (April 2020 to March 2021)," Fitch said.
It saw growth at 6.3 per cent in FY23 and 6.6 per cent in the following three fiscals.
"The expected rollout of various vaccines in 2021 prompted us to raise our GDP growth projections for the fiscal years ending March 2022 and 2023 (FY22 and FY23) to 6.3 per cent (from 6 per cent previously)," it said.
The growth will be supported by "expectation of the rollout of an effective vaccine, but we expect the level of GDP to remain well below its pre-pandemic path even after the health crisis has passed," the rating agency said.
The rollout of effective vaccines brings forward the time by which the economy will normalise, Fitch said. "We see the Indian GDP rebounding sharply in 2022. However, the amount of spare capacity in the economy is likely to remain elevated, even by 2025, as demand will be held back by lacklustre credit supply." India has pre-ordered 1.6 billion doses of vaccines, including 500 million doses of the Oxford/AstraZeneca vaccine.
"This is quite a high number - even accounting for the size of the population - for an emerging market," Fitch said. "India also produces large amounts of vaccine doses of its own." Distribution should allow a faster-than-previously-expected easing of social-distancing restrictions and boost sentiment.
"However, it seems likely that the vaccine rollout over the next 12 months will not reach the majority of the population given the huge logistical and distribution challenges," it said, adding regional shutdowns are possible in the next few months.
A significantly slower rollout of the vaccine than expected will be a downside risk.
"A combination of supply-side scarring and demand-side constraints - such as the weak state of the financial sector - will keep the level of GDP well below its pre-pandemic path," it said.
Fitch said the medium-term recovery will 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." This, it said, will weigh on labour productivity, lowering its projection of supply-side potential GDP growth for the six-year period FY21 to FY26 to 5.1 per cent per annum compared to our pre-pandemic projection of 7 per cent.
"Our historical analysis of India's growth performance highlights the key role played by a high investment rate in driving growth in labour 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," it said.
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 estimated supply-side potential over the medium term following the unprecedented downturn in FY21. But our projection for the medium-term recovery path - at around 6.5 per cent per annum over FY23 to FY26 - would leave GDP well below its pre-pandemic trend," it said.
