Fitch revises India GDP forecast for FY21 to -10.5% from -5% earlier

Fitch has sharply lowered its forecast for India’s gross domestic product (GDP) growth for the current fiscal 2020-21 (FY21) and now expects the country’s GDP to contract 10.5 per cent versus its earlier estimate of 5 per cent contraction in this period. This, at a time, when the rating agency has revised upwards, albeit modestly, its forecast for global GDP – from the earlier estimated fall of 4.6 per cent to 4.4 per cent now.

The downward revision in India's forecast for FY21 comes on the heels of a sharp contraction in Indian economy in the April – June 2020 period, when the GDP came in at a negative to 23.9 per cent year-on-year (YoY) - the worst performance in nearly four decades.

“The severe fall in activity has 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. Furthermore, high inflation has added strains to household income,” Fitch said.

That said, the rating agency expects GDP in India to rebound strongly in the third quarter of calendar year 2020 (Q3-20) as the economy re-opens. However, it cautions 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 Q3-20. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending,” Fitch said.

As coronavirus cases rise and force some states and union territories to re-tighten restrictions, the continued spread of the virus and the imposition of sporadic shutdowns across the country has depressed sentiment and disrupted economic activity. “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.

Besides Fitch, the fall in Q1FY21 GDP has seen most forecasters cut India's economic growth projection for calendar year 2020 (CY20) and FY21. Those at Nomura, for instance, has slashed GDP growth projection to -9.0 per cent YoY in 2020 (versus -5 per cent previously) and -10.8 per cent in FY21 (versus -6.1 per cent earlier).

Pranjul Bhandari, chief India economist at HSBC, too, expects growth to remain negative until December 2020, before turning slightly positive in early 2021 (that too led largely by a weak statistical base). “Despite our forecast for a positive 7.2 per cent GDP growth next year, GDP is only likely to return to pre-pandemic levels in early 2022,” Bhandari believes.

Global view

Fitch expects global GDP to fall by 4.4 per cent in 2020, a modest upward revision from the 4.6 per cent decline expected earlier. The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated, Fitch said, but they expect the pace of expansion to moderate soon.

“China has already regained its pre-virus level of GDP and retail sales in the US, France and the UK now exceed February levels, but we doubt this will become the much-lauded V-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to directly constrain private-sector spending”, said Brian Coulton, chief economist, Fitch Ratings.

Fitch now expects the US economy to contract by 4.6 per cent this year compared to a fall of 5.6 per cent earlier. Their China growth forecast for 2020 now stands at +2.7 per cent compared to +1.2 per cent in June.

“These revisions have been partly offset by cuts to our 2020 GDP forecasts for the Eurozone to -9.0 per cent (-8.0 per cent), the UK to -11.5 per cent (-9.0 per cent) and for emerging markets (EM) excluding China to -5.7 per cent (-4.7 per cent),” Fitch said.