Indian economy to contract but will do better than earlier forecast: Fitch

Fitch expects economy to contract by a record 9.4 per cent in the current fiscal year ending March 2021 amid coronavirus but this represents a 1.1 percentage point improvement from previous forecast

Fitch Ratings expects India's economy to contract by a record 9.4 per cent in the current fiscal year ending March 2021 (FY21) amid the shock from coronavirus pandemic but this represents a 1.1 percentage point improvement from its our previous forecast, reflecting a stronger-than-anticipated rebound in 3Q 2020.

Risks to the growth outlook appear to have eased in recent weeks as vaccine rollouts began in other parts of the world. Fitch said forward-looking indicators suggest gathering momentum in the domestic economy, supporting its forecast that output will grow by 11 per cent in FY22.

"Base effects after a record 9.4 per cent contraction in FY21 should underpin a return to growth of 11 per cent in India's economy over FY22, supported by the rollout of vaccines," said Senior Director Duncan Innes-Ker.

The latest wave of COVID-19 cases in the United States, Europe and parts of Asia has led to renewed restrictions on activity, highlighting the continued risks to growth posed by the pandemic.

"The number of newly identified cases per day continues to trend lower in India, but it remains high and a successful vaccine rollout will be important to sustain economic recovery," he said.

Fitch said India is unusual among emerging markets in having secured pre-orders of various vaccines sufficient to cover a population-wide programme. It has pre-ordered 1.6 billion vaccine doses, including 500 million of the Oxford/AstraZeneca vaccine through a local producer.

Distribution should allow social distancing restrictions to be eased over time and will underpin sentiment.

Nevertheless, said Fitch, the logistical challenges of the rollout mean that one does not expect vaccines to reach a majority of the population over the next 12 months and regional shutdowns will remain a risk in the next few months while the virus is still spreading.

More structural problems with the vaccination drive like delays beyond baseline assumptions or issues with vaccine efficacy could also pose downside risks to the forecasts.

Even if vaccination proceeds smoothly, the coronavirus recession has inflicted severe economic scarring. The need to repair balance sheets, increased caution about long-term planning and company closures will dampen corporate investment in the months ahead.

Furthermore, said Fitch, increased financial-sector weakness -- amid deteriorating asset quality -- will hold back credit provision. The failure of Lakshmi Vilas Bank in November underlined the challenges in financial sector.