Fitch sees covid-19 adversely impacting India's medium-term growth trajectory
The current pandemic induced recession will leave lasting scars on the Indian economy even with a rollout of coronavirus vaccine unlikely to fully restore the economy to health over the next five years, Fitch Ratings said on Thursday, while lowering its estimate of potential growth to 5.1% on average over 2020 to 2025, from 7% before the pandemic.The rating agency said even though government has pre-ordered 1.6 billion doses of vaccines, including 500 million doses of the Oxford/AstraZeneca vaccine, 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. “The rollout of the vaccine will require unprecedented cooperation among manufacturers, governments, cargo operators and ground workers. Against this backdrop, regional shutdowns are possible in the next few months. A key downside risk to our scenario is a significantly slower rollout of the vaccine than we expect," it added.Fitch has projected potential growth to average 5.1% per year over 2020-2025. “Potential growth should be very low in the aftermath of the crisis (2021-2022), at around 4.5%, but it will pick up to close to 6% in subsequent years (2023-2025)," it added.Potential growth is the rate of growth that an economy can sustain over a medium term without generating excess inflation. It is different from real GDP growth in any particular year. Fitch has projected Indian economy to bounce back to grow at 11% in FY22 after contracting 9.4% in FY21 but will become range bound within 6.3-6.6% till FY26.The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years with National Statistical Office assuming 0.6% growth in the second half (October-March) of FY21.The main potential growth dampener is expected to be lower investment as the pandemic is set to weigh on capital expenditure for some years, feeding directly into a slower pace of capital deepening. “Uncertainty over demand, the desire to expand cash buffers and to repair balance sheets, as well as limited bank supply of credit will hold back investment. Changes in work and shopping patterns related to social distancing could also restrain investment in commercial real estate," Fitch said.Fitch said several reforms passed by Parliament in response to the pandemic such as labour and farm reforms could lift medium-term growth prospects. “Nevertheless, implementation risks are significant. For example, segments of the farm lobby have protested the reform, apparently over fears that it could result in the abolition of minimum support prices, although the government says this will not happen. More recently, Indian’s Supreme Court put the agricultural reforms on hold until further notice. A reversal of the agricultural reforms would pose a downside risk to our forecast," it added.