The Indian economy will suffer “lasting damage” from the Covid-19 crisis, after a strong rebound in FY22, with its growth slowing to around 6.5 percent per year on FY23 to FY26, according to Fitch Ratings.
This is believed to be due to a combination of scars on the supply side and constraints on the demand side, such as the weakness of the financial sector which will keep India’s GDP well below its pre-pandemic trajectory, according to one. rating agency rating.
India’s Covid-19-induced recession has been one of the worst in the world due to tight lockdown and limited direct budget support. “The economy is now in a recovery phase which will be further supported by the rollout of vaccines in the coming months and we expect GDP to grow 11 percent in FY22 after falling 9.4 percent in FY21,” says he.
India is expected to experience its first GDP contraction of 7.7% in decades, according to early government estimates. The Reserve Bank of India has projected the economy to contract 7.5% in the current fiscal year.
Even if growth will be supported by the deployment of effective vaccines, the level of GDP will remain well below its pre-pandemic trajectory even after the passage of the health crisis, the note said.
“The current recession will leave lasting scars,” he says. The crisis will result in lower investment growth for a few years, and slower capital accumulation will be the main source of weaker growth on the supply side, according to the rating agency.
The rating agency described the decline in investment as “the main brake on potential growth”. The pandemic is expected to weigh on capital spending for a few years, directly fueling a slower pace of capital deepening, he said. Fitch Ratings predicts a 14% drop in investments in FY21, which would increase by 18% in FY22 due to favorable base effects and the mitigation of the health crisis. However, investment growth is expected to slow to around 6% per year in subsequent years, he said.
Demand for investment will be hampered by the need to fix balance sheets and shut down businesses. Businesses have received limited direct tax support, with the overall fiscal stance only slightly relaxed. “The limited supply of credit in a fragile financial system is another barrier to investment. The banks entered the already fragile crisis, hampered by a bad allocation of credit, ”the rating agency said.
Further deterioration in the quality of banks’ assets
Government political support and debt abstention kept many businesses afloat and limited credit loss provisions on banks’ books. Policy support, including government guaranteed credit guarantees, will gradually dissipate as
conditions allow and result in a further deterioration in the quality of banks’ assets. “… this will put a damper on lending for years to come as banks strive to maintain or restore capital buffers,” the rating agency said.
The extent of the damage to the banking sector is expected to become more apparent in mid-2021, when the debt restructuring program expires, he said.
In a separate note, Barclays India in a note, said the distribution of an effective vaccine is expected to ease the few remaining restrictions placed. Given a reasonably good pace of distribution, the final unblocking of the economy will begin soon, which should lead to recovery in the first half of the next fiscal year.
The research report projects a “strong recovery” of 8.5% for fiscal 22. “The economic recovery continues to widen and activity is back at or above pre-COVID levels in many sectors, ”he said.
However, the Fitch Ratings rating indicates that it is likely that the vaccine rollout over the next 12
months will not reach the majority of the population given the enormous logistical and distribution challenges. “The deployment of the vaccine will require unprecedented cooperation between manufacturers, governments, freight operators and ground workers,” he said.
This could lead to regional closures in the coming months, he said.
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