Fitch Ratings on Wednesday upgraded India’s growth projection for FY22 to 12.8% from 11% estimated earlier on a stronger carryover effect, a looser fiscal stance and better virus containment.
“The biggest revisions are for Turkey and India. India’s 2H20 rebound also took GDP back above its pre-pandemic level. Nevertheless, we expect the level of Indian GDP to remain well below our pre-pandemic forecast trajectory,” the rating agency said in its latest Global Economic Outlook.
The Organisation for Economic Co-operation and Development (OECD) earlier this month projected that the Indian economy will bounce back to grow at 12.6% in FY22, the highest among G20 countries, aided by additional fiscal support after the covid-19 pandemic pushed the economy into recession after a gap of more than 40 years.
Fitch said India’s recovery from the depths of the lockdown-induced recession in June quarter has been swifter than it expected. “GDP surpassed its pre-pandemic level in 4Q20 (December quarter), growing 0.4% yoy, after contracting 7.3% yoy in the previous quarter. The rapid pace of expansion at the end of 2020 was powered by falling virus cases and the gradual rollback of restrictions across States and Union territories,” it added.
High-frequency indicators point to a strong start to 2021, the rating agency said. “The manufacturing PMI remained elevated in February, while the pickup in mobility and a rise in the services PMI point to further gains in the services sector. However, the recent flare up in new virus cases in some states has prompted us to expect milder growth in 2Q21 (June quarter). Moreover, the global auto chip shortage could temporarily diminish Indian industrial production gains in 1H21,” it added.
Fitch said the Union Budget for the fiscal year ending March 2022 (FY22) unveiled a fiscal stance more accommodative than we expected. “Spending is set to be increased substantially, notably infrastructure, healthcare, and military outlays. Looser fiscal policy should support the short-term cyclical recovery, which along with stronger underlying growth momentum prompted us to nudge up our FY22 GDP growth forecast substantially, to 12.8%,” it added.
The increase in inoculation to the most at-risk people should allow restrictions to be eased significantly towards end-2021 and in 2022, the rating agency said. “This should further support services sector activity and consumption. Nevertheless, an impaired financial sector is likely to keep the provision of credit tight, limiting investment spending. We expect GDP growth to ease to 5.8% in FY23, a downward revision of -0.5pp since December. The forecast level of GDP remains substantially below our pre-pandemic trajectory,” it said.
Fitch said it no longer expect the Reserve Bank of India (RBI) to cut its policy rate, owing to a brighter short-term growth outlook and a more limited decline in inflation than it had forecast. “The RBI will nonetheless keep its policy loose over the forecast horizon to shore up the recovery. The central bank will likely continue to use forward guidance on policy rates and carry out open-market operations to keep a lid on borrowing costs,” it added.