Fitch sees India’s GDP contraction at 9.4%

The outlook for India is brighter owing to an expected roll-out of various vaccines in 2021, according to Fitch Ratings.

The global rating agency now expects India’s GDP to contract 9.4 per cent in fiscal year to end March 2021 (FY21) (from 10.5 per cent contraction forecast earlier), followed by +11 per cent (unchanged) and +6.3 per cent (6 per cent in previous forecast) in the following years.

“The coronavirus recession has nevertheless inflicted severe economic scarring. The need to repair balance sheets, increased caution about long-term planning, and firm closures will limit investment demand,” the agency said in a report.

Furthermore, increased financial-sector weakness – amid deteriorating asset quality – will hold back credit provision.

Fitch observed that the failure of another bank in recent weeks – the third failure in the past 16 months –underlines the challenges in the financial sector.

Pre-ordered vaccine

“India has pre-ordered 1.6 billion doses including 500 million doses of the Oxford/AstraZeneca vaccine. Distribution should allow a faster-than-expected easing of social-distancing restrictions and boost sentiment,” Fitch said in a report.

However, it seems likely that the vaccine roll-out over the next 12 months will not reach the majority of the people given the huge logistical and distribution challenges in a heavily populated country like India.

Regional shutdowns are likely in the next few months, while the virus is still spreading, the agency added.

Inflation has peaked

Fitch said consumer prices have continued to accelerate in recent months, buoyed by lingering supply disruptions. This has deterred the Reserve Bank of India (RBI) from resuming its easing cycle.

“We think inflation has now peaked and should start to decelerate rapidly on favourable base effects and an easing of supply disruptions. This should provide room for the RBI to cut interest rates in 2021,” it added.