Economy to suffer lasting damage from coronavirus crisis, says Fitch
Growth to slow to 6.5% a year over FY23 to FY26
The economy will suffer a “lasting” damage from the Covid-19 crisis after a strong rebound in financial year ending March 2022, with its growth slowing to around 6.5 per cent a year over FY23 to FY26, according to Fitch Ratings.
This would be due to a combination of supply-side scarring and demand-side constraints such as the weak state of the financial sector that will keep the gross domestic product (GDP) well below its pre-pandemic path, the ratings agency said.
The Covid-induced recession in India has been among the most severe in the world due to a stringent lockdown and limited direct fiscal support. “The economy is now in a recovery phase that will be further supported by the rollout of vaccines in the next months and we expect GDP to expand by 11 per cent in FY22 after falling by 9.4 per cent in FY21,” it said.
India is projected to witness its first GDP contraction of 7.7 per cent in decades, according to government’s first Advance Estimates. The RBI has projected the economy to shrink by 7.5 per cent in the current fiscal year.
Even as the growth will be supported by the rollout of effective vaccines, the level of GDP will remain well below its pre-pandemic path even after the health crisis has passed, the agency said.
“The current recession will leave lasting scars,” it said. The crisis will mean lower investment growth for some years, and slower capital accumulation will be the main source of weaker supply-side growth, according to the agency.
The agency called lower investments as the “main potential growth dampener”. The pandemic is set to weigh on capital expenditure for some years, feeding directly into a slower pace of capital deepening, it said.
Fitch Ratings projects a 14 per cent drop in investment in FY21, which would increase by 18 per cent in FY22 due to favourable base effects and easing of the heath crisis. However, investment growth is expected to slow to around 6 per cent a year in the subsequent years, it said.
Investment demand will be dragged down by the need to repair balance sheets and shutting of firms. “Constrained credit supply amid a fragile financial system is another headwind to investment.”