Fitch Ratings forecasts Indian economy to contract 10.5% instead of 5%

New Delhi: Fitch Ratings on Tuesday said that it expects the Indian economy to contract by a massive 10.5 per cent in the fiscal year ending March 2021 (FY21) versus its earlier estimates of 5 per cent during the same period.

“We have slashed our GDP forecast for this fiscal year to -10.5 per cent, a huge revision of -5pp (percentage points) compared to the June GEO. We expect the shortfall of activity relative to our pre-virus forecast to be 16 per cent by early 2022,” it said in its September update of Global Economic Outlook (GEO).

India’s GDP shrank by a staggering 24 per cent year-on-year amid the imposition of one of the most stringent global nationwide lockdown.

“GDP should rebound strongly in 3Q20 (October-December) amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven,” Fitch said.

The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3-20. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending, the rating agency said.

“New cases of the coronavirus continue to increase, forcing some states and union territories to re-tighten restrictions… The continued spread of the virus and the imposition of sporadic shutdowns across the country depress sentiment and disrupt economic activity,” Fitch said.

“The severe fall in activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers. Furthermore, high inflation has added strains to household income,” Fitch said.

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