Economy to suffer lasting damage due to Covid, post strong rebound: Fitch

Economy to suffer lasting damage due to Covid, post strong rebound: Fitch

Medium-term growth to slow around 6.5 per cent a year over FY23 to FY26


Indian Economy | Fitch Ratings | India GDP growth

Nikunj Ohri |.
New Delhi

The Indian economy will suffer “long lasting damage” from the Covid-19 crisis, after a strong rebound in FY22, with its growth slowing to about 6.5 percent a year over FY23 to FY26, according to Fitch Ratings.

This would be because of a mix of supply-side scarring and demand-side constraints such as the weak state of the financial sector that will keep India’s GDP well listed below its pre-pandemic course, a note by the ratings agency stated.

The Covid-19 caused economic downturn in India has been among the most extreme worldwide due to a rigid lockdown and limited direct fiscal assistance. “The economy is now in a healing stage that will be further supported by the rollout of vaccines in the next months and we expect GDP to expand by 11 percent in FY22 after falling by 9.4 per cent in FY21,” it stated.

India is predicted to witness its first GDP contraction of 7.7 percent in years, according to government’s first advance quotes. The Reserve Bank of India has predicted the economy to diminish by 7.5 percent in the present fiscal year.

Even as the growth will be supported by the rollout of reliable vaccines, the level of GDP will remain well below its pre-pandemic path even after the health crisis has passed, the note stated.

” The current recession will leave lasting scars,” it stated. The crisis will imply lower financial investment growth for some years, and slower capital build-up will be the main source of weaker supply-side development, according to the ratings firm.

Financial investment growth is expected to slow to around 6%a year in the subsequent years, it stated.

Banks entered the crisis currently vulnerable, hindered by a misallocation of credit,” the scores agency said.


Renewed wear and tear of banks’ asset quality

The government’s policy support and financial obligation forbearance have kept lots of business afloat and restricted the credit loss provisions in banks’ books. Policy assistance, consisting of government-backed credit guarantees, will gradually loosen up when financial

conditions allow, and equate into a restored deterioration of banks’ possessions quality. “… this will put the brakes on lending for years to come as banks work to keep or bring back capital buffers,” the scores agency stated.

The level of damage to the banking sector need to become more obvious in mid-2021, when the debt restructuring scheme expires, it said.

Vaccine optimism

In a separate note, Barclays India in a note, stated the distribution of an efficient vaccine need to enable the few staying constraints positioned to be alleviated. Thinking about a reasonably excellent pace of circulation, the final mile unlocking of the economy will begin quickly, which ought to drive the healing through the very first half of the next financial year.

The research report jobs a ‘solid healing’ in FY22 of 8.5 per cent. “The financial healing is gradually broadening, and activity is back at or above pre-COVID levels in lots of sectors,” it said.

The note by Fitch Scores stated it’s likely that the vaccine rollout over the next 12

months will not reach most of the population provided the huge logistical and distribution obstacles. “The rollout of the vaccine will need unprecedented cooperation among makers, governments, freight operators and ground workers,” it stated.

This may result in local shutdowns in the next couple of months, it stated.

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