Fitch: India’s economy in FY21 could see its worst contraction

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Fitch Ratings slashed India’s FY21 Gross Domestic Product (GDP) forecast to 10.5 percent, down from a 5 percent contraction in June which is expected to obstruct rapid normalization by the restricted tax assistance, and risk assessment in the continued increase in cases of coronaviruses.

India Ratings revised its forecast of FY21 for India downward to 11.8 percent from a previously estimated contraction of 5.3 percent. Fitch and India Ratings’ new forecasts for the Indian economy include one of the worst FY21 projections, which could make them the biggest contraction in its history. In FY80, the previous lowest was a 5.2 percent GDP contraction.

In a reopening economy in the September quarter, the rating agency said India’s GDP should recover strongly. However, the recovery is gradual and inconsistent. ” The index balances of the purchasing department have bounced back, but they indicate that their activity levels in the 3Q20 (September quarter) period are still well below their pre-pandemic level. Still, declining import, two-wheel sales, and output of capital goods show that domestic spending is recovering mutedly,” the report said.

Fitch has updated its global forecast of GDP to a 4.4% decline in recent calendar year 2020 from a 4.6% decline projected in June when it updated upward its forecasts of growth for the United States (0.6%) and China (2%). Fitch noted that its global GDP forecast for 2020 is undermined in India, the Eurozone, and the UK by deeper contractions.

“New coronavirus cases continue to rise, prompting some States and Union territories to reintroduce controls, although those control measures at the local level are usually less stringent than those in March-April. The virus continues to spread and intermittent shutdowns are causing uncertainty and disruption in economic activity throughout the world, “the rating agency says.

In India’s GDP, which decreased by 23.9% in the quarter of June, one of the world’s tightest lockdowns resulted in supply shortages, major job losses, and a sharp decline in domestic demand. The rating agency also reported that India was the G20’s worst performer in June.

The recovery in India, both in the short and medium-term, is hampered by several challenges, said Fitch.

Fitch said that the significant decline in activity also impacted household and company income and balances, amid minimal fiscal support.

“The inevitable deterioration of the asset quality in the financial sector will hold back credit in the center of low banking capital reserves. 

“The disruption of the supply chain and the increase in excise duty have helped raise prices. However, amid lower demand, inflation is expected to slow down, easing disturbances in the supply chain and a solid monsoon,” the report said.

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