Indian Economy lasting Damage From Covid :Fitch

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The Indian economy will suffer ‘lasting damage’ from the pandemic-induced crisis, after a strong rebound in fiscal 2021-22, with its growth slowing to about 6.5 per cent a year from fiscal 2022-23 to 2025-26, according to Fitch Ratings. This would be due to a mix of supply-side scarring and demand-side constraints like the weak state of the financial sector.

This combination will keep India’s gross domestic product (GDP) well below its pre-pandemic path, a note by the ratings agency said.

“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 Reserve Bank of India has projected the economy to shrink by 7.5 per cent in the current financial 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 note 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 ratings agency.

The ratings 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% 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. Companies have received limited direct fiscal support, with the overall fiscal stance eased by only a little. “Constrained credit supply amid a fragile financial system is another headwind to investment. Banks entered the crisis already fragile, hampered by a misallocation of credit,” the ratings agency said.

The government’s policy support and debt forbearance have kept many companies afloat and limited the credit loss provisions in banks’ books. Policy support, including government-backed credit guarantees, will gradually unwind when economic conditions allow, and translate into a renewed deterioration of banks’ assets quality. “…this will put the brakes on lending for years to come as banks work to maintain or restore capital buffers,” Fitch said.

The extent of damage to the banking sector should become more apparent in mid-2021, when the debt restructuring scheme expires, it said.

However, the note said it is likely that the vaccine rollout over the next 12 months will not reach the majority of the population given the huge logistical and distribution challenges. This may lead to regional shutdowns in the next few months, it added.