Indian Economy To Contract 5% In 2020-21, Says Fitch Ratings

The forecast of 5 per cent contraction is sharp decline from 0.8 per cent growth projected by the global rating agency in late April.

Indian Economy To Contract 5% In 2020-21, Says Fitch Ratings

Fitch said the growth contraction in the current fiscal was mainly due to a 8.3 per cent

New Delhi:

Fitch Ratings on Tuesday forecast the Indian economy to contract 5 per cent in the current fiscal on account of slump in economic activities following a "very severe" lockdown that has lasted much longer than expected.

In its Global Economic Outlook (GEO) for May, Fitch projected growth to rebound to 9.5 per cent in 2021-22 and an estimated 3.9 per cent growth in 2019-20.

The forecast of 5 per cent contraction is sharp decline from 0.8 per cent growth projected by the global rating agency in late April.

"The biggest contribution to the downward revision in global GDP for 2020 comes from EM (emerging markets) excluding China, where we now see GDP falling by 5 per cent in India and Russia and by 6-7 per cent in Brazil and Mexico," Fitch said.

This reflects the surge in coronavirus infections from mid-April and measures taken to contain the outbreak, it added.

"The biggest revision by far has been for India, where the virus outbreak has prompted a very severe lockdown that has lasted much longer than expected," the rating agency said.

It predicted two consecutive quarters of contraction or negative year-on-year growth in current fiscal -- (-)2.7 per cent in April-June and (-)12.4 per cent in July-September. This compares to 1.2 per cent estimated growth in January-March.

Fitch said the growth contraction in the current fiscal was mainly due to a 8.3 per cent and 9.7 per cent contraction in consumer spending and fixed investment in FY21.

While Fitch further cut world GDP forecasts in its latest Global Economic Outlook (GEO), but said that the slump in global economic activity is close to reaching its trough.

"World GDP is now forecast to fall by 4.6 per cent in 2020 compared to a decline of 3.9 per cent predicted in our late-April GEO. This reflects downward revisions to the eurozone and the UK and, most significantly, to emerging markets (EM) excluding China," said Brian Coulton, Chief Economist, Fitch Ratings.

Fitch expects output in emerging markets, excluding China, to fall by 4.5 per cent this year compared to a predicted fall of 1.9 per cent before. This large revision reflects the deterioration in the health crisis in many of the largest EMs over the past month or so, including in Brazil, India and Russia, it said.

"The biggest forecast cut was to India where we now anticipate a 5 per cent decline in the current financial year (ending March 2021) in contrast to an earlier forecast of growth of 0.8 per cent. India has had a very stringent lockdown policy that has lasted a lot longer than initially expected and incoming economic activity data have been spectacularly weak," Fitch said.

The agency has kept its forecasts for 2020 GDP growth for China, the US and Japan unchanged since late April at 0.7 per cent, (-)5.6 per cent and (-)5 per cent, respectively.

"This concurs with other evidence that the collapse in global economic activity may be close to bottoming out. A number of early monthly economic indicators for May have improved slightly on their April values and daily mobility data show consumer visits to retail and recreation venues have increased in the eurozone and the US since lockdowns started to be eased in late April/early May," Fitch said.

Fitch said global macroeconomic policy stimulus has been increased further over the past month or so, beyond the already announced huge commitments.

The US has announced an additional fiscal package valued at more than 2 per cent of GDP (with more being discussed), Italy unveiled a second wave of easing measures, the UK extended its job-subsidy scheme, and Fitch now expects China''s general government fiscal deficit to widen to 11.2 per cent in 2020 from 4.9 per cent in 2019.

Fitch predicts that global quantitative easing (QE) will reach USD 6 trillion in 2020, equivalent to half of the cumulative QE purchases by the Fed, ECB, Bank of England and Bank of Japan combined in 2009-2018.

This explosion in central bank liquidity has helped to secure a pick-up in bank credit to the real economy (specifically, to firms) in the past couple of months, a development that contrasts with the pattern in 2009, it said.

Fitch said the return to economic normality is likely to be a slow and bumpy process. The rupture in the labour market - with US unemployment now expected to peak at 20 per cent in May - and ongoing social distancing will weigh heavily on consumer spending post-crisis, while firms will be very cautious on capital spending.

"We foresee a ''technical'' pick-up in global GDP growth to 5.1 per cent in 2021 - with US and eurozone output rising by around 4 per cent - but pre-virus levels of GDP are unlikely to be reached until mid-2022 in the US and significantly later in Europe. This is despite massive policy stimulus," Coulton added.