Fitch Ratings has revised India's GDP growth estimate to 12.8 per cent for the fiscal year beginning April 1 from its previous estimate of 11 per cent, saying its recovery from the depths of the lockdown-induced recession has been swifter than expected.
In its latest Global Economic Outlook (GEO), Fitch said revision is on the back of "a stronger carryover effect, a looser fiscal stance and better virus containment. India's second half of 2020 rebound also took GDP back above its pre-pandemic level and we have revised up our 2021-2022 forecast to 12.8 per cent from 11 per cent," it said. "Nevertheless, we expect the level of Indian GDP to remain well below our pre-pandemic forecast trajectory." GDP surpassed its pre-pandemic level in December quarter, growing 0.4 per cent year-on-year, after contracting 7.3 per cent in the previous quarter.
"India's recovery from the depths of the lockdown-induced recession in 2Q20 (calendar year) has been swifter than we expected," it said. "The rapid pace of expansion at the end of 2020 was powered by falling virus cases and the gradual rollback of restrictions across States and Union territories." High-frequency indicators point to a strong start to 2021. The manufacturing PMI remained elevated in February, while the pick-up in mobility and a rise in the services PMI point to further gains in the services sector. However, the recent flare up in new virus cases in some states has prompted us to expect milder growth in 2Q21.
"Moreover, the global auto chip shortage could temporarily diminish Indian industrial production gains in 1H21(first half of 2021)," it said. The Union Budget for the fiscal year ending March 2022 (FY22) unveiled a fiscal stance more accommodative than expected.
Spending is set to be increased substantially, notably infrastructure, healthcare, and military outlays. Looser fiscal policy should support the short-term cyclical recovery, which along with stronger underlying growth momentum prompted FY22 GDP growth forecast revision, Fitch said. "The increase in inoculation to the most at-risk people should allow restrictions to be eased significantly towards end-2021 and in 2022," it said. "This should further support services sector activity and consumption." The rating agency however said an impaired financial sector is likely to keep the provision of credit tight, limiting investment spending.
"We expect GDP growth to ease to 5.8 per cent in FY23, a downward revision of -0.5 percentage points since December," it said. "The forecast level of GDP remains substantially below our pre-pandemic trajectory." It no longer expected the Reserve Bank of India (RBI) to cut its policy rate, owing to a brighter short-term growth outlook and a more limited decline in inflation. The RBI will nonetheless keep its policy loose over the forecast horizon to shore up the recovery. The central bank will likely continue to use forward guidance on policy rates and carry out open-market operations to keep a lid on borrowing costs, it added.