After RBI and Moody's, Fitch Ratings now cuts India's growth forecast

Fitch Ratings on Wednesday (July 7) cut India’s growth forecast to 10 per cent for the current fiscal, from 12.8 per cent estimated earlier, due to slower recovery rate post-second wave of COVID-19, and said rapid vaccination could support a sustainable revival in business and consumer confidence.

In a report, the global rating agency said the challenges for the banking sector posed by the coronavirus pandemic have increased due to a virulent second wave in the first quarter of the financial year ending March 2022 (FY22).

“Fitch Ratings revised down India’s real GDP for FY22 by 280bp to 10 per cent, underlining our belief that renewed restrictions have slowed recovery efforts and left banks with a moderately worse outlook for business and revenue generation in FY22,” it said.

Fitch believes that rapid vaccination could support a sustainable revival in business and consumer confidence; however, without it, economic recovery would remain vulnerable to further waves and lockdowns.

Also read: Moody’s cuts India growth projection to 5.4% for 2020

It said localised lockdowns during the second wave kept economic activity from stalling to levels similar to those during 2020, but disruption in several key business sectors has slowed the recovery and dented Fitch’s expectations of a rebound to pre-pandemic levels by FY22.

India’s economy contracted 23.9 per cent in the June quarter of 2020. Fitch views India’s rebound potential to be better than most comparable ‘BBB’ peers because it does not expect a structurally weaker real GDP growth outlook.

However, there is a risk that India’s medium-term growth could suffer if the business and consumer activity were to experience scarring from the COVID-19 pandemic. The agency estimates India’s medium-term growth potential at about 6.5 percent.

Stating that vaccination is key for business revival and relief measures would only provide interim support, Fitch said the low vaccination rate makes India vulnerable to further waves of the pandemic.

Also read: Post-COVID economic recovery may be at the cost of public health, environment

“Only 4.7 percent of its 1.37 billion population was fully vaccinated as of July 5, 2021. This poses risks to the prospects of a meaningful and sustainable economic recovery,” it added.

The Indian economy contracted by 7.3 per cent in fiscal 2020-21, as the country battled the first wave of COVID, as against a 4 per cent growth in 2019-20. GDP growth in the current fiscal year was estimated to be in double digits initially, but a severe second wave of the pandemic has led to various agencies cutting growth projections.

The RBI also earlier this month cut India’s growth forecast to 9.5 per cent for this fiscal, from 10.5 per cent estimated earlier. While S&P Global Ratings lowered its growth estimate to 9.5 per cent, another US-based rating agency Moody’s, has projected a 9.3 per  cent growth in the current fiscal ending March 2022.

For the 2021 calendar year, Moody’s has cut the growth estimate sharply to 9.6 per cent. Last month, World Bank too slashed its GDP growth forecast for the current fiscal ending March 2022 to 8.3 per cent, from the 10.1 per cent estimated in April, saying economic recovery is being hampered by the devastating second wave of coronavirus infections.

Domestic rating agency ICRA also had projected economic growth at 8.5 per cent for this financial year, while British brokerage firm Barclays had last month cut India’s growth forecast to 9.2 per cent.

Fitch in its report on Indian banks further said that regulatory relief measures have postponed underlying asset-quality issues for now, but banks’ medium-term performance will be dented without a meaningful economic recovery.

“The operating environment remains challenging for the banks with limited opportunities for business and revenue growth. Problems could escalate in the event that successive COVID-19 waves and lockdowns prevent a meaningful economic recovery considering that India’s full vaccination rate is still quite low,” it said.

Fitch expects banks’ exposure to stressed MSME and retail borrowers to rise further with the increasing relief outlay and is likely to compel banks, especially state-owned ones, to slow regular lending in the absence of adequate core capital cushions and weak contingency buffers.