Fitch Ratings on Tuesday lowered its forecast for India's GDP (gross domestic product) growth for FY21, projecting a 10.5 per cent contraction of the economy from an earlier estimate of 5 per cent shrinkage in the same period.
India's GDP contracted by 24 per cent year-on-year amid the imposition of coronavirus-induced nationwide lockdown.
"GDP should rebound strongly in Q3 20 (October-December) amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven," Fitch said adding that it has "slashed our GDP forecast for this fiscal year 10.5 per cent, a huge revision of 5pp compared to the June Global Economic Outlook (GEO),"
This comes at a time when the rating agency has revised upwards, although moderately, its prediction for global GDP to 4.4 per cent now from the earlier estimated fall of 4.6 per cent.
Fitch's downward revision in India's prediction for FY21 comes in the aftermath of a sharp contraction in the Indian economy in April-June 2020 period (by 24 per cent), the worst performance in nearly four decades.
"The severe fall in activity has damaged household and corporate incomes and balance sheets, amid limited fiscal support. A looming deterioration in asset quality in the financial sector will hold back credit provision amid weak bank capital buffers. Furthermore, high inflation has added strains to household income," Fitch said.
Having said that, the rating agency also expects India's GDP to rebound strongly in the third quarter of the calendar year 2020 (Q3-20) as the economic activity resumes.
Nevertheless, it cautions that the recovery has been jagged and torpid.
"The PMI balances have bounced back but they imply that the level of activity is still well below its pre-pandemic level in Q3-20. Still-depressed levels of imports, two-wheeler sales and capital goods production indicate a muted recovery in domestic spending," Fitch stated in its outlook commentary.
The rating agency further said that the continued spread of coronavirus and imposition of intermittent shutdowns across India have led to a gloomy sentiment besides disrupting economic activity.
"Supply-chain disruptions and excise duties increases have caused prices to rise. However, we expect inflation to slow amid weak underlying demand, an easing in supply-chain disruptions, and a good monsoon," Fitch said.