Fitch cuts India growth forecast to 10%, says rapid vaccination to support revival

In a report, the global rating agency said the challenges for 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 on July 7 cut India’s growth forecast to 10% for the current fiscal, from 12.8% estimated earlier, due to slowing recovery 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 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%, 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.

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 centres has slowed the recovery and dented Fitch’s expectations of a rebound to pre-pandemic levels by FY22. India’s economy contracted 24.4% in 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%.

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.

“Only 4.7% 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.

Indian economy contracted by 7.3% in fiscal 2020-21 as the country battled the first wave of COVID, as against a 4% growth in 2019-20.

GDP growth in current fiscal was estimated to be in double digits initially, but a severe second wave of pandemic has led to various agencies cut growth projections.

RBI too earlier this month cut India’s growth forecast to 9.5% for this fiscal, from 10.5% estimated earlier.

While S&P Global Ratings lowered its growth estimate to 9.5%, another U.S.-based rating agency Moody’s has projected a 9.3% growth in the current fiscal ending March 2022. For 2021 calendar year, Moody’s has cut growth estimate sharply to 9.6%.

Last month, World Bank slashed its GDP growth forecast for current fiscal ending March 2022 to 8.3%, from 10.1% estimated in April, saying economic recovery is being hampered by the devastating second wave of coronavirus infections.

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

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.

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