Fitch slashes India's FY22 GDP growth forecast to 8.7%

Fitch Ratings on Thursday slashed India’s economic growth forecast to 8.7% for the current fiscal, but at the same time raised the GDP growth projection to 10% for FY23, saying that the second wave of Covid-19 only delayed but did not derail the economic recovery.

The ratings agency in its APAC Sovereign Credit Overview said India’s BBB or negative rating gives an outlook that reflects uncertainty over the debt trajectory following the sharp deterioration in India’s public finances due to the pandemic shock.

It has further lowered the country’s GDP forecast for the fiscal year ending March 2022 (FY22) to 8.7% from 10% in June as a result of the severe second Covid wave. Prior to June, the growth forecast was at 12.8%.

For 2021-22 fiscal, the projection compares to a 7.3% contraction recorded in the last financial year and a 4% growth in 2019-20.

In the second quarter of the current fiscal (April 2021-March 2022), high frequency indicators point to a strong rebound as business activity returned to pre-pandemic levels. However, Fitch saw a wider fiscal deficit.

It said that a 7.2% GDP has been forecasted (excluding disinvestment) in central government deficit in FY 22.

Fitch expects inflation to ease

In June, the government had announced a fiscal package worth about 2.7% of GDP. Much of this consists of loan guarantees, with only 0.6% of GDP in higher on budget spending.

It said that, fiscal deficit would be contained, if the buyoant revenue performance largely offsets the higher spending.

Due to the commodity pressure raised prices, inflation has hovered around the upper end of the Reserve Bank of India’s (RBI) target inflation band of 2-6% for the past several months.

Since March 2020, the RBI has kept the repo rate at 4%, due to its focus on supporting the economy. Fitch said that it expects moderate inflation, which would the central bank to keep rates on hold, until the next fiscal year.