India's growth in the medium-term will slow to around 6.5% from 2023 - 2025 after initially growing a strong 11% in financial year FY22, according to Fitch Ratings.
According to its estimates shared in a report titled 'India Set for Slow Medium-Term Recovery' released earlier today, growth in Indian supply side potential growth for the period 2020 - 2025 will be dragged down from an estimated 7% to 5.1% due to the ongoing COVID-19 pandemic.
With FY20 growth in gross domestic product (GDP) being 4.2% and the economy forecasted to contract by 9.4% this year in FY21 due to the aftershock of the pandemic, FY22 will see a recovery of 11%.
In FY21, the government expects the economy to contract by 7.7%, which means than Fitch is expecting a stronger contraction this year.
After this spurt, however, growth in the Indian economy will fizzle, according to the report. Growth in FY23 will be 6.3%, with growth in FY24, FY25 and FY26 to be around 6.6%. For this entire period (FY23 - FY 26), growth will be around 6.5%.
"Fitch projects GDP to remain below our pre-coronavirus forecast due to a combination of demand weakness and damaged potential", says the report.
Fitch also projects that pre-pandemic levels of the economy - seen in the last quarter of FY20 (first quarter of the calendar year 2020) - will be attained by the third quarter of FY22 (fourth quarter of calendar year 2021). This growth timeline has actually been brought forward due to an expectation of an effective vaccine rollout, which should facilitate quicker easing of social distancing norms and should boost sentiment. "However, we think that even widespread vaccination will not fully restore the economy to heath over the next five years", it adds.
While it does mention that regional shutdowns could be expected over the next few months, a key downside to this prediction scenario is a slower-than-expected rollout of a vaccine.
What will contribute to slow growth?
The scars of the ongoing recession will leave lasting scars on the economy. Among major emerging economies, the COVID-19 pandemic-induced recession is more severe in India.
The main reason behind the slow growth in the future will be lower investment growth. The pandemic is set to impact capital expenditure, and in turn capital accumulation. The hit in capital accumulation in 2020 will reverberate on potential growth. In FY21, investments in the economy will drop 14%, but it will pick up 18% in FY22 due to an anticipated recovering economy and a lower base effect. However, in subsequent years, growth in investments will be muted at 6%. This will reflect in the slower GDP growth estimates for these years.
Emerging markets such as India rely on high rates of investment for sustaining high levels of growth. Going into the pandemic, investment spending was already weakening in the two years preceding it due to issues with non-banking financial companies (NBFCs).
Another reason for it will be damaged private income and corporate balance sheets. This has been attributed to the limited reach of social security net and income support. The need to repair balance sheets will hurt the demand side of the economy.