Coronavirus impact: Fitch cuts India's growth to 5.1 pc for FY21, says world economy in recession

Fitch Ratings on Friday cut India's growth forecast to 5.1 percent for FY 2020-21, saying supply chain disruptions in the wake of coronavirus outbreak are likely to hit investment and exports.

20th Mar 2020
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Fitch Ratings on Friday cut India's growth forecast to 5.1 percent for FY 2020-21, saying supply chain disruptions in the wake of the coronavirus outbreak are likely to hit investment and exports.


It also said that with global GDP falling, the world is in "recession territory".


In December 2019, Fitch had projected that India will grow at 5.6 percent in 2020-21 and 6.5 percent in the following year.


coronavirus

Fitch Ratings slashes India's growth projections for FY21




In its Global Economic Outlook 2020 report, Fitch said the number of people affected by coronavirus in India will keep rising in the coming weeks but that the outbreak will remain contained. However, there are downside risks to this scenario.


"Supply-chain disruptions are expected to hit business investment and exports... We see GDP growth to remain broadly steady at 5.1 percent in the fiscal year 2020-2021 following growth of 5.0 percent in 2019-2020," Fitch said.


For 2021-22, Fitch projected India's growth to be 6.4 percent.


Stating that the coronavirus crisis is "crushing" global GDP growth, Fitch halved its baseline global growth forecast for 2020 — to just 1.3 percent from 2.5 percent projected in December 2019.


"The level of world GDP is falling. For all intents and purposes we are in global recession territory," said Brian Coulton, chief economist at Fitch Ratings.


Fitch said the outbreak of the virus is hitting investor sentiment, while local governments have rolled out measures to contain the spread of the virus, such as closing schools, cinemas and restaurants.


"While India's linkages with China (e.g. trade and tourism) are modest, manufacturers in India are heavily reliant on key Chinese intermediate inputs especially of electronics and machinery and equipment, it said.


It also projected the Indian rupee to be at 74 to the US dollar by the end of December 2020. The rupee is currently trading around 74.78 to a dollar.


WHO has declared coronavirus a pandemic. Over 2 lakh people have been infected globally and the disease caused by COVID-19 has claimed over 9,000 lives. In India there are over 190 positive cases and 5 deaths so far.


The difficulties facing the Indian economy have been exacerbated by Yes Bank failure.


"Fragilities in the financial system will further undermine sentiment and domestic spending. The overall financial system remains burdened with weak balance sheets, which will limit any upside to credit and growth despite policymakers' efforts in recent months to ease stresses," it added.


Fitch said the Reserve Bank of India (RBI) held an emergency meeting in mid-March and announced measures to shore up liquidity in money markets, including the launch of further long-term repo operations.


"Given downside pressures on growth, we think the RBI will have to take additional measures and we forecast a cut in the policy rate to 4.5 percent before the end of the year," said Fitch - which has a 'BBB-' rating on India with a stable outlook. On the fiscal front, the authorities announced targeted stimulus measures to mitigate the impact of the outbreak, it added.





Fitch said the number of confirmed COVID-19 cases in India was low, but was picking up, at the time of projecting growth in the Global economic outlook report.


"Our scenario assumes the number of people affected will keep rising in the coming weeks but that the outbreak will remain contained. However, there are downside risks to this scenario," it added.


Fitch also lowered its oil price forecast to $41 per barrel (Brent) for 2020 (annual average) from $62.5 per barrel in December.


"With the collapse of 'OPEC+' co-operation boosting prospects for OPEC supply, we now expect oil prices to average $48 per barrel in 2021 compared to our previous forecast of $60 per barrel, it said.


Fitch said the global health crisis sparked by the outbreak of the coronavirus is taking an extraordinarily heavy toll on the world economy.


Fitch further stated it sees an outright decline in global GDP this year if more pervasive lockdown measures have to be rolled out across all the G7 economies, but a recovery could be in sight in the second half of calendar year 2020.


"Emergency macro policy responses are purely about damage limitation at this stage but should help secure a 'V-shaped' recovery..., although this assumes that the health crisis eases, it added.


Fitch said even though it expects a recovery in China from the second quarter of 2020, Chinese growth is expected to fall just 3.7 year for the year as a whole, down from 6.1 year in 2019.


"The shock to the Chinese economy primarily resulting from the official 'lockdown' response to contain the virus has been very severe," it added.


Separately, the global rating agency said given the speed at which the coronavirus crisis is evolving, it intends to update its global economic forecasts with a much higher frequency over the coming months than its usual quarterly publication cycle.


(Edited by Kanishk Singh)

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