Post-Covid reforms to aid India’s medium-term growth: Fitch

By: |
November 21, 2020 2:30 AM

The agency had in September forecast India’s real GDP to shrink by a record 10.5% in FY21, thanks to the pandemic. However, it predicted a rebound in growth to as much as 11% in the next fiscal and 6% in FY23.

After a record slide of 23.9% in the June quarter, the year-on-year contraction in real GDP narrowed to 7.5% in the second quarter of this fiscal.

The revival of the government’s reform agenda in the wake of the coronavirus pandemic can potentially raise India’s medium-term growth rates, Fitch Ratings said on Friday. However, downside risks to growth persist and any worthwhile assessment of the effective implementation of reforms will take time, it added.

The agency had in September forecast India’s real GDP to shrink by a record 10.5% in FY21, thanks to the pandemic. However, it predicted a rebound in growth to as much as 11% in the next fiscal and 6% in FY23.

The agency hailed the government’s plan to privatise some state-owned enterprises, of which more than 200 are owned by the Centre and 800 by state governments. The Centre will soon bring in a policy under which at best four state-run entities will be allowed to operate in each of the specified strategic sectors.

“A wide-ranging privatisation push involving large state-owned enterprises could be transformative. However, it remains unclear whether the government plans to surrender its majority control. The strength of market demand for state assets is also yet to be tested,” it said. The agency, however, expects the central government to remain generally reform-minded over the next few years”, while reforms also take place at the state level.

Flagging some risks, the global rating agency said on Friday that damaged corporate balance sheets will dampen investment for years.

“Renewed asset-quality challenges in banks and generally fragile liquidity for non-bank financial companies could also constrain growth prospects and jeopardise the stability of the medium-term government debt/GDP trajectory,” it said.

Improving medium-term growth rates under these circumstances will require reforms to support investment and boost productivity.

“Several reforms passed by parliament since the pandemic set in could lift medium-term growth prospects. The most notable are agricultural reforms to give farmers more flexibility over where to sell their produce. Stripping out middle men, as the reform allows, could improve farmer incomes while reducing consumer prices. Nevertheless, implementation risks are significant,” it said.

Parliament has also cleared some labour reforms. Their intent, among other things, is to improve worker access to social security (notably in the large unorganised sector), strengthen occupational safety requirements, speed up the resolution of labour disputes and ease migrant workers’ ability to move between states.

Similarly, employers will now only require prior state government approval for redundancies if they have over 300 workers, up from 100 previously, and state governments may raise this threshold. “These changes could support formalisation of India’s labour market and improve its flexibility, with positive efficiency gains, but our assumption is that in practice their impact will be modest,” Fitch said.

Do you know What is FinMin releases Rs 9,871 cr grant to 17 state, Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Services trade to boost Indo-US ‘ever expanding’ business ties: Piyush Goyal
2Centre agrees to clear FY21 pending GST compensation of Rs 11,400 cr in instalments: Karnataka CM
3Monsoon Review: Sowing picks up, Kharif area deficit narrows