Weak reform implementation, financial sector woes could lower India’s medium-term growth: Fitch

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January 20, 2021 5:43 PM

"If implemented effectively, we believe these reforms may help to support India's medium-term growth and partially offset downside pressures to investment from renewed asset-quality challenges in the financial sector and damaged corporate balance sheets," Fitch said.

The rating agency last week said India's gross domestic product (GDP) would expand by 11 per cent in the financial year 2021-22, after witnessing a 9.4 per cent contraction this fiscal ending March 2021.The rating agency last week said India's gross domestic product (GDP) would expand by 11 per cent in the financial year 2021-22, after witnessing a 9.4 per cent contraction this fiscal ending March 2021.

Fitch Ratings on Wednesday said India’s medium-term growth potential is at around 6.5 per cent but weak implementation of reforms, combined with continued financial sector problems, could lower its potential.
It said the revival of the reform agenda is among the Indian government’s policy responses to the COVID-19 pandemic shock.

“If implemented effectively, we believe these reforms may help to support India’s medium-term growth and partially offset downside pressures to investment from renewed asset-quality challenges in the financial sector and damaged corporate balance sheets,” Fitch said.

It said the planned farm sector reforms aim to enhance efficiency, by giving farmers more flexibility over where to sell their produce by stripping out middle men and has the potential to improve farmers’ income and reduce consumer prices.

“But, implementation risks are significant and the Supreme Court in mid-January suspended the relevant laws to facilitate a review and airing of farmer grievances,” Fitch Ratings said.

It added that segments of the farm lobby have protested for months, apparently over fears that the reform could result in abolition of minimum support prices, although the government has said this will not happen.

Further, the labour market reforms aim at improving worker access to social security (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. The steps could support formalisation of India’s labour market and improve its flexibility and efficiency.

“We expect India’s central government to remain generally reform-minded over the next few years, and potential areas for further reform seem plentiful, in our view. However, the process of reform in India remains complex, and implementation at times has proven difficult,” Fitch said.

It added that weak implementation of the reforms, combined with continued financial sector problems, could lower growth potential below our current estimates. “Our projected annual medium-term GDP growth is relatively high, nevertheless, at around 6.5 per cent reflecting above-trend growth rates needed to close the output gap.”

Fitch estimates medium-term growth potential to be some 1.7 percentage point lower than otherwise as a result of the scarring effects of the health crisis and financial sector weaknesses.

The rating agency last week said India’s gross domestic product (GDP) would expand by 11 per cent in the financial year 2021-22, after witnessing a 9.4 per cent contraction this fiscal ending March 2021.

India’s economy had been losing momentum even ahead of the shock delivered by the COVID-19 crisis. The rate of GDP growth sank to a more than 10-year low of 4.2 per cent in 2019-20, down from 6.1 per cent in the previous year.

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