Weak Reform Implementation, Financial Sector Woes Could Lower India’s Medium-Term Growth, Says Fitch
Fitch Ratings on Wednesday said India's medium-term economic growth potential is around 6.5% but weak implementation of reforms, combined with continued financial sector problems, could lower that number.
The rating agency 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.
Fitch said the planned farm sector reforms aim to enhance efficiency, by giving farmers more flexibility over where to sell their produce by stripping out middlemen 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 farmers have protested for months, over fears that the reform could result in the abolition of minimum support prices, although the government has said this will not happen.
Further, Fitch added, that the labour market reforms could improve worker access to social security, strengthen occupational safety, speed up the resolution of 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, the rating agency said.
"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% 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 would expand by 11% in the financial year 2021-22, after witnessing a 9.4% 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% in 2019-20, down from 6.1% in the previous year.