‘Weak reform push, financial sector woes may damp growth’

Effective implementation key to realising India’s medium-term potential, says Fitch.

Fitch Ratings on Wednesday said India’s medium-term growth potential is at about 6.5% 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.

‘Partially offset’

“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,” the ratings 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.

“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 ratings agency last week said India’s gross domestic product (GDP) would expand by 11% in the financial year 2021-22, after witnessing a 9.4% contraction in the current fiscal period ending in March 2021.

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