E-Paper
Post-Covid growth capacity may have fallen by 50 basis points
The potential growth of a country is the maximum output growth that an economy can sustain over the medium to long run without stoking inflation.
India’s potential growth may have dipped because of the coronavirus pandemic, amid growing inequality and structural inefficiencies such as a weak financial system, according to rating agencies S&P and Moody’s.
The potential growth of a country is the maximum output growth that an economy can sustain over the medium to long run without stoking inflation.
The pandemic will not derail India’s medium-run growth, but the costs associated with it reduce this growth by about 50 basis points annually, according to Vishrut Rana, economist at S&P Global Ratings.
“There are some medium-term costs associated with deep economic downturns such as the one caused by the pandemic. Balance sheets in the economy are scarred. Households have dipped into their savings, firms have closed down or taken on debt, and public sector balance sheets have weakened. As a result, over the medium run, some resources that would otherwise contribute towards growth will be diverted into balance sheet repair,” he said.
India’s real gross domestic product (GDP) growth is likely to average around 6% over the long term, said William Foster, vice president, sovereign risk group at Moody’s Investors Service.
“The pandemic will leave new economic scars and deepen pre-pandemic constraints. Our growth forecasts indicate a shortfall in GDP compared with our pre-pandemic expectations of more than 10% in the fiscal year ending in March 2024. Structural inefficiencies continue to constrain growth potential and limit resilience to shocks. If implemented effectively, government reforms that target these challenges would be credit positive,” Foster said.
In the five years before FY21, the economy’s average growth rate was 6.7%. After contracting by 8% in FY21, the economy was initially expected to grow at double digits in FY22. However, with the second wave taking a heavy toll on consumer confidence, most forecasters have slashed their growth estimates to single digits.
The Economic Survey for FY21 said the growth rate is likely be 6.5% in FY23 and 7% in FY24, aided by structural reforms.
A weak financial system and rising inequality could drag down post-pandemic potential growth by 1 percentage point to 5%, Pranjul Bhandari, chief India economist at HSBC, said in May. “We worry that these scars may deepen further with the second wave. However, it is possible for potential growth to go up over time with careful policy steps. Beyond that, we see four key policy steps for government focus: strengthening the Insolvency and Bankruptcy Code, sustaining social welfare spending, getting disinvestment done urgently, and choosing export promotion over import substitution. These, we think, can help heal some of the scars,” she said.
Fitch Ratings, while affirming India’s lowest investment grade with negative outlook in April, said it expects the country’s potential growth to remain robust relative to peers at around 6.5%. “The government remains reform-minded, evidenced by the passing of agricultural and labour market reforms in November. These reforms could lift growth if implementation risks are addressed,” it said.
