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India’s annual average growth of potential Gross Domestic Product (GDP) is expected to be 6.2 per cent during 2019-2027, 0.7 percentage points higher than the 5.7 per cent estimate for 2013-2022, primarily due to improved employment rate and better working-age population forecast, Fitch Ratings said in its latest report. This comes amid a downward revision by Fitch of the medium-term growth potential for 10 emerging economies driven by a cut in China’s growth outlook.
In India’s case, potential growth has increased by 0.7 percentage points to 6.2 per cent given an improvement in the employment rate and a modest increase in the working-age population forecast, the report said, adding that India’s labour productivity forecast is also higher.
India’s projected labour supply growth is, however, lower relative to 2019, given the expected negative growth in the participation rate. “While the participation rate has recovered from its pandemic slump, it remains significantly below levels recorded in the early 2000s, partly as the employment rate among women remains very low,” it said.
The agency has made shock level adjustments to the estimated level of potential GDP in 2020 and 2021 for Mexico, South Africa, India and Indonesia, with downward adjustments to the level of potential GDP by a cumulative 7 per cent for both India and Indonesia.
Fitch said the medium-term potential growth for the 10 emerging economies covered in its Global Economic Outlook (GEO) is at 4.0 per cent on a GDP weighted average basis, which is a downward revision from 4.3 per cent from the previous assessment in July 2021, driven by a 0.7 percentage point cut in China’s growth outlook. China’s supply-side GDP growth potential is seen at 4.6 per cent now as against 5.3 per cent earlier. Fitch has, however, made upward revisions to Brazil, India, Mexico, Indonesia, Poland and Turkiye due to the common factor of swift recovery in labour force participation rates following sharp declines in 2020.
“China’s growth has slowed sharply in recent years and prospects for capital deepening have deteriorated as the property slump weighs heavily on the investment outlook. The labour supply outlook is also weakening, reflecting demographics and falls in the labour force participation rate. We have also cut Russia’s potential growth, by 0.8pp to 0.8%,” Fitch Ratings said.
The downward revision to China since the July 2021 assessment reflects a weaker outlook for the employment rate and a weaker outlook for capital deepening over the next five years, given large cuts to our forecasts for investment growth. Slower capital deepening has reduced projections for labour productivity growth, it said.
The latest estimates remain below the pre-pandemic potential growth projections by Fitch for all the 10 emerging economies except Brazil and Poland. “This partly reflects a widespread deterioration in EM10 demographic trends over time. But it also highlights the legacy of economic disruptions from the pandemic. GDP fell in all the EM10 except China and Turkiye in 2020, with very steep declines in India, Mexico and South Africa. Even after subsequent recoveries, GDP in 2022 was generally still far below levels implied by extrapolating pre-pandemic trends, particularly in India, Indonesia and Mexico,” the report said.
The report said that the 2020 pandemic-caused recession was severe in some emerging markets,with very large GDP declines in Mexico, South Africa and India but only a mild contraction in Korea and moderately positive growth in Turkiye and China. “The subsequent economic recovery was strong in most EM10 economies as governments increased fiscal spending, global trade recovered and private consumption rebounded following the re-opening of economic activity,” it said.
However, most of the 10 emerging market economies now look like they will suffer a “permanent loss of output” to varying degrees relative to pre-pandemic expectations despite these strong recoveries, it said.
Comparing the gap between the pre-pandemic potential GDP path forecast and actual GDP in 2022, Fitch said India, Indonesia, Mexico and South Africa fared the worst in 2022, with their economies 10.8 per cent, 8.4 per cent, 7.2 per cent and 5.1 per cent smaller, respectively, than they would have been in the absence of the pandemic shock.
