Fitch Ratings raises India’s mid-term growth forecast to 6.2%, downgrades China

Fitch Ratings has raised its medium-term potential growth estimate for India by 70 basis points to 6.2% from 5.5%, even as it reduced its estimate of potential growth for the 10 emerging markets (EMs) to 4.0% on a GDP weighted-average basis. 

“We have made large upgrades to India and Mexico, with the latter benefiting from a much better outlook for the capital-to-labor ratio. India’s estimate is higher at 6.2% from 5.5% and Mexico’s at 2.0% from 1.4%, the global rating agency said in its latest Global Economic Outlook (GEO) report on ten emerging economies. 

The ratings agency has made downward revisions to growth estimates for other nations. The estimate for China has been cut to 4.6% from 5.3%. Russia’s estimate is now 0.8% instead of 1.6%, South Korea’s to 2.1 % from 2.3%, and South Africa’s expected growth is at 1% from the earlier 1.2%.

The descending cycle for China in contrast to the earlier July 2021 calculation is a result of a weaker outlook for the employment rate and an abridged expectation for capital deepening in the coming five years, owing to significant reductions in investment growth forecasts. This decrease in capital deepening has resulted in lower projections for labor productivity growth, Fitch rating data showed.

Fitch said it predicts average GDP weighed potential growth for 10 emerging markets at 4.0% compared to 4.3% earlier, owing to China’s supply-side growth potential and its weight of 57% GDP in 10 emerging markets.

It said that if China is taken out of the equation, then a GDP-weighted average of nine emerging markets’ potential growth forecast will be 3.2%, well above the previous estimate of 3.0%.

Average EM10 potential growth on an unweighted basis remains unchanged at 3%, reflecting upward revisions elsewhere, Fitch said. 

In the case of India, the elevated growth estimate is emphasized by positive factors, including an improvement in the employment rate and a modest increase in the projected working-age population. India’s labor productivity forecast has also seen an increase.

Fitch Ratings, however, added that the existing evaluations continue to fall short of their pre-pandemic potential growth projections for all the 10 emerging markets, with the exception of Brazil and Poland. This discrepancy is attributed to adverse demographic trends and the lingering effects of disruptions caused by the Covid-19 pandemic.

“This reflects deteriorating demographic trends and the legacy of disruptions from the pandemic. The latter are partly reflected through revisions to projections for capital stock and productivity growth,” the report said. 

“But some ‘scarring’ effects are hard to capture in our growth framework and we now also incorporate ‘levels shocks’ to potential GDP in 2020 and 2021 for Mexico, Indonesia, India, and South Africa,” it said.

Integrating these operational blows and alterations to upcoming growth forecasts results in the assessed potential GDP for the 10 emerging markets by 2027 to be around 3.0%, below the trajectory implied by extending pre-pandemic potential growth assessments from 2019.