Fitch Ratings has upwardly revised its medium-term potential growth forecast for India by 70 basis points, now pegged at 6.2 per cent. 

Simultaneously, Fitch has attributed the reduction of the estimate for 10 emerging markets to 4 per cent, calculated on a GDP-weighted average basis, to the influence of China.

In a recent report, the global ratings agency stated, “We have made significant upgrades to India and Mexico, with the latter benefiting from a markedly improved outlook for the capital-to-labour ratio. India’s estimate has risen to 6.2 per cent from 5.5 per cent, while Mexico’s now stands at 2 per cent, up from 1.4 per cent.”

A common factor contributing to these heightened growth projections has been the rapid recovery in labour force participation rates following sharp declines in 2020, as per Fitch.

However, China’s estimate has been reduced to 4.6 per cent from 5.3 per cent, along with cuts for Russia to 0.8 per cent from 1.6 per cent, Korea to 2.1 per cent from 2.3 per cent, and South Africa to 1 per cent from 1.2 per cent.

The downward revision for China in comparison to the July 2021 assessment is a consequence of a less robust outlook for the employment rate and a diminished expectation for capital deepening over the next five years, largely due to significant reductions in investment growth forecasts. This decline in capital deepening has led to lower projections for labour productivity growth, as explained by Fitch.

Fitch predicts that the average GDP-weighted potential growth for the EM10 (Emerging Markets 10) now stands at 4 per cent, down from 4.3 per cent, primarily owing to China’s lowered potential growth forecast and its substantial 57 per cent weight in the EM10 GDP.

If China is excluded from the calculation, the GDP-weighted average potential growth forecast for the EM9 (Emerging Markets 9) climbs to 3.2 per cent, exceeding the previous estimate of 3 per cent.

Regarding India, the improved growth estimate is attributable to enhancements in the employment rate, a modest uptick in the forecast for the working-age population, and higher labour productivity projections, according to Fitch.

Nonetheless, Fitch emphasises that its latest estimates, with the exception of Brazil and Poland, remain below their pre-pandemic potential growth projections for all the EM10.

This reflects adverse demographic trends and the enduring repercussions of disruptions caused by the pandemic.

Some of these effects are challenging to quantify, and Fitch has introduced additional downward adjustments to historical estimates of potential GDP for 2020 and 2021 for Mexico, Indonesia, India and South Africa.

Taking into account these structural shocks and adjustments to future growth forecasts, Fitch anticipates that the estimated potential GDP for the EM10 nations by 2027 will be 3 percentage points below the trajectory implied by extending pre-pandemic potential growth estimates from 2019.