Is India's Growth Potential Now 6.4% Over The Next Five Years?

New Delhi, May 22 (NationPress) Global credit rating agency Fitch Ratings announced on Thursday that it has elevated India's GDP growth potential by 0.2 percentage points, bringing it to 6.4 percent over the next five years, driven by a significant increase in the country's labour force participation rate in recent years.

Fitch underscored that this updated estimate for India indicates a more robust contribution from labour inputs, primarily total employment, instead of labour productivity.

In contrast, the agency has reduced China's growth forecast by 0.3 percentage points, adjusting it from 4.6 percent to 4.3 percent.

These revisions are part of Fitch's updated analysis of potential GDP growth for ten emerging market economies over the upcoming five years.

Fitch stated, "Our estimate of India's trend growth is now slightly elevated at 6.4 percent, compared to 6.2 percent previously. We anticipate that TFP growth will decelerate to align with its long-term average of 1.5 percent."

Total-factor productivity (TFP), also referred to as multi-factor productivity, is typically quantified as the ratio of overall output (GDP) to total inputs. Under certain simplified assumptions regarding production technology, TFP growth represents the segment of output growth not attributed to traditionally measured inputs of labour and capital.

Fitch pointed out that the updated estimate for India highlights a stronger contribution from labour inputs, particularly total employment, rather than from labour productivity.

The rating agency has adjusted its projections based on a new evaluation of labour force data. It noted an upward revision in the contribution from the participation rate, while the anticipated contribution from capital deepening has been decreased.

“Our revised estimate suggests a more significant contribution from labour inputs (total employment) rather than from labour productivity. India’s labour force participation rate has seen a sharp increase in recent years; we expect this trend to continue, albeit at a slower rate,” remarked Fitch Ratings.

“Our updated potential growth for emerging markets now stands at 3.9 percent, marking a slight decline from the 4 percent estimate we released in November 2023. This is primarily due to lower potential growth in China,” stated Robert Sierra, Director at Fitch Ratings.

The decline in China’s potential, according to the global ratings agency, can be linked to weakened capital deepening and a pronounced drop in labour force participation.

India remains the globe's fastest-growing major economy, projected to exceed 6 percent growth in the next two years, as per an IMF report published last month. The IMF has revised growth forecasts for over 120 countries.