International credit rating agency Fitch Ratings has upwardly revised India's potential GDP growth to 6.4% during the next five years, an increase of 0.2 percentage points.
The upward revision is made at a time when the country's labor force participation rate has shown a sharp increase in the recent years.
Fitch says the upwarde revision is largely driven by increased contribution from labor inputs—specifically by the growth in employment—in contrast to productivity gains per worker.
Conversely, China's five-year growth prospects have been lowered by 0.3 percentage points to 4.3% from the previous estimate of 4.6%.
These downgrades are among Fitch's revised five-year growth forecasts for ten emerging market economies.
"While our forecast of India's trend growth is slightly higher at 6.4 per cent, compared to 6.2 per cent earlier, we believe TFP growth will moderate from recent levels to be in line with its long-run average of 1.5 per cent," Fitch said.
Total-factor productivity (TFP), or multi-factor productivity, is a measure that quantifies the unexplained output by factors such as labour and capital. In effect, it measures output increases resulting from improvements in efficiency within the production process.
Fitch underscored its revised estimate to represent a change in India's growth dynamics where employment instead became the driving force compared with output increases resulting from productivity gains.
The rating agency's evaluation also includes a revised analysis of labor force statistics. It concluded that the contribution from labor participation has been increased, and the anticipated effect from investment in capital (capital deepening) has been reduced.
"Our updated estimate suggests that there is a more significant contribution from labour inputs (overall employment) than from labour productivity. India's labor force participation rate has picked up strongly over the last few years; we anticipate it will continue to do so but at a diminishing rate," Fitch Ratings said.
Speaking on the general emerging markets outlook, Fitch Ratings Director Robert Sierra noted, "Our revised estimate of emerging market potential growth is 3.9 per cent, down another, though slight, reduction from the 4 per cent figure we released in November 2023. This is primarily the result of lower potential growth in China."
Fitch pointed to lower capital accumulation and a steeper fall in China's labour force participation as reasons for revising down China's outlook.
India is the only country forecasted to have a growth rate above 6% for the next couple of years, while remaining the fastest-growing major economy despite the uncertainties faced by the world. This is consistent with the latest report issued by the International Monetary Fund, which slashed forecasts for more than 120 nations.
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