India’s second Covid wave may derail a strong recovery in the economy and credit conditions
S&P Global Ratings on Wednesday slashed India’s GDP growth forecast for the current financial year to 9.8 per cent saying the second Covid wave may derail a budding recovery in the economy and credit conditions.
The US-based rating agency in March had a 11 per cent GDP growth forecast for India for the April 2021-March 2022 fiscal, on account of a fast economic reopening and fiscal stimulus.
S&P, which currently has a ‘BBB-‘ rating on India with a stable outlook, said the depth of the Indian economy’s deceleration will determine the hit on its sovereign credit profile.
The Indian government’s fiscal position is already stretched. The general government deficit was about 14 per cent of GDP in fiscal 2021, with net debt stock of just over 90 per cent of GDP.
“India’s second wave has prompted us to reconsider our forecast of 11 per cent GDP growth this fiscal year. The timing of the peak in cases, and subsequent rate of decline, drive our considerations,” said S&P Global Ratings Asia-Pacific chief economist Shaun Roache.
It said the projections assume that initial shocks to private consumption and investment filter through to the rest of the economy.
For example, lower consumption will mean less hiring, lower wages, and a second hit to consumption, it noted.
As per official estimates, Indian economy contracted 8 per cent in the 2020-21 fiscal, which ended March 31, 2021.
“Our moderate scenario suggests a hit to GDP of about 1.2 percentage points. This means full-year growth of 9.8 per cent for fiscal 2022 (the year ending March 31, 2022). This compares with our baseline forecast of 11 per cent growth for the period, set in March 2021. In the severe scenario, the hit is 2.8 percentage points, with growth of 8.2 per cent,” S&P said.
Last month, another global rating agency Fitch had projected India’s economic growth in current fiscal at 12.8 per cent, while Moody’s Investors Service too had said that the second wave of COVID infections presents a risk to India’s growth forecast, but a double-digit GDP growth is likely in 2021 given the low level of activity last year.
In its report titled ‘Second Covid Wave May Derail India’s Budding Recovery’, S&P said it believes the possibility the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.
“India’s second Covid wave may derail a strong recovery in the economy and credit conditions. The country’s rate of daily new infections keeps spiralling upward, accounting for almost half of the world’s cases, overwhelming the Indian health system,” it added.
Domestic banks continue to face high levels of systemic risk. In the moderate downside scenario, the Indian banking system’s weak loans should remain elevated at 11-12 per cent of gross loans.
Credit losses will remain high in fiscal 2022 at 2.2 per cent of total loans, before recovering to 1.8 per cent in fiscal 2023, S&P said.