"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.
The second wave of COVID infections may derail a strong recovery in the Indian economy and credit conditions, S&P Global Ratings said on Wednesday projecting a lower than previously anticipated GDP growth rate in different scenarios.
S&P, which in March had seen Indian economy growing by 11 per cent in the fiscal year to March 2022, saw GDP growth rate dropping to 9.8 per cent under ‘moderate’ scenario where infections peak in May, and falling to as low as 8.2 per cent under ‘severe’ scenario under which caseload would peak only in late June.
Just as the economy appeared to be inching back to normalcy, India was hit by a second wave of COVID-19 infections in early April, prompting states and cities to restrict public movements and impose lockdowns, which have hit some businesses hard.
India added 382,315 COVID-19 cases over the last 24 hours to reach a total of 2.06 crore, while death rose by a record 3,780 to 226,188, health ministry data showed.
“India’s second COVID wave may derail a strong recovery in the economy and credit conditions,” S&P Global Ratings said in a note adding the spiraling new infections, which account for almost half of the world’s cases, has overwhelmed the health system in the country.
The possibility of more local lockdowns being imposed to curb the spread may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability, it said.
“We look at two scenarios at how this might play out across sectors. Our severe scenario holds that new infections peak in late June 2021. Our second, moderate scenario posits that infections peak in May,” it said.
“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). In the severe scenario, the hit is 2.8 percentage points, with growth of 8.2 per cent.”
As per official estimates, Indian economy contracted 8 per cent in the 2020-21 fiscal, which ended on March 31, 2021.
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.
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.
S&P said rated Indian companies are going into this second COVID wave with much improved operating and liquidity conditions than they did going into the first wave, last year. “As such, we expect the credit profile of Indian corporate entities to be resilient to the second COVID wave,” it said.
S&P further said the second wave may challenge an otherwise strong recovery for Indian infrastructure and the severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks.
India’s 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 added.