This year’s negative growth will help, but S&P’s projected 8.5% for FY22 is a stretch with few robust levers of growth.
Standard & Poors is absolutely right when it says the risks to India’s long-term growth are rising, and that the impact of the pandemic could throw growth off trajectory. It is somewhat surprising, therefore, that it expects the country’s GDP to rebound to 8.5% in 2021, especially since consumption is expected to be very muted thanks to a fall in the already-low per capita income; investment levels have, in any case, been falling for several years not.
It is never easy to recover from a global shock of this magnitude and, in India’s case, the economy was already slowing sharply; despite just 10 days of lockdown in FY20, GDP grew at just 4.2%. Nor is it true that, unlike say the US, the government has injected a huge stimulus. While the stimulus may not be just the 1% of GDP that most critics claim, even the likely increase in the fiscal deficit—the correct way to measure the stimulus—isn’t enough to compensate for the collapse in GDP.
S&P is hoping the reforms will prove to be a remedy, but the only big reforms that have taken place in recent weeks are those in the agriculture sector, and the impact of that will take time. Indeed, in the case of the Essential Commodities Act which is an integral part of the agriculture reforms, the actual ordinance makes it possible for the proposed liberalisation to be rolled back quite easily; while the guidelines allow stocking limits to be re-imposed if prices rise by 50-100%, such movements are not uncommon between the post-harvest and later periods. Merely liberalising FDI rules, another reform measure announced, can’t bring in foreign capital; the truth is it is hard to do business in India.
In fact, S&P itself has drawn attention to the fact that India’s financial system is fragile. No economy can grow meaningfully if its financial system is hobbled; in India, banks are reluctant to lend because there are few creditworthy customers, and they fear harassment if loans go bad. The two big trouble spots are the moratoriums and the suspension of the IBC for six months or even longer because these could bruise banks’ balance sheets, leaving them starved for capital.
Also, while low interest rates will stimulate investment, it is not clear how long these will last. In any case, there are so many other constraints to investment, there needs to be considerable attempts to reduce those. The economy can’t really recover meaningfully unless private sector investment does because the government is strapped for cash and has very little room to spend. While the combined central and state deficit of 11% in FY21 will be overlooked by ratings agencies given the exceptional circumstances, it leaves the government virtually no room at all for any further stimulus unless tax collections rebound sharply.
Again, such a large deficit is not likely to be viewed as sympathetically next year, and would constrain governments—state and the Centre—requiring them to be a lot more judicious about their borrowings. That S&P has reaffirmed India’s rating at BBB- and retained the stable outlook—unlike Moody’s—and not lowered it to below investment grade is probably because it is confident of the country’s ability to service its debt even if this is a high 70% of GDP. S&P hasn’t categorically said how it would view the monetisation of the deficit, merely observing that the circumstances under which the central bank funded the government, as also the quantum of borrowing and the rate and tenure, would be important.
Since there has been no outright criticism of such a practice, the government may want to explore this route to pump some money into the economy. Without this, it would be hard for the economy to bounce back to growth levels of 6-7% before FY23 given the kind of damage inflicted by the pandemic. A fast pace of reform will help, but progress has been slow on this front. A poor GDP growth number in FY22—around 3-4%, say—will not only pressure the fisc, it would push the debt to higher levels, leaving the ratings agencies with no choice.