Economy shrank by 8 per cent last year; Banks are still exposed to a high level of systemic risk
S&P Global Ratings on Wednesday said that the second wave of Covid infections poses downside risks to India's GDP and heightens the possibility of business disruptions. The second wave brings in uncertainty and a drawn-out Covid outbreak will impede India's recovery, it said. "This may prompt us to revise our base-case assumption of 11 per cent growth over fiscal 2021-2022, particularly if the government is forced to reimpose broad containment measures," S&P said in a statement.
Last week another global rating agency Fitch had projected India's economic growth in the current fiscal at 12.8 per cent, while Moody's Investors Service had earlier said this month that the second wave of Covid infections presents a risk to India's growth forecast, but double-digit GDP growth is likely in 2021 given the low level of activity last year. As per official estimates, the Indian economy contracted 8 per cent in the 2020-21 fiscal, which ended March 31, 2021.
S&P said the country already faces a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 per cent of GDP, it added. "India's escalating second wave of Covid-19 infections is serious. In addition to the substantial loss of life and significant humanitarian concerns, S&P Global Ratings believes the outbreak poses downside risks to GDP and heightens the possibility of business disruptions," it said. India reported a record 3,60,960 new infections on Wednesday, bringing its total to over 1.79 crore. Deaths also rose by a record 3,293 to 2,01,187.
S&P said, the high absolute number of infections in India also presents a significant contagion risk to other geographies and the outbreak is putting severe pressure on the country's health infrastructure. "Strong economic growth will be critical to sustain the government's aggressive fiscal stance put forth within India's latest national budget and to stabilize its high debt stock, relative to GDP. The pace and scale of the post-crisis recovery will have important implications for the sovereign credit rating," S&P said. S&P, which currently has a 'BBB-' rating on India with a stable outlook, earlier this month had a forecast of 11 per cent for India's GDP this fiscal on account of fast economic reopening and fiscal stimulus.
It said the localised lockdowns currently in force, disrupt daily work and related economic behaviour, which could drag out the recovery of revenue and earnings of some corporate sectors. Banks continue to face a high level of systemic risk. Lenders' asset quality remains strained and credit losses will continue to hold back profitability during fiscal 2021-22. "India's speedy economic recovery right up until March 2021, has partly alleviated non-performing loan stresses," the US-based agency said. S&P further said the Asia-Pacific region is susceptible to contagion from the highly infectious Covid-19 variants present in India, given the low ratios of vaccination in the region. "In the event, some vaccines have limited efficacy against newer virus mutations, the countries may be exposed to further waves of Covid-19 outbreaks," it added.