On Tuesday, Moody’s Investors Service joined various other rating agencies to slash its FY22 economic growth forecast for India from 13.7% estimated earlier to 9.3%. The reason cited for a low economic growth was the negative impact of the second wave of coronavirus pandemic on Indian healthcare system. Moody’s stated that the severe second wave of coronavirus infections will “slow the near-term economic recovery and could weigh on longer-term growth dynamics”.
The rating agency cautioned that risks from deeper and significant stresses in the economy and financial system could lead to a more severe and prolonged erosion in India’s fiscal strength. The agency further stated that this could exert further pressure on the credit profile of Asia’s third largest economy, India.
However, it is to be noted that the agency raised the Financial year 2023 growth projection for India from 6.2% to 7.9%. Moody’s, over the longer term, expects India’s growth to hover around 6%. The agency also pegged India’s real GDP contraction in FY21 at 7.2%, against 7% expected earlier.
Moody’s revision of India’s growth forecast comes days after S&P, which had in March emphatically expected India to grow by 11% in FY22, lately forecasted the growth rate to slip to 9.8% under a “moderate” scenario where Covid infections peak in May itself.
Moody’s, in its latest update, projected India’s state and central government fiscal deficit to rise to about 11.8% of GDP in financial year 2022, compared with the previous forecast of 10.8% and an estimated 14% in the current fiscal.
The rating agency maintained that the combined impact of slower growth and a wider deficit will drive the general government debt burden to almost about 90% of GDP in Financial year 2022, gradually rising to 92% of GDP in FY24.
India’s fiscal deficit will rise due to significant spending on the healthcare sector and the vaccination drive in response to the virus but India will witness a shortfall in its revenue due to partial and complete lockdowns imposed in various states due to the renewed surge in the virus.
According to the agency “The reimposition of lockdown measures will curb economic activity and could dampen market and consumer sentiment. However, we do not expect the impact to be as severe as during the first wave. Unlike the first wave where lockdowns were applied nationwide for several months, the second wave “micro-containment zone” measures are more localized, targeted and will likely be of shorter duration. Businesses and consumers have also grown more accustomed to operating under pandemic conditions. As of now, we expect the negative impact on economic output to be limited to the April to June quarter, followed by a strong rebound in the second half of the year,”.
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As it is no news, escalating covid positive cases have overwhelmed India’s healthcare system, which has overwhelmingly forced many states to announce localized lockdowns and night curfews. Though lower in severity, lockdowns and night curfews are expected to delay a strong recovery in domestic economic activity.
Other than Moody’s, many other rating agencies have come forward to slash India’s economic growth forecast, these include Brickwork Ratings and S&P. Earlier this month Brickwork Ratings revised down its FY22 India’s economic growth projection from 11% to 9%. This is due to the fact that its earlier presumption of a V-shaped economic recovery is unlikely as the deadly second covid wave has brought an abrupt and detestable halt to India’s nascent economic recovery. On the other hand, S&P Global Ratings too last week stated, that it expects India’s GDP growth at 9.8%, given moderate conditionalities and at 8.2% under the severe conditions based on when the current infection wave peaks.
Moody’s, which has assigned lowest investment grade with negative outlook for India said obstacles to growth includes various factors like weak infrastructure, land and product markets, rigidities in labor and rising financial sector risks, meaning that a rating upgrade is unlikely in the near future.
But it stated that “However, we would change the outlook on India’s rating to stable if economic developments and policy actions were to raise confidence that real and nominal growth will rise to sustainably higher rates than we project. Measures which enhance financial stability by strengthening the supervision, regulation and capitalization of the financial sector would support such a move. Commensurate action to halt and reverse the rise in the debt trajectory, even slowly, would also promote a stable outlook. Further evidence that self-reinforcing economic and financial risks are rising would put (downward) pressure on the rating,”.