COVID-19 second wave: S&P cuts India's GDP growth forecast to 9.8% for FY22

S&P Global Ratings on Wednesday cut India's GDP growth forecast to 9.8 per cent for financial year 2021-22 from 11 per cent earlier due to the second wave of COVID-19 pandemic which can derail the "promising" recovery in the economy.

The rating agency said new infections during the second wave of COVID-19 will peak in late June as per its 'severe' scenario, while they will peak in May as per its 'moderate' scenario.

"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...This would see a recovery taking hold again later in the year," it said, adding that the hit to GDP growth will be 2.8 percentage points with growth of 8.2 per cent in the severe scenario.

The second wave can derail what has been a promising recovery in the economy, profits, and credit metrics in the year to date. "The Indian recovery had been so vigorous across many measures, particularly in the last quarter of fiscal 2021, and yet the latest outbreak has escalated rapidly," it said.

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Despite being the largest vaccine manufacturer in the world, India's vaccination rollout to the country's very large and largely rural population has proven challenging. The combination of a more infectious COVID variant and limited vaccination coverage will mean potentially higher infection cases.

While the Centre has avoided imposing another nationwide lockdown, authorities have already imposed local lockdowns that cover much of the country, including Mumbai, New Delhi, and Bengaluru.

"The scope of lockdowns affects mobility, and is indicative of the strength of India's recovery. Much more extensive restrictions would prolong the pain of badly hit sectors, such as retail and tourism. Halts to domestic air traffic and subdued international travel may dismantle a fragile recovery underway for airports," the rating agency said.

S&P said a drawn out COVID wave would hit small and mid-size enterprises particularly hard, and delay recovery in banks' asset quality. While a prolonged health crisis would hurt banks' asset quality more adversely, issues with availability of labour and supply chain bottlenecks may further crimp the cash flows of companies. 

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The rating agency had predicted a permanent damage to annual output to the level of potential GDP of above 10 per cent before the start of second wave. Without adding to this estimate, it said the longer the pandemic remains intense, the greater the probability of permanent costs increases. "A prolonged second wave would result in job losses and business closures, which could impair physical and human capital."

S&P, which currently has a 'BBB-' rating on India with a stable outlook, said the depth of the Indian economy's deceleration will also determine the hit on its sovereign credit profile. The Indian government's fiscal position is already stretched. The general government's fiscal deficit was about 14 per cent of GDP in fiscal 2021, driving its net debt stock to just over 90 per cent of GDP.

"In both the moderate and severe downside scenarios for the Indian economy, there is a risk that the fiscal deficit would be higher than our forecast 11.4 per cent of GDP this year, which could push the debt stock slightly higher still," it said.

Over the next two to three years, fast nominal GDP growth will be critical in arresting the rise of the government debt to GDP ratio, which may only stabilise in the following fiscal in the severe downside scenario, it added.

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