NEW DELHI :
Moody’s Investors Service on Tuesday joined other rating agencies slashing its FY22 economic growth forecast for India from 13.7% estimated earlier to 9.3%, citing negative impact of the second wave of coronavirus pandemic. The rating agency cautioned that risks from deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further pressure on the credit profile of Asia’s third largest economy.
“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,” it said.
Escalating covid cases have overwhelmed India’s health system, forcing many states to announce localized lockdowns and night curfews which are expected to delay a strong recovery in domestic economic activity. Brickwork Ratings earlier this month revised its FY22 economic growth projection for India to 9% from 11% estimated earlier, holding that its earlier presumption of a V-shaped economic recovery is unlikely as the deadly second wave of covid has brought an abrupt halt to India’s nascent economic recovery from the pandemic. S&P Global Ratings last week said it expects India’s GDP growth at 9.8% under its moderate scenario and to 8.2% under the severe scenario based on when the current infection wave peaks.
Moody’s, which has assigned lowest investment grade with negative outlook for India said persistent obstacles to growth—including weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks mean a rating upgrade is unlikely in the near future. “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,” it said.
The finance ministry in its latest monthly economic report released on Friday said with the second wave of covid-19 infections forcing localized or state-wide restrictions, there is a downside risk to growth in the first quarter of FY22. “However, there are reasons to expect a muted economic impact as compared to the first wave. The experience from other countries suggests a lower correlation between falling mobility and growth as economic activity has learnt to operate ‘with covid-19’,” it added.
Mint reported last week quoting finance ministry sources that the government’s internal assessment suggests limited economic impact of the second wave of the pandemic. “We don’t think the economic impact will be as serious as last year. The localized lockdowns will last at best for a month or two months. This may lead to around 1 percentage point loss of GDP compared with starting estimates,” a senior finance ministry official said on the condition of anonymity.
While the Economic Survey has assumed 11% GDP growth in FY22, the budget presented by finance minister Nirmala Sitharaman in February has factored in 10.5% GDP growth. The finance ministry’s fresh estimate seems to indicate growth may remain within 9.5-10% range for this fiscal.
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