Two men paint graffiti by frontline workers on a wall during the coronavirus pandemic in Mumbai, India.
Imtiyaz Shaikh | Anadolu Agency | Getty Images
Rating agency S&P Global Ratings announced Tuesday that India is on track to recover from a pandemic-triggered economic contraction by next year.
South Asia’s largest economy could grow by 10% in fiscal year 2022, the rating agency forecast in a report. India’s fiscal year starts on April 1st and ends on March 31st of the following year.
“The Indian economy is well on its way to recovering in fiscal 2022,” the report said. “A consistently good performance in agriculture, a flattening of the Covid-19 infection curve and an upturn in government spending support the economy.”
In 2020, India entered a technical recession due to the economic consequences of a protracted lockdown aimed at slowing the spread of the coronavirus outbreak. Overall, the country has reported the second highest number of cases with over 10.9 million infections.
For the full fiscal year 2021 ending March 31, India’s economy is expected to shrink by 7.7%.
The speed at which the Indian economy is recovering from the coronavirus crisis will have “important ramifications” on the country’s credit rating, according to S&P.
“This includes the sustainability of the government’s tight budgetary position,” the report said.
In this month’s budget announcement for fiscal year 2022, the Indian government focused on spending measures aimed at stimulating demand and getting the economy back on a growth path.
India’s budget deficit target for the next fiscal year is around 6.8% of GDP, which is comparatively higher than before the pandemic.
While the budget will support the recovery from higher budget spending, India’s improving growth outlook will be crucial to its ability to maintain the higher deficit, according to the S&P report.
The rating agency estimates India has seen a permanent loss of around 10% of GDP production compared to its pre-pandemic time.
Vaccination campaign crucial
India’s near-term outlook is positive as a declining number of new Covid-19 cases allows for a gradual easing of restrictive social measures, according to S&P.
The country launched the world’s largest mass vaccination campaign against the disease last month. Efforts aim to vaccinate up to 300 million people in the first phase, most of them frontline workers and those at high risk.
“We consider Covid vaccinations to be critical to India’s recovery over the next few years and key to normalizing demand,” the S&P report said. “The emergence of even more contagious variants of Covid-19 with the potential to evade vaccines immunity poses a major risk to this recovery.”
A premature withdrawal of global fiscal stimulus is another risk to India’s path to recovery.
The Indian banking sector is expected to lag behind the economic recovery and is unlikely to show any significant signs of improvement until fiscal 2023, S&P said
Asset quality for Indian banks will remain strained as the sharp economic slowdown will add to the volume of bad loans, according to the rating agency. Profitability is likely to remain low in the current financial year.
While corporate earnings have rebounded from the initial shock of the pandemic to the economy, some sectors, including construction, real estate development, airlines and tourism, continue to struggle due to low levels of activity, the report said. These sectors could potentially become a source of stress for banks.
In this month’s budget, India announced it was creating an asset recovery company that would take over existing bad debts and find ways to manage them and sell them to alternative mutual funds. Some experts have said that this can potentially help banks by allowing them to focus on growing their books instead.