As India faces a sharp rise in infections in the second wave of corona virus, Moody’s Investor Service has cut India’s GDP forecast to 9.3%, which is sharply lower than its earlier projection of 13.7%.
The US-based rating agency has also ruled out a sovereign rating upgrade for a while.
“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,” Moody's said.
The downward revision, the agency said, was necessitated by the fresh wave of Covid infections that will pose obstacles for growth with localised lockdowns. The second round of infections hampers economic recovery and increases risk of longer-term scarring.
However, Moody's does not expect the economic impact to be as severe as during the first wave. Unlike the first wave where lockdowns were nationwide for several months, the second wave "micro-containment zone" measures are more localised, targeted and will likely be of shorter duration.
As of now, Moody's expects negative sequential economic activity to be limited to the April to June quarter, followed by a strong rebound in the second half of the year. Moody's now forecasts real inflation-adjusted gross domestic product (GDP) growth to fall to 9.3% from 13.7% for fiscal 2021 and to 7.9% from 6.2% in fiscal 2022. Over the longer term, Moody's expects growth of around 6% thereafter.
India's (Baa3 negative) policymaking institutions have struggled to mitigate and contain the country's economic growth challenges, high debt burden and weak financial system. The coronavirus pandemic has exacerbated these risks, Moody's Investors Service said in a new report released on Tuesday..
"India's severe second wave of coronavirus infections will slow economic recovery over the next three months and could weigh on longer-term growth dynamics," said Gene Fang, a Moody's Associate Managing Director. "Deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further credit pressure."
Moody's projects the renewed virus surge will contribute to a marginal shortfall in revenue and a redirection of spending toward healthcare and virus response relative to what had been budgeted by the government in February. The second wave has been driven by a highly contagious variant, putting significant strain on India's healthcare system with hospitals overrun and medical supplies in limited supply.
As a result, Moody's now expects a wider general government fiscal deficit of about 11.8% of GDP in fiscal 2021, compared with its previous forecast of 10.8% and an estimated 14% in fiscal 2020. The agency expects the combined impact of slower growth and a wider deficit to drive the general government debt burden to 90% of GDP in fiscal 2021 and to gradually rise to 92% in fiscal 2023.
