India's growth potential at 6.5-7% but reforms critical for recovery: S&P

The rating agency has forecast a 5% contraction in the fiscal year starting April, and the growth to recover to 8.5% next fiscal

India's economic growth potential in medium and long-term is 6.5-7 per cent but reforms are critical for the country to get back to recovery after deep shock this year, S&P Global said on Friday.

Days after keeping India's rating at lowest investment grade for 13th year in a row, the rating agency in a webinar said despite the contraction in GDP this year, the country continues to be an outperformer among the peer groups.

"Economy around the world are facing a very difficult situation," Andrew Wood, S&P Director & Lead Analyst Sovereign & IPF Ratings APAC, said.

"India, despite a contraction this year, continues to be an outperformer among the peer group."

The rating agency has forecast a 5 per cent contraction in the fiscal year starting April, and the growth to recover to 8.5 per cent next fiscal.

But, this will not stop the rating agency to downgrade India if Covid-19 pandemic had done more structural damage to the economy.

 

"We will consider a downgrade if we see that the pandemic has done more structural damage to India. India is not alone getting affected by the crisis. We are in unprecedented times and pace and strength of the recovery will be paramount (in deciding future rating action)," he said.

A national lockdown began on March 25 to contain the spread of coronavirus and has continued in various phases in June, albeit with significant easing of restrictions since early May. This protracted lockdown has resulted in the severe disruption of industrial production and consumer spending, with GDP growth forecast to contract sharply in the April-June quarter.

"India's economic potential and trend growth rate in the medium and long term is 6.5-7 per cent. This high growth rate would be essential for credit profile to remain sustainable," Wood said. "Reforms are critical for India to get back to recovery and despite deep shock this year India remains solid outperformer compared to peers."

The recovery in the labour market will be the key, and the recovery in informal sector will take time, he noted.

"Weak fiscal position will be the key constraint in reacting to the crisis," Wood said.

Stating that although India's weak fiscal position will increase on account of the pandemic, he said the rating agency expects general government deficit to be 11 per cent this year, and decline to 10 per cent next year.

The government, he said, has been conservative in its fiscal stimulus measure.

S&P expected the deficit to decline to 7-9 per cent over medium-term and said India's fiscal position will weigh in credit rating for the long term.

"India's structural growth rate is lower than the past," he said.

On deficit monetisation, he said there is no indication so far that that the RBI will participate in the primary debt market.

"However, if it starts purchasing government debt we will see what is the level of purchase, the rate, and the quantum," Wood added.