Second Covid-19 wave heightens downside risks to India's GDP, says S&P

The country is already facing a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10% of GDP

Rating agency Standard & Poor's (S&P) on Wednesday said the second Covid-19 wave, which has engulfed India, brings uncertainty and a drawn-out outbreak will impede India's economic recovery.
 
This may need a revision of the base assumption of 11 per cent growth over fiscal 2021-2022, particularly if the government is forced to reimpose broad containment measures, according to S&P.
 
It said the country is already facing a permanent loss of output compared to its pre-pandemic days, suggesting a long-term production deficit equivalent to about 10 per cent of gross domestic product (GDP).
 

In addition to the substantial loss of life and significant humanitarian concerns, the coronavirus pandemic heightens the possibility of business disruptions, it added. The negative credit spillovers to rated portfolios remain limited, but the situation is fluid.

 
As daily infection cases exceed 0.3 million, the outbreak is putting severe pressure on the country's health infrastructure. The high absolute number of infections in India also presents a significant contagion risk to other geographies, it said.
 
It added, the strong economic growth will be critical to sustain the government's aggressive fiscal stance put forth within India's latest national Budget, and to stabilise its high debt stock relative to GDP.
 
The pace and scale of the post-crisis recovery will have important implications for the sovereign credit rating, it added.
 
Various levels of the government have enacted localised Covid containment measures. The lockdowns disrupt daily work and related economic behavior, which could drag out the recovery of revenue and earnings of some corporates sectors. This is especially true for sectors highly sensitive to mobility, such as consumer retail and airports.

 
Banks continue to face a high level of systemic risk. Lenders' asset quality remains strained and credit losses will continue to hold back profitability during fiscal 2021-2022.
 
According to S&P, India's speedy economic recovery, right up until March 2021, has partly alleviated non-performing loan stresses.
 
Government measures have helped, including emergency credit guarantees for small to mid-sized enterprises.
 
Also, under the state's partial guarantee programme, the government promises to cover up to 20 per cent of the first loss incurred by banks on certain bonds issued by finance companies, the rating agency added.