Global rating agency Standard & Poor's (S&P) said India is on track for an economic recovery in the fiscal year ending March 2022 with consistently good performance in agriculture, a flattening of the Covid-19 infection curve, and a pick-up in government spending are all supporting the economy.
However, the economy still faces major risks as it transitions from stabilisation to recovery. India faces a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 per cent of Gross Domestic Product (GDP).
India needs many things to be right for its recovery to continue. Most significantly, the country needs to quickly and thoroughly vaccinate most of its 1.4 billion people, S&P, in a report titled, "Cross-Sector Outlook: India's Escape From Covid," said.
The emergence of yet more contagious Covid-19 variants with the potential to evade vaccine-derived immunity present a major risk to this recovery. As does the possibility of early withdrawal of global fiscal stimulus, it said.
Near-term prospects are positive. With a sustained decline in national confirmed Covid-19 cases allowing for a gradual relaxation of formerly stringent epidemic control measures, high frequency economic indicators continue to show improvement.
The government's recently released Budget will also support the recovery, with higher than previously expected expenditures for fiscals 2021 and 2022. India's improving growth prospects are critical to its ability to sustain the higher deficits associated with its more aggressive fiscal stance, S&P added.
Localised containment measures in India are replacing nationwide lockdowns. This has rejuvenated demand, removed supply bottlenecks and labour shortages, supporting a sharp recovery in infrastructure use. The pace of recovery varies widely. Airports are still struggling with most flights grounded.
Utilities are faring better, bolstered by regulated, contracted or availability-based returns that protect their operating cash flows despite an earlier fall in unit demand. The counterparty credit risks and receivable delays pose the biggest risk for utilities (including renewables) while benign funding conditions assuage liquidity risk, agency said.
Likewise, a faster-than-expected earnings recovery has lowered downside risk for rated corporates. An increase in commodity prices and a revival of domestic demand after lockdowns were eased have driven upside earnings surprises. Changes in consumer choices, for example a preference for personal transport for health-safety reasons, have helped sectors such as automobiles, it added.