Standard & Poor’s (S&P) on Thursday forecast that the Indian economy will contract 5 per cent this fiscal, thus joining the list of several others who have projected difficult times amid the coronavirus outbreak.

In a report, the global ratings agency said the Covid-19 outbreak in India and the two months of lockdown, which is longer in some areas, has led to a sudden jolt to the economy, which will result in growth contracting sharply this fiscal.

“Economic activity will face ongoing disruption over the next year as the country transitions to a post-Covid-19 world,” it warned while pointing out that there could be varying degrees of containment measures and economic resumption across India during the transition.

The rating agency had in April forecast the Indian economy to grow 1.8 per cent during this fiscal.

According to S&P, the coronavirus has not yet been contained in India and new cases have been averaging more than 6,000 a day over the past week as authorities begin easing stringent lockdown restrictions gradually.

S&P, which expects the outbreak to peak by the third quarter of this calendar year, said that areas currently classified as red zones are also economically significant, and the authorities could extend mobility restrictions.

“We believe economic activity in these places will take longer to normalise. This will have a knock-on impact on countrywide supply chains, which will slow the overall recovery,’’ it noted. S&P further pointed out that India has limited room to manoeuvre on policy support.

The Reserve Bank of India (RBI) cut policy rates by 40 basis points in May, and the policy repo rate is 115 basis points lower since February.

However, it added that despite the cuts, banks in India have been unwilling to extend credit. Small and midsize enterprises continue to face restricted access to credit markets despite some policy measures aimed at easing financing for the sector.

Further, the Government's stimulus package, had only about 1.2 per cent of direct stimulus measures, which, it said, is low relative to countries with similar economic impacts from the pandemic.

``The big hit to growth will mean a large, permanent economic loss and a deterioration in balance sheets throughout the economy’’, it observed.

S&P went on to add that the risks around the path of recovery will depend on three key factors. The speed with which the Covid-19 outbreak comes under control or faster flattening of the curve. This apart, a labour market recovery will also be key to getting the economy running again.

Lastly, the ability of all sectors of the economy to restore their balance sheets following the adverse shock will be important.