Global credit rating agency Standard and Poor’s (S&P) on Wednesday warned of downside risks for the Indian economy if the second wave of the pandemic persists. A long-drawn outbreak will impede India’s economic recovery and may force the credit rating agency to revise its 11 per cent growth forecast for 2021-22 if wider containment measures are re-imposed.

The report says lenders’ asset quality remains strained and will hold back profitability this fiscal and banks will continue to face a high level of systemic risk.

“In addition to the substantial loss of life and significant humanitarian concerns,

S&P Global Ratings believes the outbreak poses downside risks to GDP and heightens the possibility of business disruptions,” the rating agency said in a note.

S&P has a long-term credit rating of ‘BBB-’ on India, just one notch above junk.

The country already faces a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 per cent of GDP, according to S&P.

“Economic recovery right up until March 2021 has partly alleviated non-performing loan stress,” it noted.

The government’s measures such as emergency credit guarantees for small to midsized enterprises have helped too. Under the state’s partial guarantee programme, the government promises to cover up to 20 per cent of the loss incurred by banks on certain bonds issued by finance firms.

S&P said strong economic growth will be critical to sustain the government’s aggressive fiscal stance, and to stabilise its high debt stock relative to GDP. The pace of the post-crisis recovery will have important implications for sovereign credit rating, it added.

ADB projection

Asian Development Bank (ADB) has said the economy is projected to grow at 11 per cent in the current financial year on the back of the strong vaccination programme, but cautioned that the second wave of Covid is worrying.

Another risk is the further tightening of global financial conditions, which would put pressure on India's market interest rates and, therefore, affect economic normalisation, the report added.

IHS Markit view

IHS Markit has said they expect the Indian economy to grow at 9.6 per cent in 2021-22. Maharashtra’s lockdown, it said, represents a significant dampener on growth as the state accounts for 16 per cent of national GDP.

“There is scope for further reductions in economic growth as wider restrictions would mean income and job losses for workers alongside significant output and revenue losses for firms,” wrote Deepa Kumar, deputy head, Asia-Pacific, IHS Markit, in a co-authored note with Hanna Luchnikava-Schorsch, principal economist for Asia Pacific, and Angus Lam, senior economist.

Brickwork revision

Domestic rating agency Brickwork Ratings has revised downwards the country’s FY22 GDP growth projection to 9 per cent from an earlier estimate of 11 per cent.

Until the virus is contained and a substantial proportion of the population has been vaccinated, the sectors that are impacted by social distancing norms and those adversely affected by supply disruptions, labour shortage and demand reduction will trail and may take longer to return to sustained growth path, it said.