Global rating agency Moody’s Investors Service has scaled down its 2021-22 Gross Domestic Product (GDP) growth forecast for India to 9.3% from 13.7% projected earlier, adding that longer term risks to the economy will increase if the second COVID-19 wave lasts beyond June and the vaccination rollout remains a challenge.
“At this stage, we expect an outright decline in economic activity to be limited to the April-June quarter, followed by a rebound in the second half of the year,” the agency said on the impact of the second wave in India.
Following the large 7.3% contraction in the GDP last year, the second wave will push recovery to the country’s pre-pandemic level of the GDP out even further, Moody’s said, with a ‘catch up’ unlikely till the end of 2021. In 2022-23, the agency now expects a growth of 7.9% compared to its earlier expectation of 6.2%.
“The impact from potential subsequent waves remain a risk to our forecasts. The government’s ability to limit the spread of the virus and materially increase the rate of vaccinations will have a direct impact on the trajectory of both health and economic outcomes,” Moody’s noted, adding that vaccine shortages and logistical challenges in reaching two-thirds of the population in rural India “have complicated the vaccine rollout”.
‘Protracted and incomplete recovery’
Going forward, it expressed concerns about “a protracted and incomplete recovery that results in economic scarring” as longer-term risks to the economy would increase if the second wave extended beyond June and the vaccination pace was slower than expected.
Moody’s warned more scarring would occur “if it caused a permanent loss of jobs and business closures”, resulting in a fundamentally weaker growth dynamic.
“For example, while there has been a marked increase in employment in India’s rural employment guarantee scheme as migrant labourers have headed home to rural villages from urban centres during the pandemic, their eventual return to more productive urban and semi-urban jobs may be slowed without material progress on vaccinations and a pickup in private sector investment,” it explained.
Stressing that private sector investments would largely determine whether India would be able to realise higher growth and more, better quality jobs, Moody’s said: “We do not expect a sustained recovery in private investment until domestic economic conditions strengthen and the health of the financial sector improves.”
“With per capita income of around $6,500 on a purchasing power parity basis in 2020, far below the Baa-rated median of around $25,200, Indian households’ capacity to absorb negative income shocks is limited. In the near term, job losses and business closures from lockdowns during two separate virus waves have damaged the income and savings of those who are unable to work from home,” the agency said in an FAQ note issued on Tuesday on the pandemic’s second wave and the medium-term credit challenges for India’s sovereign. India has a Baa3 negative rating from Moody’s.
“Given India’s relatively large informal sector and the fact that the vast majority of jobs are with micro, small and medium enterprises (MSMEs), many households will have been hurt by the lockdowns,” Moody’s said.
While Moody’s did not expect the government to enhance spending much from its Budget plans, revenue shortfalls and diversion of more funds to countering the pandemic, would push India’s general government fiscal deficit to 11.8% of GDP this year instead of 10.8% projected earlier. The combined impact of slower growth and a wider deficit would drive the general government debt burden to 90% of GDP in 2021-22, it said.
Citing structural constraints and the limited effectiveness of recent reforms, Moody’s said it expected India’s real GDP growth rate to average around 6% over the medium term.
“Relatively weak government effectiveness in applying previous reforms informs our current view that implementation of new measures will be difficult and may not address key credit challenges as intended,” it said, referring to the implementation challenges and multiple design changes to GST and the stalled farm sector reforms of 2020.
The Fiscal Responsibility and Budget Management Act, established to achieve medium-term fiscal consolidation, was not adhered to with Central government fiscal deficits “consistently slipping from set targets before the pandemic”, the agency noted.
“The reimposition of lockdown measures along with behavioural changes for fear of contagion are curbing economic activity and mobility, which will delay India’s economic recovery. However, we do not expect the impact of the lockdown measures to be as severe as during the first wave,” Moody’s said.