India's economy will rebound in the current financial year to mark a growth of 9.3 per cent but the second Covid-19 wave has increased risks to the country's outlook with potential longer-term credit implications, Moody's Investors Service said on Tuesday.
The economy rebounded quickly from a steep contraction in 2020, it said. But risks to India's credit profile including a persistent slowdown in growth, weak government finances and rising financial sector risks have been exacerbated by the shock of coronavirus second wave.
"We expect a decline in economic activity in the April to June quarter followed by a rebound, resulting in real, inflation-adjusted GDP growth of 9.3 per cent in the fiscal year ending March 2022 (fiscal 2021) and 7.9 per cent in fiscal 2022," said Moody's.
It said the reimposition of lockdown measures along with behavioural changes on fear of contagion will curb economic activity. However, the impact is not expected to be as severe as during the first wave.
A small shortfall in budgeted revenue and a redirection of spending toward the response to the pandemic will result in a general government fiscal deficit of 11.8 per cent of GDP and a rise in the general government debt burden to 90.3 per cent of GDP in fiscal 2021.
Debt-to-GDP will edge up to 92 per cent by fiscal 2023, largely driven by relatively slow economic growth.
Moody's said India's financial sector is the main driver of potential event risk to the sovereign. Whether the feedback loop between the real economy and the financial sector settles in a credit-supportive or credit-hindering mode will shape India's credit profile.
So far, the second wave has increased financial risks to households and small businesses, which may hurt bank profitability.
New loan forbearance and liquidity measures by the central bank, and government plans to set up an asset reconstruction company to take over stressed loans along with modest recapitalisation of public sector banks will mitigate, but not eliminate sector risks.
Moody's said the impact from potential subsequent Covid waves remain a risk to 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.
India began the third phase of its vaccination campaign for those aged 18 to 44 on May 1, making vaccines available to the entire adult population. However, as of late May only around 15 per cent of the country's population had received at least one dose of the vaccine.
A shortage of vaccines and logistical challenges reaching a large rural population (about two-thirds of the population) have complicated the vaccine rollout, said Moody's.
The international community has recently contributed to India's efforts with increased medical and vaccine supplies to help address shortfalls. Moody's expects the pace of vaccinations to pick up this summer, with substantial progress by the end of 2021.
Moody's said longer-term risks to India's economy will increase if the second wave extended beyond June and the pace of vaccinations was slower than it expects.
"This could contribute to more scarring if it caused a permanent loss of jobs and business closures, particularly in more productive sectors of the economy outside of agriculture in and around urban centers, resulting in a fundamentally weaker growth dynamic."
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