India’s second COVID wave heightens downside risks to GDP and credit: S&P Ratings

With daily infections rising to well over 3 lakh, the health infrastructure of the country is already under severe pressure. A more drawn out COVID-19 outbreak will only impede India’s economic recovery, S&P said.

“This may prompt us to revise our base-case assumption of 11% growth over fiscal 2021/2022, particularly if the government is forced to reimpose broad containment measures” it warned.

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

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

With various parts of the country under various levels of restrictions, the lockdowns are disrupting daily work and related economic behaviour, S&P said. This could drag out the recovery of revenue and earnings of some corporates sectors, especially for sectors highly sensitive to mobility, such as consumer retail and airports.

Banks continue to face a high level of systemic risk. “Lenders' asset quality remains strained and credit losses will continue to hold back profitability during fiscal 2021/2022. India's speedy economic recovery right up until March 2021 has partly alleviated nonperforming loan stresses,” it noted

Government measures have helped, including emergency credit guarantees for small to midsize enterprises. Also, under the state's partial guarantee program, the government promises to cover up to 20% of the first loss incurred by banks on certain bonds issued by finance companies.

The report also warned that Asia-Pacific is susceptible to contagion from the highly infectious COVID-19 variants present in India, given the low ratios of vaccination in the region. In the event some vaccines having limited efficacy against newer virus mutations, the countries may be exposed to further waves of COVID-19 outbreaks.

India’s GDP growth forecast has been downgraded by a series of brokerages in the light of the rising COVID19 cases by anywhere between 50 and 200 basis points.

JP Morgan for instance, now projects India will grow at 11 percent in FY22, versus 13 percent forecast earlier. Nomura has downgraded India’s GDP forecast to 12.6 percent from 13.5 percent earlier. UBS sees 10 percent GDP growth, down from 11.5 percent earlier and Citi has downgraded India’s growth forecast to 12 percent. Brickwork Ratings also downgraded the FY22 GDP growth forecast for India from 11 percent to 9 percent.