S&P projects Indian economy to contract 9% in FY21; says COVID-19 will restrain economic activity

S&P said risks to the growth outlook include a weaker recovery in informal sectors of the economy and deeper economic losses for micro and small enterprises

S&P Global Ratings on Monday slashed its FY21 growth forecast for India to (-) 9 %, from (-) 5 % estimated earlier, saying that rising COVID-19 cases would keep private spending and investment lower for longer.

“One factor holding back private economic activity is the continued escalation of the COVID-19,” S&P Global Ratings Asia-Pacific Economist Vishrut Rana said.

Rising COVID-19 cases in India will keep private spending and investment lower for longer. S&P Global Ratings now expects the country’s economy to contract by 9 % in the current fiscal year, which ends March 31, 2021, the US-based rating agency said in a statement.

For 2021-22 fiscal, it expects economic growth at 10 %.

S&P had earlier forecast India’s economic contraction at 5 %.

It said risks to the growth outlook include a weaker recovery in informal sectors of the economy and deeper economic losses for micro and small enterprises.

“In addition, if credit quality worsens materially following the expiration of loan moratoriums, the recovery will slow. One factor that presents potential upside to growth is the availability of a widely-distributed COVID vaccine earlier than our current estimate around mid-2021,” S&P added.

It said the 23.9 % contraction in the April-June quarter was larger than expected.

“While India eased lockdowns in June, we believe the pandemic will continue to restrain economic activity. New cases per day in India averaged nearly 90,000 in the week ending September 11, according to data from the World Health Organization.

“This is up from an average of about 70,000 per day in August. As long as the virus spread remains uncontained, consumers will be cautious in going out and spending and firms will be under strain,” S&P said.

Last week, two other global rating agencies Moody’s and Fitch projected Indian economy to contract 11.5 % and 10.5 % respectively in the current fiscal. However, Goldman Sachs has estimated the contraction at 14.8 %.

Domestic agencies — India Ratings and Research projected contraction at 11.8 %, while Crisil estimated contraction at 9 %.

S&P said even as industrial activity is recovering faster than services, high frequency indicators suggest that output is still lower relative to the same period last year and hence growth for the July—September quarter will be negative year on year.

“The potential for further monetary support is curbed by India’s inflation worries,” Mr. Rana said.

The Reserve Bank of India has cut policy rates by 115 basis points so far this year, to 4 %. However, rising food inflation has pushed inflation to 6.9 % in July, higher than the upper band of the central bank’s 2-6 % target range.

This will constrain the central bank from cutting policy rates further, it said.

S&P said India’s high deficits limit the scope for fiscal stimulus and, the targeted fiscal stimulus measures announced so far amounts to about 1.2 % of GDP.

“This magnitude is lower compared with global averages. The International Monetary Fund estimates that on average comparable stimulus measures across global emerging markets have been about 3.1 % of GDP,” S&P added.