India's economy likely to tank 9 pc due to Covid distress: S&P

S&P Global Ratings said on Monday it expects India's economy to contract by 9 per cent in the current fiscal year ending March 31, 2021 as rising Covid-19 cases will keep private spending and investment lower for longer.

S&P Global Ratings said on Monday it expects India's economy to contract by 9 percent in the current fiscal year ending March 31, 2021, as rising Covid-19 cases will keep private spending and investment lower for longer. Its previous forecast had put the economic hit from COVID at minus 5 percent.

"One factor holding back private economic activity is the continued escalation of the Covid-19," said Vishrut Rana, Asia Pacific Economist for S&P Global Ratings. India's economy shrank 23.9 percent year-over-year in the March to June period, larger than expected. The pandemic and tight lockdown measures enforced to combat it knocked private consumption by 26.7 percent while fixed investment sunk 47.1 percent.

Higher welfare spending prevented an even sharper fall in growth. Agriculture cushioned the blow as it was the only major sector to expand, thanks to a favorable monsoon season. "While India eased lockdowns in June, we believe the pandemic will continue to restrain economic activity," said S&P. New cases per day in India averaged nearly 90,000 in the week ending September 11, according to data from the World Health Organisation.

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 industrial activity is recovering faster than services. However, high-frequency indicators suggest that output is still lower relative to the same period last year, and hence growth for the June to September quarter will be the negative year on year.

"The potential for further support monetary support is curbed by India's inflation worries," said Rana. "We expect a degree of normalization to result in the growth of about 10 percent in the following fiscal year as consumers resume the discretionary activity that they are curtailing during the pandemic. A significant part of the growth rebound is due to the very weak base during the current fiscal year," said Rana.

He said S&P does not expect policymakers to enforce further widespread lockdowns. The larger adverse shock to growth will be driven by corporate balance sheet damage with small and mid-size enterprises closing shop, and larger firms holding back capital expenditure, which will constrain their growth capacity. "We now expect a larger permanent loss in output of 13 percent over the next three years. We expect a growth of 6 percent in fiscal 2022 and 6.2 percent in fiscal 2023. Before the pandemic, we expected India's economy to expand 6.5 percent in the current fiscal year."

Risks to the growth outlook include a weaker recovery in the informal sectors of the economy and deeper economic losses for micro and small enterprises. Also, if credit quality worsens materially following the expiration of loan moratoriums, the recovery will slow. One factor that presents a potential upside to growth is the availability of a widely-distributed COVID vaccine earlier than the current estimate around mid-2021.