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May 7, 2021

According to S & P Second wave of COVID May overturn India’s promising Recovery

by Mahesh Mara in Compliance Law

According to S&P Second wave of COVID May overturn India’s promising Recovery

Due to increasing COVID infections and possibility of further local lockdown measures, S&P Global Ratings stated that India’s second COVID wave may derail a strong recovery in the economy and credit conditions.

As per the report titled, “Second COVID Wave May Derail India’s Budding Recovery”, the ratings agency stated that, the country’s rate of daily new infections keeps spiralling upward, accounting for almost half of the world’s cases, overwhelming the Indian health system. The agency believes that there is a possibility that the government will impose more local lockdowns may ruin what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.

As per S&P Global Ratings credit analyst Eunice Tan, the Indian recovery had been so vigorous across many measures, particularly in the last quarter of fiscal 2021, and yet the latest outbreak has escalated rapidly. Despite being the largest vaccine manufacturer in the world, India’s vaccination rollout to the country’s very large and largely rural population has proven challenging.

The union government has avoided rolling out another nationwide lockdown, given this would be unpopular and economically costly. However, authorities have already imposed local lockdowns that cover much of the country, including Mumbai, New Delhi, and Bangalore.

According to the ratings agency, the scope of lockdowns affects mobility, and is indicative of the strength of India’s recovery. The agency is looking at two scenarios at how this might play out across sectors. The agency stated that the first scenario holds that new infections peak in late June 2021 and the second, moderate scenario posits that infections peak in May

S&P Global Ratings Asia-Pacific chief economist Shaun Roache states that, India’s second wave has prompted us to reconsider our forecast of 11% GDP growth this fiscal year. The timing of the peak in cases, and subsequent rate of decline, drive our considerations.

The ratings agency’s scenario projections assume that initial shocks to private consumption and investment filter through to the rest of the economy. For example, it says, lower consumption will mean less hiring, lower wages, and a second hit to consumption.

The rating agency also added that the first moderate scenario suggests a hit to GDP of about 1.2 percentage points. This means full-year growth of 9.8% for fiscal 2022. This compares with our baseline forecast of 11.0% growth for the period, set in March 2021. In the severe scenario, the hit is 2.8 percentage points, with growth of 8.2%.

According to the ratings agency, the depth of the Indian economy’s deceleration will determine the hit on its sovereign credit profile. The Indian government’s fiscal position is already stretched. The general government deficit was about 14% of GDP in fiscal 2021, with net debt stock of just over 90% of GDP.

S&P ratings states that, Rated Indian companies are going into this second COVID wave with much improved operating and liquidity conditions than they did going into the first wave, last year. As such, we expect the credit profile of Indian corporate entities to be resilient to India’s second COVID wave.

They also added that, the second wave may challenge an otherwise strong recovery for Indian infrastructure. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevated.

India’s domestic banks continue to face high levels of systemic risk, S&P says, adding “In the moderate downside scenario, the Indian banking system’s weak loans should remain elevated at 11%-12% of gross loans. Credit losses will remain high in fiscal 2022 at 2.2% of total loans, before recovering to 1.8% in fiscal 2023.

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