S&P Predicts India’s economy to recover strongly next fiscal year

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India’s economy is expected to recover strongly in its 2022 fiscal year following a deep contraction in the current fiscal year due to the coronavirus pandemic, a report issued by S&P Global Ratings says.

The ratings agency forecast a gross domestic product growth of 8.5 per cent for India for fiscal 2022, following a 5 per cent contraction in the current fiscal year, which ends in March 2021.

“India’s wide range of structural trends, including healthy demographics and competitive unit labour costs, work in its favour. Economic reforms, if executed well, would support this outcome. With a recovery of this magnitude, India’s 10-year weighted average real GDP per capita growth will likely stay well above the average of its peers,” S&P said in a report on Sunday.

However, the ratings agency cautioned that a more severe local outbreak of the disease could hit the country’s growth rate and exert downward pressure on its sovereign rating.

In addition, prolonged financial and corporate distress in India coupled with long-lasting global economic malaise further risk derailing India’s recovery.

“Such risk scenarios may involve a comprehensive review of our assumptions of the sovereign. Expectations for a strong rebound may change if this crisis has a more chronically debilitating effect on Indian growth than we now assume.”

India has seen its coronavirus cases rise after the government eased restrictions to allow business and transportation activities to resume earlier this month. It is currently the fourth-most affected country globally after the US, Brazil and Russia with 320,922 cases as of Sunday, according to Johns Hopkins University, which is tracking the virus.

S&P Global estimated that the country’s “economic reopening will require momentous coordination between the public and private sectors” and that it could find it difficult to resume operations following the extended lockdown.

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“Economic activity will likely only meaningfully improve around the end of calendar 2020.”

The agency said that it expects India’s fiscal deficit to rise this year as the government steps up spending to quell the coronavirus spread.

The government in May announced a 20 trillion rupees ($264.8 billion, Dh972.4bn) stimulus package to boost the economy in the wake of the pandemic. However, direct government spending will be less than 1 per cent of GDP, according to the ratings agency.

Most of the aid will come in the form of government guarantees, and credit and liquidity support provided by the banking sector through the Reserve Bank of India.

“India’s external settings continue to support our rating, owing largely to the country’s modest external debt stock. As a large net importer of energy, low oil prices benefit the country’s terms of trade, likely leading to a lower current account deficit over the next few years.”

S&P Global currently has a BBB- rating on India’s sovereign debt. It said the Indian economy was on a “weak footing” from the start of the crisis, with real GDP growth at an 11-year low.

“Myriad domestic problems have weighed on growth over recent years, including a moribund banking sector, weak investment and consumer sentiment, and labour market fragility.”

The ratings agency called for fresh reforms to arrest these trends and make the country attractive to foreign investors.

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