NEW DELHI: Rating agency Standard and Poor’s on Thursday said the Indian economy will contract 5% in FY21 assuming that the ongoing coronavirus pandemic will peak by September quarter. S&P’s Indian arm Crisil on Monday made similar forecasts.
“The covid-19 outbreak in India and two months of lockdown--longer in some areas--has led to a sudden stop in the economy. That means growth will contract sharply this fiscal year. Economic activity will face ongoing disruption over the next year as the country transitions to a post-covid-19 world," the rating agency said.
Acknowledging a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak, S&P said it is assuming the pandemic will peak around September quarter. “Covid-19 has not yet been contained in India. New cases have been averaging more than 6,000 a day over the past week as authorities begin easing stringent lockdown restrictions gradually to prevent economic costs from blowing out further. We currently assume that the outbreak peaks by the third quarter," it added.
S&P said the big hit to growth will mean a large, permanent economic loss and a deterioration in balance sheets throughout the economy.
“The risks around the path of recovery will depend on three key factors. First, the speed with which the covid-19 outbreak comes under control. Faster flattening of the curve--in other words, reducing the number of new cases--will potentially allow faster normalization of activity. Second, a labor market recovery will be key to getting the economy running again. Finally, the ability of all sectors of the economy to restore their balance sheets following the adverse shock will be important. The longer the duration of the shock, the longer recovery," it cautioned.
The rating agency said India has limited room to maneuver on policy support. “The Reserve Bank of India cut policy rates by 40 basis points in May, meaning the repo rate is 115 basis points lower since February. Despite the cuts, India banks have been unwilling to extend credit. Small and midsize enterprises continue to face restricted access to credit markets despite some policy measures aimed at easing financing for the sector. The government's stimulus package, with a headline amount of 10% of GDP, has about 1.2% of direct stimulus measures, which is low relative to countries with similar economic impacts from the pandemic. The remaining 8.8% of the package includes liquidity support measures and credit guarantees that will not directly support growth," it added.
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