India is on track for an economic recovery in the fiscal year ending March 2022, S&P Global Ratings said on Tuesday.
Consistently good agriculture performance, a flattening of the Covid-19 infection curve, and a pickup in government spending are all supporting the economy, it said in a report titled ‘Cross-Sector Outlook: India’s Escape From Covid.’
India needs many things to be right for its recovery to continue. Most significantly, the country needs to quickly and thoroughly vaccinate most of its 1.4 billion people.
“The emergence of yet more contagious Covid-19 variants with the potential to evade vaccine-derived immunity present a major risk to this recovery. As does the possibility of early withdrawal of global fiscal stimulus,” said the report.
However, near-term prospects are positive. With a sustained decline in national confirmed Covid-19 cases allowing for a gradual relaxation of formerly stringent epidemic control measures, high-frequency economic indicators continue to show improvement.
S&P said the Indian government’s recently released Budget will also support the recovery with higher than previously expected expenditures for fiscals 2021 and 2022.
“India’s improving growth prospects are critical to its ability to sustain the higher deficits associated with its more aggressive fiscal stance.”
The economy still faces important risks as it transitions from stabilisation to recovery. “We estimate that India faces a permanent loss of output versus its pre-pandemic path, suggesting a long-term production deficit equivalent to about 10 percent of GDP,” said the report.
Localised containment measures in India are replacing nationwide lockdowns. This has rejuvenated demand and removed supply bottlenecks and labour shortages, supporting a sharp recovery in infrastructure use.
But the pace of recovery varies widely. Airports are still struggling with most flights grounded.
Utilities are faring better, bolstered by regulated, contracted, or availability-based returns that protect their operating cash flows despite an earlier fall in unit demand. “We believe counterparty credit risks and receivable delays pose the biggest risk for utilities (including renewables) while benign funding conditions assuage liquidity risk.”
Likewise, a faster-than-expected earnings recovery has lowered downside risk for rated corporates. An increase in commodity prices and a revival of domestic demand after lockdowns were eased have driven upside earnings surprises.
Changes in consumer choices, for example, a preference for personal transport for health-safety reasons, have helped sectors like automobiles.
“In our view, a sustained earnings rebound is key for ratings to stabilise. Roughly one-quarter of ratings are still on a negative outlook. On the other hand, proactive refinancing by speculative-grade corporates has materially reduced refinancing risk in 2021.”
On the banking front in India, S&P estimates the system’s weak loans ratio at 12 percent of gross loans and credit cost to remain elevated at 2.2 to 2.7 percent.
Faster economic recovery and steps taken by the Reserve Bank of India and the Indian government to cushion the effect of the economic crisis have helped ease the stress on bank balance sheets.
“In our view, India’s banking system’s performance is likely to start improving materially in fiscal 2023, trailing an economic recovery of 10 percent in fiscal 2022. On a positive note, banks are building capital buffers and reserves to deal with the Covid crunch.”
S&P said finance companies’ performance has been a mixed bag and polarisation between Indian finance companies can persist.