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Moody's cuts 2021 India's growth forecast to 9.6%, flags low vaccination rate as risk

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Moody's Investors Service on Wednesday slashed India's growth projection to 9.6 percent for 2021 calendar year from its earlier estimate of 13.9 percent. The US rating agency expects the overall hit to India's economy to be softer than that during the first COVID-19 wave last year.

Moody's cuts 2021 India's growth forecast to 9.6%, flags low vaccination rate as risk
Moody's Investors Service on Wednesday slashed India's growth projection to 9.6 percent for 2021 calendar year from its earlier estimate of 13.9 percent, and said faster COVID vaccination will be paramount in restricting economic losses to June quarter.
The US-based rating agency said high-frequency economic indicators show that the second wave of COVID-19 infections hit India's economy in April and May. With states now easing restrictions, economic activity in May is likely to signify the trough, it said in a report on India.
"The virus resurgence adds uncertainty to India's growth forecast for 2021; however, it is likely that the economic damage will remain restricted to the April-June quarter. We currently expect India's real GDP to grow at 9.6 percent in 2021 and 7 percent in 2022," Moody's said in a report titled "Macroeconomics India: Economic shocks from second COVID wave will not be as severe as last year's".
Flagging low inoculation rate, it said faster vaccination progress will be paramount in restricting economic losses to the current quarter. As of the third week in June, only about 16 percent of the population had received one vaccine dose; of those, only about 3.6 percent had been fully vaccinated.
"While infection rates have been declining and restrictions relaxed in many regions, vaccination rates remain low. As a result, the risk of subsequent waves that could require further lockdowns cannot be ruled out. Thus, we expect a more gradual recovery in economic growth for fiscal year ending March 2022," Moody's said in a separate report on India's infrastructure sector.
Earlier this month, Moody's had projected India to clock a 9.3 percent growth in the current fiscal ending March 2022, but a severe second COVID wave has increased risks to India's credit profile and rated entities.
The Indian economy contracted by 7.3 percent in fiscal 2020-21 as the country battled the first wave of COVID, as against a 4 percent growth in 2019-20. Stating that stringent lockdowns in economically significant states will mar April-June quarter economic activity, Moody's said the 10 states that have been hardest hit by the second wave collectively account for more than 60 percent of the pre-pandemic level of India's GDP.
Four states - Maharashtra, Tamil Nadu, Uttar Pradesh, and Karnataka - contributed the largest shares among all states in the financial year 2019-20. "Mobility and economic activity will likely accelerate in the second half of the year as the pace of vaccinations picks up. The government recently announced a strategy to centralise vaccine procurement in order to boost vaccinations, which if successful, will support the economic recovery," it added.
Moody's expects the overall hit to India's economy to be softer than that during the first wave last year.
However, the pace of recovery will be determined by access to and delivery of vaccines, and the strength of the recovery in private consumption, which could be hampered by the deterioration of balance sheets of low- and middle-income households from job, income and wealth losses.
India's second wave peaked at the beginning of May; since then, new cases and daily deaths have continued to fall, and the number of people who have recovered from the virus has exceeded the number of new infections since mid-May.
India's total tally of COVID-19 cases crossed the three-crore mark with 50,848 new cases reported in 24 hours. The death toll climbed to 3,90,660 with 1,358 fresh fatalities.
"We assess the overall economic effect of the second wave to be softer than that during the first wave of the pandemic last year, although delivery of and access to vaccines will determine the durability of the recovery," Moody's added.
It said airports and toll roads will face increased difficulties following the second wave and the recovery of Indian airports will get further pushed back following the recent surge in new infections and regional lockdowns.
Even though domestic and international traffic should rise in the second half of fiscal 2022, on the back of easing infection rate and movement restrictions, the disruption caused by the second wave will likely lead to lower traffic and revenue in fiscal 2022, and potentially fiscal 2023, Moody's added.
Earlier this month, World Bank had slashed its GDP growth forecast for current fiscal ending March 2022 to 8.3 percent, from 10.1 percent estimated in April, saying economic recovery is being hampered by the devastating second wave of coronavirus infections.
Domestic rating agency ICRA too had projected economic growth at 8.5 percent for this financial year, while British brokerage firm Barclays had last month cut India's growth forecast to 9.2 percent.
In May, another US-based rating agency S&P had said India's GDP growth rate could drop to 9.8 percent under the 'moderate' scenario, where COVID infections peak in May. It could even fall to as low as 8.2 percent in a 'severe' scenario under which cases peak in late June.