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Second COVID-19 wave may derail India’s budding recovery: S&P Ratings

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India's second COVID-19 wave may derail a strong recovery in the economy and credit conditions, while the possibility that the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability, says a report by S&P Global Ratings.

India's second COVID-19 wave may derail a strong recovery in the economy and credit conditions, while the possibility that the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability, says a report by S&P Global Ratings.
The country's rate of daily new infections keeps spiraling upward, accounting for almost half of the world's cases, overwhelming the Indian health system.
"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," said S&P Global Ratings credit analyst Eunice Tan.
"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," he noted.
The central 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.
The scope of lockdowns affects mobility, and is indicative of the strength of India's recovery, the report said.
S&P Global Ratings looks at two scenarios at how this might play out across sectors. Its severe scenario holds that new infections peak in late June 2021, while its moderate scenario posts that infections peak in May.
"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," said S&P Global Ratings Asia-Pacific chief economist Shaun Roache.
S&P Rating's moderate scenario suggests a hit to GDP of about 1.2 percentage points. This means full-year growth of 9.8 percent for fiscal 2022. This compares with its baseline forecast of 11.0 percent growth for the period, set in March 2021.
In the severe scenario, the hit is 2.8 percentage points, with a growth of 8.2 percent, it said.
Source: S&P Global Rating report titled, "Second COVID Wave May Derail India's Budding Recovery"
"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," the rating agency report said.
However, the agency also pointed out that the Indian companies were 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, the agency expects the credit profile of Indian corporate entities to be resilient to India's second COVID wave.
"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," the report added.
The agency also believes that India's domestic banks continue to face high levels of systemic risk. In the moderate downside scenario, the Indian banking system's weak loans should remain elevated at 11 percent-12 percent of gross loans.
It expects credit losses to remain high in fiscal 2022 at 2.2 percent of total loans, before recovering to 1.8 percent in fiscal 2023," the report said.
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