Indian economy on track for recovery in next fiscal but banking sector to show improvement by 2023, says S&P

S&P Global Ratings on Tuesday said Indian economy is on track for a recovery in the next fiscal year beginning 1 April, as consistent good performance of the farm sector, flattening COVID-19 infection curve, and a pickup in government spending are all supporting the economy. Stating that India needs many things to be right for its recovery to continue, S&P said 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,” S&P said in a report titled ‘Cross-sector outlook: India’s escape from COVID’. It said the budget for fiscal 2021-22, will also support the recovery, with higher than expected expenditures. 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 per cent of GDP, S&P said. “The Indian economy is on track for a recovery in fiscal 2022, bolstering corporate earnings and demand for utilities. The recovery’s pace and scale determines the sustainability of the government’s higher fiscal deficit and debt stock… Consistently good agriculture performance, a flattening of the COVID-19 infection curve, and a pickup in government spending are all supporting the economy,” S&P said. The US-based rating agency said a sustained earnings rebound is key for ratings to stabilise as roughly one quarter of ratings are still on negative outlook. On the banking front in India, it estimates the system’s weak loans ratio at 12 percent of gross loans and credit cost to remain elevated at 2.2-2.7 per cent. “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.