S&P projects economy to contract 5% in current fiscal; says lockdown was longer than expected, will slow overall recovery

S&P Global Ratings on Thursday forecast Indian economy to contract 5 percent in the current fiscal as the lockdown imposed to contain COVID-19 pandemic has curtailed economic activity severely.

FP Staff May 28, 2020 10:52:47 IST
S&P projects economy to contract 5% in current fiscal; says lockdown was longer than expected, will slow overall recovery

After a slew of rating agencies predicted the Indian economy to shrink in the current fiscal because of coronavirus lockdown, S&P Global Ratings on Thursday forecast Indian economy to contract 5 percent in the current fiscal as the lockdown imposed to contain COVID-19 pandemic has curtailed economic activity severely.

"We have lowered our growth forecast for fiscal year ending March 2021 to a 5 percent contraction... We currently assume that the outbreak peaks by the third quarter," S&P said in a statement.

Earlier this week, rating agencies Fitch and Crisil too had projected a 5 percent contraction for the Indian economy.

"The COVID-19 outbreak in India and two months of lockdown -- longer in some areas -- have 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," S&P said in a statement, according to a PTI report.

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.

Policymakers have grouped geographical zones into red, orange, or green categories based on the number of cases.

Areas currently classified as red zones are also economically significant, and the authorities could extend mobility restrictions.

"We believe economic activity in these places will take longer to normalize. This will have knock-on impacts on countrywide supply chains, which will slow the overall recovery... We expect varying degrees of containment measures and economic resumption across India during this transition," S&P said.

Service sectors, which account for high shares of employment, have been severely affected, thus leading to large-scale job losses across the country. Workers have been geographically displaced as migrant workers travelled back home before the lockdown, and this will take time to unwind as lockdown measures are lifted.

"We expect that employment will remain depressed over the transition period," it added.

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, PTI said.

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"Despite the cuts, India banks have been unwilling to extend credit. Small and mid-size enterprises continue to face restricted access to credit markets despite some policy measures aimed at easing financing for the sector," S&P added.

It said the government's stimulus package, with a headline amount of 10 percent of GDP, has about 1.2 percent of direct stimulus measures, which is low relative to countries with similar economic impacts from the pandemic.

The remaining 8.8 percent of the package includes liquidity support measures and credit guarantees that will not directly support growth.

S&P said the big hit to growth will mean a large, permanent economic loss and a deterioration in balance sheets throughout the economy.

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It said 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 normalisation of activity. Second, a labour 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 said.

Economy to contract, say rating agencies

Fitch Ratings on Tuesday forecast the Indian economy to contract 5 percent in the current fiscal on account of the slump in economic activities following a "very severe" lockdown that has lasted much longer than expected.

CRISIL predicted the economy will to shrink by 5 percent in the current fiscal because of coronavirus lockdown. It said, this would be India's fourth recession since Independence, the first since liberalisation and perhaps the worst to date.

Moody's Investors Service on Friday said India's economy is expected to contract for the first time in more than four decades saying economic damage owing to the coronavirus-induced lockdown will be significant with lower consumption and sluggish business activity.

American brokerage Goldman Sachs expects the Indian economy to contract by 5 percent in FY21, making it the worst performance by the country ever.

The brokerage said the GDP will contract by a mind-boggling 45 percent in the June quarter as compared to the January-March period on an annualised basis, because of the continuing lockdown which is chilling economic activity, before recovering later.

The economy is likely to have expanded at its slowest pace in at least eight years in the January-March quarter, partly as a result of the coronavirus clampdown, a Reuters poll predicted.

 

---With inputs from agencies

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