Global firm, S&P on Thursday lowered India’s growth forecast to 9.5 per cent during current fiscal. It also said that considering lower vaccination, pandemic waves are posing risk to outlook.

On Wednesday, another global firm, Moody’s Investor Services said overall economic effect of the second wave was milder 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. It also lowered baseline forecasts for India’s real GDP growth to 9.6 per cent in calendar 2021 from 13.9 per cent.

In its report, titled ‘Asia-Pacific's Recovery Regains Its Footing’, S&P Global Ratings forecast growth of 9.5 per cent this fiscal year from its March forecast of 11 per cent. In fiscal year 2022-23, it expects growth to come in at 7.8 per cent. “Permanent damage to private and public sector balance sheets will constrain growth over the next couple of years. Further pandemic waves are a risk to the outlook given that only about 15 per cent of the population has received at least one vaccine dose so far, although vaccine supplies are expected to ramp up,” it said.

S&P latest forecast is at par with RBI’s estimate of 9.5 per cent announced earlier this month. However, it is higher than Moody’s forecast of 9.3 per cent and close to CRISIL’s range of 8.2-9.8 per cent. Other agencies have also cut the forecast to single digit. There is one common factor in revision by all that impact of second wave is expected to be limited to April-June quarter.

Recovery underway

Stating that India is starting to come out of lockdown, S&P said that a gradual revival is underway after a severe second Covid-19 outbreak in April and May led to lockdowns across much of the country and to a sharp contraction in economic activity. The lockdowns were more targeted compared with the blanket national lockdown seen last year but were still enough to lower discretionary mobility to more than 60 per cent below normal.

Manufacturing and exports were less severely affected compared with 2020, but services were acutely disrupted. Consumption indicators such as vehicle sales fell sharply in May 2021 and consumer confidence remains downbeat. “The economy has turned a corner now. New Covid-19 cases have been falling consistently and mobility is recovering. We expect this recovery to be less steep compared with the bounce in late 2020 and early 2021. Households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens,” it said.

The agency mentioned that monetary and fiscal policies will remain accommodative, but new stimulus will not be forthcoming. “The Reserve Bank of India (RBI) is likely to focus its policy efforts on quantity channels rather than interest rate changes.” It said while adding that inflation is running hot. Retail inflation based on Consumer Price Index (CPI) surged to 6.3 per cent in May. This is over and above the upper end of targeted range of 2-6 per cent.

“It means the RBI has no room to cut interest rates,” it said. Further it noted that fiscal policy is constrained by limited policy space, particularly because the budget for fiscal 2022 (ending March 31, 2022), which was decided before the second Covid-19 wave, had already targeted a large general government deficit of 9.5 per cent of GDP.

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