Amidst Covid-19 cases surging in seven populous States in India, including commercial capital Mumbai and national capital Delhi, global rating agency Moody's on Friday slashed India's GDP growth rate at Zero for the current fiscal --. 2020-21. However, on a positive note, it has forecast India's GDP growth rate to bounce back to 6.6 per cent in 2021-22.

Its previous estimate was 2.6 per cent. The latest estimate is lower than Fitch's forecast of 0.8 per cent, IMF's 1.9 per cent, World Bank's 1.5-2.8 per cent and ADB's estimate of 4 per cent. However, it is slightly better than contraction estimate up to 2 per cent by ICRA and 0.4 per cent by Nomura. Indian economy registered the last contraction in 1979-80 at with (-) 5.2 per cent growth rate. Before that, there have been four instances of contraction (FY 1957-58: negative 0.4 per cent, FY 1965-66: negative 2.6 per cent, FY 1966-67: negative 0.1 per cent and FY 1972-73: negative 0.6 per cent).

Meanwhile, there is no change in sovereign rating by Moody's, and it stands at 'Baa2' with 'Negative' outlook. This outlook reflects increasing risks that economic growth will remain significantly lower than in the past. This is in light of the deep shock triggered by the coronavirus outbreak, and partly reflects weaker government and policy effectiveness at addressing longstanding economic and institutional weaknesses, leading to a gradual rise in the debt burden from already high levels. Government measures to support the economy should help to reduce the depth and duration of India's growth slowdown.

However, prolonged financial stress among rural households, weak job creation and, more recently, a credit crunch among non-bank financial institutions (NBFIs) have increased the probability of a more entrenched weakening. Moreover, prospects of further reforms that would support business investment and growth at high levels, and significantly broaden the narrow tax base have diminished. "If nominal GDP growth does not return to high rates, we expect that the government will face very significant constraints in narrowing the general government budget deficit and preventing a rise in the debt burden," the agency said in its latest update on India.

Negative outlook implies a rating upgrade unlikely shortly. However, there is a possibility of outlook to be revised to stable. This will depend upon improvement in the fiscal situation. This will also require sustainable reforms along with strong investment and GDP growth. However, weakening of fiscal metrics could lead to downgrade, which will affect investment flow in India.

The agency feels that lockdown could be extended beyond May 17 as the number of positive cases are still rising and that too at an alarming pace in States such as Maharashtra and Gujarat. "Even when restrictions are lifted, we do not expect an immediate pickup in consumption, as the resumption of activity is likely to be gradual," the agency said while adding that output is likely to contract sharply in the second quarter due to the lockdown, resulting in very weak economic activity for the year, as our revised real GDP forecast reflects.

"We expect that India's containment measures will be effective and lockdown restrictions will ease by the end of the second quarter, helping to support more normalized economic activity," the agency hoped. Though slide in oil prices will provide some benefit, but the lockdown and weaker demand will limit the gain. "Even without longer-duration lockdowns, a self-perpetuating dynamic could take hold, resulting in large-scale destruction of businesses and entire sectors, as well as a structurally high unemployment rate, a permanent loss of human capital, and persistent malaise in consumption and investment," the agency said.