The S&P Global ratings has kept the Indian sovereign rating to BBB – with a stable outlook in view of the Indian economy is on a track for a recovery in fiscal 2022, fortifying corporate earnings and demand for utilities. The pace of the recovery will determine the sustainability of the government’s higher fiscal deficit and debt stock. A few sectors, which are included in the S&P Global Ratings portfolio continue to struggle with suboptimal activity levels and these include airports, construction, real estate development, tourism and restaurants. The rating agency expects that the material improvement in Indian banks will happen with a lag. The weak loans are currently 12% of total loans.
“The Indian economy is on track to recover in fiscal 2022. 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 Global Ratings believes strengthening macroeconomic conditions should limit the downside credit risks of key sectors,” says the report.
To recover, India must get many things right for its recovery to continue. India has vaccinated just below 1% of its 1.4 billion people which should be accelerated. More contagious COVID-19 variants may pose risk to recovery if the threat presented itself. Another threat is the possibility of early withdrawal of global fiscal stimulus.
The rating agency considers the Near-term prospects as positive. “With a sustained decline in national confirmed COVID-19 cases, allowing for a gradual relaxation of formerly stringent epidemic control measures, high frequency economic indicators continue to show improvement. IHS Markit Purchasing Managers’ Indices for India’s manufacturing industries rose to 57.7 in January 2020. The same index for services rose to 52.8. An index above 50 reflects expansion. This signals a recovery is unfolding in the economy’s secondary and tertiary sectors,” says the report.
Goods and services tax (GST) revenue is showing year-on-year growth in the past few months, durable goods demand is healthy, and mobility trends continue to normalize. The Reserve Bank of India’s (RBI) latest consumer confidence survey shows depressed sentiment, but the rating agency believes that the expectations are improving for households and businesses.
The Apple Mobility Index shows that driving in India has surpassed pre-COVID levels and is stronger than many other large countries. The index tracks requests for directions by people using Apple devices, and is therefore a proxy for mobility. The data suggests lockdown fatigue, and a greater willingness to leave home given the lack of a second COVID outbreak wave, and low COVID-19 mortality rates.
The rating agency, however, says that the Sovereign Ratings now hinge on post-crisis recovery. “Our sovereign credit ratings on India balance the economy’s above-average trend rate of growth, sound external settings, and well-established institutions against very weak fiscal and debt metrics. We expect the speed of India’s post-crisis recovery to have important implications for the sovereign credit rating. This includes the sustainability of the government’s strained fiscal position,” says the report.
The rating agency is also counting upon the Indian government’s recently released budget to support the recovery with higher than expected expenditures programmed for fiscal’s 2021 and 2022. “India’s improving growth prospects are critical to its ability to sustain the higher deficits associated with its more aggressive fiscal stance. The country is also maintaining a large net debt stock that we estimate to be around 92% of GDP at the general government level,” states the report.
Indian economy still faces important risks as it transitions from stabilization 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% of GDP. Put another way, nominal GDP will only return to its fiscal 2020 full-year output in fiscal 2022, even in the event that real GDP growth meets or modestly surpasses our 10% growth expectation. This means that fiscal 2022’s high real GDP growth forecast is largely a function of various economic activities coming back online,” says the report.