But more contagious COVID-19 variants is a concern
India is on track for an economic recovery in the fiscal year ending March 2022, supported by good agriculture performance, a flattening of the COVID-19 infection curve, and a pickup in government spending.
Near-term prospects are positive, S&P Global Ratings said on 16 Feb 2021 in an economy assessing report, “Cross-Sector Outlook: India’s Escape From COVID”.
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, it said.
India needs many things to be right for its recovery to continue. Most significantly, 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, cautioned S&P.
The Indian government’s recently released budget will also support the recovery, with higher than previously expected expenditures for fiscals 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 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,” said the rating agency.
Localized containment measures in India are replacing nationwide lockdowns. This has rejuvenated demand and removed supply bottlenecks and labor shortages, supporting a sharp recovery in infrastructure use. The pace of recovery varies widely. Airports are still struggling with most flights grounded.
Utilities are faring better, bolstered by regulated, contracted or availability-based returns that protect their operating cash flows despite an earlier fall in unit demand. “We believe counter-party credit risks and receivable delays pose the biggest risk for utilities (including renewables) while benign funding conditions assuage liquidity risk.”
Likewise, a faster-than-expected earnings recovery has lowered downside risk for rated corporates. An increase in commodity prices and a revival of domestic demand after lockdowns were eased have driven upside earnings surprises. Changes in consumer choices, for example a preference for personal transport for health-safety reasons, have helped sectors such as automobiles.
“In our view, a sustained earnings rebound is key for ratings to stabilize; roughly one quarter of ratings are still on negative outlook. On the other hand, proactive refinancing by speculative-grade corporates has materially reduced refinancing risk in 2021,” said S&P.
“On the banking front in India, we estimate the system’s weak loans ratio at 12% of gross loans and credit cost to remain elevated at 2.2%-2.7%.”
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% in fiscal 2022. On a positive note, banks are building capital buffers and reserves to deal with the COVID crunch.
“Finance companies’ performance has been a mixed bag. We expect polarization between Indian finance companies to persist,” it said. #economy #banks #market #investment /fiinews.com
