Surge in Covid cases postpones but does not derail India’s recovery: Jeremy Zook, Fitch Ratings

How is India positioned versus the rest of the world? What are the parameters that will lead to deterioration in fiscal outlook, if any?
Back in March, we had forecast a 12.8% rebound for India. India was well positioned compared to most other economies in the world for a very robust recovery from the pandemic shock last year. Of course, what we are seeing now is a very worrying public health emergency across India. It is a very rapidly changing situation that we think will add some headwinds to our 12.8% growth forecast. As restrictions are being rolled out across a number of states and virus cases continue to increase, we are keeping quite a close eye on a number of indicators. We are looking at mobility indicators in particular and just the level of restrictions across the economy to assess what sort of impact we can expect from this new wave of the virus.

So certainly, we will be revising down our growth forecast based on the recent surge in cases. It is just a question of how much of a headwind this poses to the economy. Around the world we have seen that the second waves usually do not have as severe of an impact as the first wave did last year. Secondly, we expect India to not go back to widespread national lockdowns. We expect lockdowns to be localised and less stringent than they were last year and that perhaps will mitigate some of the risk but certainly we are seeing downsides to the near term macro outlook.

Do you think the sharp rise in cases is something which definitely poses a risk? Till now the market and economists were expecting a sharp recovery. But the second wave continues to be a big risk?
This near-term surge in cases postpones but does not derail India’s recovery, in our view. It would likely take a little bit longer now for India’s economy to come out of this recent surge in Covid cases but we still expect India to return to a relatively strong pace of growth.

What we saw after the first wave last year was quite a robust rebound in growth in India and we expect that to materialise again once the second wave subsides. In the very near term, we are likely to see some more headwinds to growth. Over the medium term, India’s growth prospects are still quite strong and that is something that we see as a fundamental rating driver for India. We expect India’s strong rates of growth to persist over the medium term.

What do you think is the best case scenario for FY22? Many agencies have downgraded their GDP estimates for India for FY22.
We are going to see quite a strong rebound but we would likely still downgrade our growth outlook because of the sequential pace of quarter-on-quarter growth that we are likely to see going forward. India’s economy is slowing to 5.8% growth in FY23 and if growth is a little on the weaker side from our current forecasts in FY22, technically that would lead to a stronger growth number for FY23.

So this really reflects our view that it is a postponement of India’s recovery from the coronavirus but not a derailment of it in terms of longer-term negative impacts on India’s medium-term potential growth.

How swift do you expect it to be? We talk about a V-shaped, U-shaped or a K-shaped recovery. Also do you see certain segments contributing more to this recovery than the others?
What we are seeing and this is generally the case in many countries in the world that there is a bit of a K-shaped recovery. So while some sectors are doing quite well, emerging from the pandemic, certain sectors where social distancing restrictions are still constraints, such as face to face retail and things of that nature, there is a little more pressure in terms of the economic recovery.

From ratings perspective, we are quite focussed on the near term impact for the growth outlook and the impact that this has on public finances in particular. The longer this pandemic shock and this second wave continues, the more impact will it have on India’s ability to recover over the medium term and return to some of those high growth rates.

Some of the scarring impacts I think will most likely come through from the financial sector. India’s financial sector was in a relatively weak position coming into the pandemic. Our view is that it is perhaps facing a little more challenging environment with the second wave in terms of banks asset quality and that could be the biggest constraint on medium term growth which as I mentioned is probably more important from a ratings perspective than just the near term.