NEW DELHI: Authorities in India are walking a tightrope as they grapple with the economic fallout of the coronavirus pandemic alongside the need to conserve limited government finances, with Covid-19 infections continuing to surge at an alarming pace, analysts say.
India’s economy has been battered by the pandemic and a strict nationwide lockdown that was enforced in March in reaction to the virus. This saw many businesses virtually stop operations and millions were left without work during what was one of the strictest lockdowns in the world.
The latest official data revealed that this resulted in India suffering its worst quarterly contraction on record in April to June, plunging 23.9 per cent compared to the same quarter a year earlier. That prompted Moody’s Investors Service in June to downgrade India to ‘Baa3’ – one notch above ‘junk status – from ‘Baa2’ for the first time in 22 years, while keeping its outlook on the country negative.
“With uncertainty around Covid-19 and while the demand recovery and economy pickup is gradual, the government and the central bank have no option but to wait and see how the situation pans out before making any further announcements as they’re left with limited resources,” says Gurpreet Sidana, the chief operating officer at Religare Broking, based in New Delhi.
There have been calls for more measures to be taken by Prime Minister Narendra Modi’s government, including further fiscal stimulus, to boost the economy. But this is not something that can be easily executed, as India exceeded its fiscal deficit target for the year in the four months to July, with a shortfall of more than $111 billion.
“Given the restricted fiscal space with the central and state governments, it is difficult to see how it can be done without running up a higher deficit – which can pressure India’s external ratings,” says VP Nandakumar, the chief executive of Manappuram Finance, a non-banking financial company based in Kerala. “That is a tightrope for the government to walk.”
On Friday, Moody’s revised India’s GDP forecast for the current financial year, which runs until the end of March 2021. The agency now projects Asia’s third-largest economy to shrink 11.5 per cent, compared to an earlier 4 per cent forecast.
The rating agency said the country’s “credit profile is increasingly constrained by low growth, a high debt burden, and a weak financial system” … [and that] policymaking institutions have struggled to mitigate and contain these risks, which have been exacerbated by the coronavirus pandemic”.
Several other institutions, including Fitch Ratings, slashed their GDP growth forecasts for the year, following the recent quarterly data release.
“GDP should rebound strongly in [the October to December quarter] amid a re-opening of the economy, but there are signs that the recovery has been sluggish and uneven,” Fitch Ratings said. The pick-up is being facilitated by a reopening of the economy following the lockdown.
