The severe second wave of the Covid-19 pandemic in India has forced many rating agencies to revisit their earlier growth forecasts.
Many had initially expected the country’s gross domestic product growth for the current fiscal year would be in double digits, but they have now scaled down their expectations.
The latest to do so is Fitch Ratings, which has cut India’s growth forecast to 10% from the 12.8% estimated earlier. The global rating agency said rapid vaccination could help ensure a sustainable revival in business and consumer confidence.
Fitch said India’s banking sector is facing a stiff challenge as the lockdowns and other restrictions have “slowed recovery efforts and left banks with a moderately worse outlook for business and revenue generation in FY22.”
It expects banks to manage the near-term balance sheet pressures on the extended relief – as they did in FY21 – “but there are also risks to their capital and earnings buffers from a protracted asset-quality cycle.”
Problems could escalate if there are fresh Covid-19 waves and lockdowns, Fitch added.
The rating agency expects banks’ exposure to stressed small enterprises and retail borrowers to rise further with the increasing relief outlay and said this is likely to compel banks to go slow on regular lending.
It expects the state-run banks to be at greater risk than their private counterparts.
It said localized lockdowns during the second wave kept economic activity from stalling to levels similar to those during 2020, but several key business centers were affected. During the second wave, almost all metro cities and manufacturing hubs faced lockdowns.
This has required rethining of Fitch’s earlier expectations of a rebound to pre-pandemic levels by FY22.
The global rating agency expressed disappointment over the country’s vaccination rate and warned that it will make India vulnerable to further waves of the pandemic.
“Only 4.7% of its 1.37 billion population was fully vaccinated as of July 5, 2021,” it said. “This poses risks to the prospects of a meaningful and sustainable economic recovery.”
The Indian economy witnessed its first full-year contraction in four decades with a negative growth rate of 7.3% in 2020-21, as against 4% growth in 2019-20.
In the April-June quarter last year, the country’s economy contracted to an all-time low of 24.4%, as the governmenton March 25 had clamped down a strict nationwide lockdown, which lasted for two months.
Earlier this month, the Reserve Bank of India cut the country’s growth forecast to 9.5% for this fiscal year, from 10.5% estimated earlier.
While S&P Global Ratings lowered its growth estimate to 9.5%, another US-based rating agency, Moody’s, has projected 9.3% growth in the current fiscal year. The World Bank has slashed its growth forecast for the current fiscal ending March 2022 to 8.3%, from 10.1% estimated before the second wave of the pandemic hit the country.
India’s central bank expects banks to face greater stress this fiscal year as bad loans are expected to rise to account for 9.8% of their loan books, from 7.5% in FY21. It expects the second wave of the pandemic to dent the income prospects of both corporate and individual borrowers.