Indian economy picking up steam after second Coronavirus wave, says S&P

S&P Global Ratings said India’s economy is “picking up steam” after having stalled during the second wave of the pandemic in May and June, as it retained the country’s BBB- sovereign rating with a stable outlook.

It said growth will improve over the July-September quarter, pointing to high-frequency indicators such as goods and service tax (GST) receipts and motor vehicle sales.

The impact of the second Covid wave on economic activity was not as severe as the first wave last year. That has helped India’s ratings but the fresh downturn left economic activity at 17% below pre-Covid levels, S&P analysts said at a webinar on Wednesday.


Data released last month showed India’s economy expanded 20.1% year-on-year in the April-June quarter on a low base though sequentially it was down 16.9% over the previous quarter.

The Indian economy is still far from normal, but activity is gradually improving, S&P said in a presentation during the webinar. Record forex reserves and India emerging as an external creditor to the world has also supported the rating and stable outlook, S&P said.

S&P Expects a ‘Less Severe’ 3rd Covid Wave
"India's external position is very strong, and this is an assessment that is quite supportive of India's sovereign ratings despite the fact that we have had this deterioration in its fiscal position, concurrently," said Andew Wood, director, sovereign and international public finance ratings for Asia Pacific.

He added that the numbers will continue to look "pretty robust" with real GDP growth at 9.5% in FY22 and expected to stay above 7% in FY23. A moderate pace of consolidation on fiscal performance is expected for the remainder of FY22 and FY23.

"Given India's weak fiscal settings and its high stock of debt at around 90% of GDP on a net basis, fast nominal GDP growth is going to be very important in order to prevent any further erosion of fiscal settings and to enable some degree of fiscal consolidation going forward," he said.

S&P anticipates another Covid wave in India as seen in other countries as well, but with rising vaccination coverage, it expects this to be less severe both in terms of health and economic impact. India’s vaccinations have crossed 700 million and in the first week of September, the daily average has been over 7.6 million doses.

Rating Outlook

Wood said that the direction of the economy and the pace and the scale of the recovery will be critical for the trajectory of India's ratings.

"We could raise the ratings on India if the economy exhibits a stronger recovery than we’re expecting over the next 24 months, subject India’s long-term growth outperformance is intact, and also its fiscal metrics dramatically improve," he said.

S&P could also raise the rating if it observed a sustained and substantial improvement in the Reserve Bank of India’s monetary policy effectiveness and credibility, such that inflation is managed to durably lower rates over time, Wood added. Downside risk could arise if India's economy were to recover significantly slower than expected from FY22 onwards or net general government deficits exceed forecasts, he said.