Is COVID-battered Indian economy staring at more downgrades?

The much-touted ‘green shoots’ seen in the Indian economy after last year’s lockdowns — increasing GST revenue and stabilisation of manufacturing — may disappear soon.

In the 2020-21 financial year, India’s GDP was estimated to have contracted 8%. After growing appreciably this year against the low base, it is projected to temper down to 6.8% in 2022-23. According to Reserve Bank of India (RBI) projections, India will see a 10.5% growth in GDP this financial year (2021-22). The IMF and World Bank have placed their estimates at 12.5% and 10.1%, respectively.

However, as the second wave of COVID proves extremely destructive to human lives as well as the economy, all the progress, however tiny, may be lost. International investors are already questioning India’s ‘investment grade’ status, says a Reuters report.

GDP projection downgrade

The recent weeks have had several rating agencies downgrade their GDP projections for India. “India is in the midst of a resurgence of COVID-19 cases, with the daily case count two times the 2020 peak,” said UBS in a report mid-April. “If the efforts to get the virus under control are successful over the coming weeks, we think recovery should gather steam from Q2 FY22 (July-September) onward.” It went on to revise its real GDP growth forecast for 2021-22 to 10%, against the earlier 11.5%. Since then, the COVID crisis has only worsened.

Nomura downgraded its GDP projections for 2021-22 to 12.6% from 13.5% earlier, and JP Morgan to 11% from 13%.

Also read: What India needs for its people, economy: COVID vaccines, in quick time

When GDP slips, credit downgrades are typically not far behind. As it is, the series of downgrades made last year had brought the country close to losing its investment grade credit ratings. Now, with the economy facing even greater peril, leading agencies S&P, Moody’s and Fitch are looking at downgrades, said the Reuters report.

The firms have already cut India’s GDP forecast, or warned that they would do so shortly. Further, they have predicted that government debt as a share of GDP will zoom to 90% this fiscal, a record high. As it is, India has enjoyed investment grade despite a high level of debt.

Investors anxious

Now that COVID is triggering higher debt levels, and the rating majors are only waiting for the severity to abate before taking a final call on downgrades, global investors are anxious, it has been observed. Certain investment instruments such as bonds are more sensitive to ratings than certain others, and investors in these are particularly worried.

“We still see India as investment grade,” the report quoted NN Investment Partners’ head of Asian Debt, Joep Huntjens, as saying. “But we do think there is at least a 50-50 chance that at least one rating agency downgrades, probably next year.”

And then there are some financial experts who believe a downgrade is long overdue. It is suspected that India, among major emerging economies, will soon be the biggest holder of debt after Brazil and Argentina. It may be noted that both the South American nations are junk-rated.