S&P Global Ratings cut India’s growth forecast for the current fiscal to 9.5 per cent, from 11 per cent earlier, on Thursday.
The agency said a severe second COVID-19 outbreak in April and May led to lockdowns imposed by states and sharp contraction in economic activity.
“We forecast growth of 9.5 per cent this fiscal year from our March forecast of 11 per cent,” S&P said.
S&P said permanent damage to private and public sector balance sheets will constrain growth over the next couple of years, and projected growth at 7.8 per cent in the next fiscal ending March 31, 2023.
Further pandemic waves are a risk to the outlook given that only about 15 per cent of the population has received at least one vaccine dose so far, although vaccine supplies are expected to ramp up, the agency said.
India’s economy contracted by 7.3 per cent in fiscal 2020-21 as the country battled the first wave of COVID, as against a 4 per cent growth in 2019-20.
GDP growth in the current fiscal was estimated to be in double digits initially, but a severe second wave of the pandemic has led to various agencies cut growth projections.
Earlier this month, RBI too cut growth forecast to 9.5 per cent for this fiscal, from 10.5 per cent estimated earlier.
It said manufacturing and exports were less severely affected compared with 2020, but services were acutely disrupted.
Consumption indicators such as vehicle sales fell sharply in May 2021 and consumer confidence remains downbeat.
S&P said households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens.
Monetary and fiscal policies will remain accommodative but new stimulus will not be forthcoming, it added.
S&P said RBI has no room to cut interest rates with inflation above 6 per cent, the upper end of the central bank target range.
Also, fiscal policy is constrained by limited policy space, particularly because the budget for fiscal 2022 (ending March 31, 2022), which was decided before the second COVID-19 wave, had already targeted a large general government deficit of 9.5 per cent of GDP.