India is likely to be among the fastest-growing emerging markets this year, Standard & Poor’s predicted, even as the US rating company said new variants of the Covid-19 virus could lead to a much larger second wave and pose a risk to economic recovery.
The steep contraction in the current financial year will be followed by a bounce back to 10% growth in FY22, putting India among the fastest-growing economies in 2021, said Andrew Wood, S&P director of sovereign and international public finance ratings.
“We see the Indian economy growing at 6% over the medium term, may be slightly higher, and that compares very well to emerging markets all around,” he said at a webinar on S&P’s India 2021 Outlook on Wednesday.
A much larger second wave that could emanate from the new strains of the Covid-19 virus would be a major risk to India’s economy, based on the significant impact similar events have had on the recovery paths of other countries, Wood said.
“We are also watching India’s vaccination campaign very closely to see how well India can mitigate the lurking risks associated with the pandemic as well as new, more transmissible and potentially resistant strains of the SARS-CoV-2 virus,” Wood said.
S&P expects India to vaccinate a significant portion of its population only by the end of 2022, against about 9 million currently, which represents less than 1% of the population.
Wood counted the Serum Institute of India, the world’s largest producer of vaccines, as an ace up the country’s sleeve because “it’s not going to have to rely upon foreign-manufactured shots, which is a major asset and differentiates India from economies around the world.”
This would be a critical component of sustaining India’s economic recovery over the medium term as keeping up growth rates would be tricky, he said.
Fiscal deficit Wood said S&P will be closely watching India’s medium-term growth with regard to the country’s sovereign rating, currently at BBB- with a stable outlook.
“Higher growth rates over the next few years are going to be critical to maintain and finance the government’s higher fiscal deficits and debt stock,” he said.
S&P has pegged India’s combined Centre and state fiscal deficit at 14.5% of GDP – which is expected to drop to 11.6% in FY22 and further to below 10% in FY23.
“This is gradual and relatively slow fiscal consolidation, given how high that fiscal deficit is,” Wood said, adding that S&P would be more concerned over the country’s finances if the deficit remained in double digits over the medium term.