S&P Director, Sovereign & International Public Finance Ratings, Andrew Wood said the forecast for India in 2021 is on stronger side and shows that a lot of economic activity, which was frozen last year, is coming back on line to normalisation thereby brightening the growth prospects, as well as structural strengths of Indian economy coming back to the fore.
“India will be one of the fastest-growing economy in the EM (emerging market) space. India’s contraction this year was steep and may be deeper than global average, but bounce back of 10% that we are expecting next fiscal year will be putting India amongst the fastest growers in 2021 and more importantly we see Indian economy growing at 6% over medium term, may be slightly higher, and that compares very well to EM all around the world,” Wood said in a webinar on India outlook for 2021.
S&P said India’s economy has stabilised over recent months, with progressively better manufacturing, services, labour market, and revenue data. The hard part will be converting these trends into a sustained recovery over the next few years.
India has exceeded its fiscal deficit target of 3.5 per cent in the current fiscal by a wide margin due to higher spendings to stimulate economy amid the pandemic.
The fiscal deficit – the excess of government expenditure over its revenues – has been pegged at 9.5 per cent of the gross domestic product (GDP) in the current fiscal ending March 31, as per the revised estimate.
For the next 2021-22 fiscal, the deficit has been put at 6.8 per cent of the GDP, which will be further lowered to 4.5 per cent by 2025-26 fiscal ending March 31, 2026.
“Vast economic growth is crucial and critical for maintaining those deficits at those rates financing them and keeping debt stocks from rising even further. If that were the case if the economy were to recover at a much lower pace than expected we would have additional concerns regarding the sustainability of those fiscal accounts,” Wood added.
S&P currently has a ‘BBB-‘ rating on India, with a stable outlook.
To a query on what could put downside pressure on ratings, Wood said, “If we have a much lower than expected recovery, slower nominal GDP growth, that would be a concern. If economy is not growing quickly then fiscal deficit would be lot higher and debt stock could be rising rather than stabilising. That would entail high government deficit and higher general government debt stock which could cause us to question the sustainability of India’s public finances.”
India’s general government debt/GDP ratio, which stood at 72 per cent in 2019, has risen to around 90 per cent. On the banking sector, S&P said large capital raising would bolster bank balance sheet and expects capital infusion in state-owned banks to be sufficient to support credit growth.
S&P Associate Director, Financial Institutions Ratings, Deepali Seth-Chhabria said the presence of a large number of government-owned banks distort the competitive environment in the Indian banking sector.
Government’s announcement to privatise two public sector banks is a welcome step and this process would require legislative changes to lower government stake in PSBs below 51 per cent.
“In the long term it (privatisation) would improve system efficiency. In terms of consolidation, yes Indian banking system is a fragmented market and we do see the logic for consolidation … We always believe consolidation is not an answer to the NPL and the capital issue that banks have been facing. Consolidation has to be accompanied with improvement in risk management and branch and staff re-alignment and governance improvement,” she added.
In 2021-22 Budget, Finance Minister Nirmala Sitharaman announced that the government would privatise two public sector banks and one general insurance company. S&P estimates the weak loans in banking system to be about 12 per cent of total loans.
“All the steps that the government has taken and the improvement in economic recovery should help reduce the stress for the banking system. Our slippage expectations is definitely lower than what we were projecting in the peak of pandemic.
“Currently, we project slippages in India will remain elevated for the next fiscal and then normalise. Though they will remain elevated, we expect them to be lower than the very high level of 5-7 per cent that we saw in fiscal 2016-18,” Chhabria added.
On the Budget announcement of setting up of a bad bank-like structure or an asset reconstruction and management company to take over bad loans of public sector bank, Chhabria said “We believe in principle it could benefit the banks by ensuring that management resources are not spent on the recovery of weak credit. India’s challenge has always been on execution.”
On growth recovery, Wood said S&P envisages a solid sequential recovery for the Indian economy in the next fiscal as demand stabilises and economic activities come back online. Strong real and nominal GDP growth are crucial in sustaining the Indian government’s wide fiscal shortfall. India’s ability to thoroughly vaccinate its 1.4 billion population will have considerable bearing on its sustained recovery prospects.
S&P expects the Indian economy to contract by 7.7 per cent in the current fiscal, resumption in economic activity will power double digit growth in the next fiscal, beginning April 1, at 10 per cent.
“10 per cent growth in FY’22 will take the economy roughly back to fiscal 2020 levels in terms of full year output… Tricky part is going to be keeping the strong growth up over the medium term. Indian economy would grow at a rate of about 6 per cent per year after a rebound in year fiscal 2022. This is a good performance compared to other emerging markets around the world,” Wood added.
However, the brightening economic prospect is in contrast to India’s weak fiscal position as the fiscal metrics have gone worse over the past 12 months. Debt stock has shot up by 18 percentage points to around 92 per cent of GDP today and fiscal deficit (Centre and states combined) at 14.5 per cent of GDP in current fiscal, S&P added.
Wood said it would be critical for the economy to maintain a healthy and fast pace of real and nominal GDP growth to strike a balance with the high debt and deficit burden.