Moody’s slashes India’s growth projection to 9.3% from earlier estimate of 13.7%

Spread of the COVID-19 virus as well as the rate of vaccinations will have a direct impact on economic outcomes

Moody’s Investors Service sharply scaled down this year’s growth projection for India to 9.3% on Tuesday from its earlier estimate of 13.7%, citing “the negative impact of the second wave”, and warned that the spread of the COVID-19 virus as well as the rate of vaccinations will have a direct impact on economic outcomes.

“The credit profile of India is increasingly constrained by obstacles to economic growth, a high debt burden and weak financial system. Policymaking institutions have struggled to tackle and contain these risks, exacerbated by the coronavirus pandemic,” the global rating agency said in a credit opinion note.

“A shortage of vaccines and logistical difficulties in reaching a large rural population (about two-thirds of the population) complicate the vaccine rollout,” it pointed out, noting that only around 10% of the country’s population had received at least one dose of the vaccine by early May.

Healthcare spending

The severe second wave of COVID-19 infections will slow the near-term economic recovery and could weigh on longer-term growth dynamics, Moody’s said.

Also read: Moody’s revises India’s 2020-21 GDP contraction to 10.6%

“As of now, we expect the negative impact on economic output to be limited to the April to June quarter, followed by a strong rebound in the second half of the year,” it said, adding that spending will have to be redirected toward healthcare and virus response relative to what the government had budgeted in February.

Factoring in fresh pandemic-related spending, the agency expects a wider general government fiscal deficit of about 11.8% of GDP in 2021-22, instead of its previous estimate of 10.8%. “We expect the combined impact of slower growth and a wider deficit to drive the general government debt burden to 90% of GDP in 2021-22, gradually rising to 92% in 2022-23,” it said.

In Moody’s view, India’s policy effectiveness has been lower than some international surveys suggest, even though it considers India’s legislative and executive institutions, civil society and judiciary to be relatively strong.

“While ongoing government efforts to reduce corruption, formalize economic activity, and bolster tax collection and administration should further strengthen institutions over the medium term, there are increasing risks to their ultimate efficacy,” the agency observed.

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