S&P Global said India’s economic growth potential in medium and long-term is 6.5-7 percent but reforms are critical for the country to get back to recovery after deep shock this year.
Days after keeping India’s rating at lowest investment grade for 13th year in a row, the rating agency said despite the contraction in GDP this year, the country continues to be an outperformer among the peer groups.
The rating agency has forecast a 5 percent contraction in the fiscal year starting April, and the growth to recover to 8.5 percent next fiscal.
But, this will not stop the rating agency to downgrade India if COVID-19 pandemic had done more structural damage to the economy.
It will consider a downgrade if it sees that the pandemic has done more structural damage to India. India is not alone getting affected by the crisis.
The protracted lockdown has resulted in the severe disruption of industrial production and consumer spending, with GDP growth forecast to contract sharply in the April-June quarter.
India’s economic potential and trend growth rate in the medium and long term is 6.5-7 percent. This high growth rate would be essential for credit profile to remain sustainable. Reforms are critical for India to get back to recovery and despite deep shock this year India remains solid outperformer compared to peers.
The recovery in the labour market will be the key, and the recovery in informal sector will take time, S&P noted.
Stating that although India’s weak fiscal position will increase on account of the pandemic, the rating agency expects general government deficit to be 11 percent this year, and decline to 10 percent next year.
S&P expected the deficit to decline to 7-9 percent over medium-term and said India’s fiscal position will weigh in credit rating for the long term.