India: Facing up to a new wave – ING

According to Robert Carnell – Regional Head of Research (Asia-Pacific) at ING – the development of a new Covid wave threatens both growth and India's sovereign ratings.

Key Quotes:

“The key metric for any downgrade is very simple - India’s fiscal position. Like most economies during the pandemic, India’s fiscal deficit worsened considerably as tax revenues slumped and government spending shot up to offset the crashing economy.”

“There are a variety of risks to the fiscal outlook. The 2021/22 budget outlook assumes a 14.4% nominal growth rate. Implicit within this is a real GDP growth rate that will not substantially dip below 10% assuming inflation runs somewhere around the middle of the RBI’s 4% +/- 2% target.”

“Rising debt-service costs are another risk given the global backdrop of tightening policies in the US and elsewhere. Revenues will also need to come in as predicted, and expenditures should not creep above budgeted amounts – slippage on fiscal targets is not uncommon in even the most prudent economy.”

“Monthly deficit figures are running at about -$20bn currently. Both export and import growth is good, and the recent decline in crude oil prices was certainly helpful. But the ongoing recovery will likely shift the balance of trade more in favour of imports, and we forecast the trade deficit further increasing in both $bn terms and as a percentage of nominal GDP.”

“The outlook for growth is tentatively positive but is maybe not as solid as some directional indicators suggest and may well be severely tested again by the Omicron Covid variant. And this is also where the biggest threat from a credit downgrade most likely lurks.”