May 14, 20212 min read

Moody's cuts India's FY22 GDP forecast to 9.3%; rules out rating upgrade

Rating agency Moody’s has cut India’s gross domestic product (GDP) forecast for FY22 to 9.3 percent from the earlier projection of 13.7 percent and has ruled out a sovereign rating upgrade – at least for now.

The downward revision in GDP estimates comes on the back of the second wave of Covid infections across the country, which have triggered localized lockdowns and mobility curbs, except for essential services.

“As a result of the negative impact of the second wave, we have revised our real, inflation-adjusted GDP growth forecast down to 9.3 percent from 13.7 percent for fiscal 2021 (FY22),” the Moody's release said.

India is experiencing a severe second wave of coronavirus infections, which Moody's said, will slow the near-term economic recovery and could also weigh on longer-term growth dynamics. As a result, the rating agency now expects a wider general government fiscal deficit of about 11.8 percent of GDP in FY22, compared with the previous forecast of 10.8 percent.

The combined impact of slower growth and a wider deficit, it believes, will drive the general government debt burden to 90 percent of GDP in fiscal 2021, which will gradually rise to 92 percent in fiscal 2023. Moody’s estimates are closer to those of IHS Markit, which had predicted the Indian economy (as measured by GDP) to grow at 9.6 percent in FY22.

Rating Upgrade

That said, Moody's has ruled out a sovereign rating upgrade for India. On the contrary, it warns that the ‘self-reinforcing economic and financial risks would put pressure on the rating.

“A rating upgrade is unlikely in the near future. However, we would change the outlook on India’s rating to stable if economic developments and policy actions were to raise confidence that real and nominal growth will rise to sustainably higher rates than we project,” Moody's said.

Long Term Story Intact

Despite the near-term headwinds, most experts - including those at Moody's - say the impact of the second wave of Covid infections will be limited.

"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," Moody's said. As a result, the rating agency has revised upwards its GDP growth forecast for India for fiscal 2022 to 7.9 percent from 6.2 percent. Over the longer term, we expect growth of around 6.0 percent thereafter," it said.

Those at Nomura, too, see a limited impact of the ongoing second wave of the pandemic but do caution against the risk to their GDP growth projections. As a result, they recently lowered India’s GDP growth projection to 9.8 percent y-o-y in 2021 (from 11.5 percent earlier) and to 10.8 percent in FY22 (versus 12.6 percent earlier) on May 7.

"The second wave should remain a short-term negative economic shock, localized to Q2-2021, while the medium-term growth outlook remains stable. Nevertheless, the sharp slowdown in ultra-high frequency indicators since April and extended restrictions does suggest downside risk," wrote Sonal Varma, managing director, and chief India economist at Nomura, in a co-authored note with Aurodeep Nandi.