ET Now: Share with us the reasons behind Moody’s lowering India GDP outlook…
Gene Fang: The update to the growth forecast is driven by our assessment of the impact from the second wave. The way we look at it, the primary impact will be felt in the current quarter. Thereafter, things will hopefully be under control by June, and we will see resumption of economic activity.
We also expect the second wave’s impact to be lesser than compared to last year’s. Lockdowns are being applied on a state by state basis with varying degree of stringencies, so there is still some degree of economic activity continuing. And that makes it somewhat different from last year.
But at the same time, this being the second such shock in a year, it could be an added burden for consumers and small businesses. We therefore expect that the recovery, when it begins, will be somewhat muted compared to what we had previously expected.
Are there any particular pockets that you feel will be more vulnerable?
I think the financial sector has been a concern ever since we put this rating outlook on negative in June of 2020. It is driven by the fact that there were pre-existing weaknesses in the financial system before even before Covid.
I would say that the relief for small businesses has been very effective and was very effective last year too. The recent relief measures will hopefully provide some buffer against the potential asset quality impact.
That said, it is still relatively early days. We will continue to monitor the financial sector very closely in terms of how the second wave will impact the system more broadly.
So, is a V-shaped economic recovery definitely off the table? What kind of policy actions do you think can help mitigate this stress?
It is hard for us to make any recommendations. We do not make any sort of policy recommendations, certainly not in the field of public health. We do not have the expertise.
But we do think that a more robust recovery compared to what we are currently expecting would be very supportive.
In India’s case, we are always very focused on the fiscal metrics. This reassessment of growth is going to lead to a higher overall debt burden. I think that is one metric that we will continue to focus on. Not just for this year, but for next 2-3 years as well.
We would like to see some of those fiscal metrics beginning to stabilise, if not improve. That would be certainly supportive of an improvement in the outlook.