S&P Global Ratings cut India's growth to 9.5% from 11.0% for the fiscal year ending March 2022 due to a severe pandemic wave. "India is starting to come back out of lock-down, however inflation is running hot," it says in a report titled "Asia-Pacific's Recovery Regains Its Footing".
"Permanent damage to private and public sector balance sheets will constrain growth over the next couple of years. Further pandemic waves are a risk to the outlook given that only about 15% of the population has received at least one vaccine dose so far, although vaccine supplies are expected to ramp up. We forecast growth of 9.5% this fiscal year from our March forecast of 11.0%. In fiscal 2023, growth will likely come in at 7.8%," the ratings agency says.
A gradual revival is underway in India after a severe second COVID-19 outbreak in April and May led to lock-downs across much of the country and to a sharp contraction in economic activity. The lock-downs were more targeted compared with the blanket national lock-down seen last year but were still enough to lower discretionary mobility to more than 60% below normal.
Manufacturing and exports were less severely affected compared with 2020, but services were acutely disrupted. Consumption indicators such as vehicle sales fell sharply in May 2021 and consumer confidence remains downbeat.
The economy has turned a corner now, S&P says, adding, "New COVID-19 cases have been falling consistently and mobility is recovering. We expect this recovery to be less steep compared with the bounce in late 2020 and early 2021. Households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens."
According to the ratings agency, monetary and fiscal policies will remain accommodative but new stimulus will not be forthcoming. "The Reserve Bank of India (RBI) is likely to focus its policy efforts on quantity channels rather than interest rate changes. Inflation is now running hot at above 6%, the upper end of the central bank target range, meaning the RBI has no room to cut interest rates. Fiscal policy is constrained by limited policy space, particularly because the budget for fiscal 2022, which was decided before the second COVID-19 wave, had already targeted a large general government deficit of 9.5% of gross domestic product (GDP)," it added.
Commenting about Asia-Pacific's recovery, which is mostly on track, the ratings agency says, early stumbles during the vaccine rollout are giving way to redoubled efforts to vaccinate and open.
"The constraint remains domestic demand, especially private consumption," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings. "External demand is robust and this has helped lift manufacturing investment."
Patchy performance in the second stage of the pandemic means the region's recovery will remain unbalanced for a while longer. Exports are contributing to some upward revisions to the growth forecasts for 2021, but as many trading partners reopen and consumers spend more on services, the impulse from exports will wane. Private consumption is exerting a drag and while S&P says it expects an improvement in the next few quarters, much depends on the pace of the vaccine rollout.
It says, "Our expectation is that reaching key vaccination thresholds--especially the 70% level identified by the World Health Organization--will determine how quickly consumption rebounds. For China, Korea, and Singapore, this may come in the third quarter. Australia and Japan should follow, perhaps in early 2022, while the emerging market economies will lag."
"In most cases, activity remains well below our pre-COVID forecasts. Gaps between activity and the pre-pandemic trend also suggest that the rise of inflation across the region is, for the most part, transitory," S&P added.
The ratings agency sees a strong demand for durable goods globally to ease as economies reopen and people are able to spend on services, from hotels to restaurants. "This effect has been powerful--for example, while overall real household spending in Korea was still soft in the first quarter, spending on durables such as laptops and washing machines was 25% above trend."
The passthrough from inflation in producer prices, including commodities and raw materials, to consumer prices has been weak in Asia-Pacific and S&P expects it to remain so. "The main reason is that with private consumption and services activities still soft, demand for labour is weak, and companies will not need to hike wages to attract or retain staff," it added.
"With labour costs accounting for a large share of final consumer prices, soft job markets should keep a lid on inflation," says Mr Roache, adding, "There are exceptions where labour markets are tightening much more quickly, such as Australia."
Low domestic inflation should mean central banks keep policy rates low, but an uneven global recovery will make life difficult for some emerging markets. The Federal Reserve recently upgraded its growth and inflation forecasts and brought forward its calendar for hiking interest rates.
For emerging markets, S&P says, this is a doubled-edged sword because faster global growth could be accompanied by rapid exchange rate depreciation as interest rate expectations elsewhere re-price higher.
"A final key assumption is that oil price increases will moderate, and on average, prices will be about 10% lower in 2022 compared with the second half of 2021. Combined with the washing out of base effects, this will ease upward pressures on inflation. We forecast regional growth of 7.1% in 2021, slightly lower than our 7.3% projection in March," the ratings agency concludes.