India's economy to see record contraction in FY21 before sharp recovery: S&P

The Indian economy will experience a record contraction in the fiscal year to March 2021 on account of the global Covid-19 pandemic but real GDP will recover significantly in FY22, rating agency Standard and Poor's said on Friday.

S&P affirmed its rating on India's long-term foreign and local currency sovereign credit at the lowest investment-grade level and retained its stable outlook on the economy.

India's long-term rating was affirmed at 'BBB-' with a stable outlook while the short-term rating was held at 'A-3'.

"The stable outlook reflects our expectation that India's economy will recover following the resolution of the Covid-19 pandemic, and that the country's strong external settings will act as a buffer against financial strains despite elevated government funding needs over the next 24 months," S&P said.

India has the second highest virus cases globally despite seeing one of the strictest of lockdowns and cases are still rising as the economy gradually opens up.

"We expect economic activity in India to begin to normalize in fiscal 2022, resulting in real GDP growth of about 10%."

The Indian government's direct fiscal support has been limited to 1.2% of GDP so far compared to roughly 3% of GDP on average in other emerging market economies.

S&P noted that the government's reluctance to provide greater direct fiscal support to the economy likely reflects pre-existing fiscal constraints owing to years of high fiscal deficits.

"Although additional stimulus may help to avert a steeper downturn this year, it would also further strain the government's weak finances," it said.

"This increasingly tenuous balance may challenge India's capacity to maintain sustainable public finances and balanced economic growth, if the recovery is slower than we anticipate."

The country's fiscal deficit is likely to rise to about 12.5% of GDP this year, largely driven by much weaker revenue generation and the government's net indebtedness is set to exceed 90% of GDP this year compared to just over 70% in fiscal 2020, S&P said.