2nd Covid wave increased financial risks to households, small biz: Moody's

The second wave of Covid infections has increased financial risks to households and small businesses, Moody’s has said. This, in turn, Moody’s said may hurt bank profitability going ahead.

“New loan forbearance and liquidity measures by the central bank, and government’s plans to set up an asset reconstruction company to take over stressed loans, along with modest recapitalization of public sector banks, will mitigate, but not eliminate, sector risks,” Moody's said.

India’s financial sector, the rating agency said, is the main driver of potential event risk to the sovereign. Structural inefficiencies, it believes, continue to constrain growth potential and limit resilience to shocks. If implemented effectively, government reforms that target these challenges would be credit positive. However, the relatively low effectiveness of previous reforms informs our medium- to long-term growth view.

“The pandemic will leave new economic scars and deepen pre-pandemic constraints. Our growth forecasts indicate a shortfall in GDP compared with our pre-pandemic expectations of more than 10 per cent in fiscal 2023 (FY23).

Limited damage

Like other economists and brokerage houses, Moody's too expects the damage to the economy from the second wave of Covid and the ensuing lockdowns to be restricted to the April - June 2021 quarter, followed by a rebound later this year, resulting in real, inflation-adjusted GDP growth of 9.3 per cent in the fiscal year ending March 2022 (fiscal 2021) and 7.9 per cent in fiscal 2022.

Those at Nomura, too, suggest the damage due to the second wave of Covid infections to be significantly less than during the first wave and less than currently feared. Already, states are taking the first steps towards relaxing lockdowns, which suggests the peak hit to growth is behind us (in May), with June to be better in sequential terms, they said.

“Beyond Q2, we expect a mix of the ‘vaccine pivot’ point, strong global growth and the lagged impact of easy financial conditions to enable a faster pickup. We expect GDP growth of 9.8 per cent y-o-y in 2021 and 10.8 per cent in FY22,” wrote Sonal Varma, managing director and chief India economist at Nomura, in a recent co-authored note with Aurodeep Nandi.

While the gradual lifting of lockdowns across key cities is a positive, economists at QuantEco Research caution that it may just be a bit early to rejoice, as some of the key indicators still remain in red.

“While some states/cities that have successfully bent the COVID curve are commencing to ease curbs, many states have extended lockdowns well into Jun 21 Given the magnitude and impact of second wave, the exit from lockdowns at the state level can be expected to be guarded and gradual at best,” wrote Shubhada Rao, founder, QuantEco Research in a co-authored note with Yuvika Singhal and Vivek Kumar, their economists.

Meanwhile, Barclays recently pegged India’s FY22 GDP growth at 7.7 per cent in the bear-case scenario, if the country is hit by the third wave of the Covid pandemic going ahead, which assumes another wave of infections and a two-month period of restrictions that disrupt economic activity in the second half of calendar year 2021 (H2-21), evenly split between the third and the fourth quarters (Q3 and Q4).

“In this scenario, we estimate that the total economic loss would rise to $117 billion, or around 3.75 per cent of GDP,” wrote Rahul Bajoria, chief India economist at Barclays in the report coauthored with Shreya Sodhani.