The second wave of COVID-19 pandemic has increased risks to India's credit profile and rated entities, Moody's Investors Service said on Tuesday.
However, it said India's economy will rebound in financial year 2021-22, after contracting in FY21, and grow by 9.3 per cent.
Moody's, which has a 'Baa3' rating on India with a negative outlook, said it expects a decline in economic activity in the June quarter due to reimposition of lockdown measures along with behavioural changes due to the pandemic.
"India's economy rebounded quickly from a steep contraction in 2020, but a severe second wave of the coronavirus has increased risks to the outlook with potential longer-term credit implications. Risks to India's credit profile, including a persistent slowdown in growth, weak government finances and rising financial sector risks, have been exacerbated by the shock," the rating agency said.
The pandemic will leave new economic scars and deepen pre-pandemic constraints and GDP growth would average around 6 per cent in the longer term, it added.
Moody's said the economy will rebound after a decline in economic activity in June quarter, and will grow 9.3 per cent in FY22 and 7.9 per cent in FY23. However, it warned that more waves of coronavirus cases pose a risk to its forecasts.
In February, Moody's had forecasted a 13.7 per cent growth in current fiscal.
The Indian economy contracted by 7.3 per cent in fiscal 2020-21 as the country battled the first wave of COVID, as against a 4 per cent growth in 2019-20.
"India's key credit challenges include a persistent slowdown in growth, weak government finances and financial sector risks. These vulnerabilities weighed on the sovereign credit profile before the coronavirus pandemic and have been exacerbated by the shock," it said.
Moody's said structural inefficiencies continue to constrain growth potential and limit resilience to shocks. If implemented effectively, government reforms that target these challenges would be credit positive.
It said India's government debt burden would rise to 90.3 per cent in the current fiscal and a small shortfall in budgeted revenue and a redirection of spending towards the response to the pandemic will result in a general government fiscal deficit of 11.8 per cent of GDP. Debt-to-GDP will edge up to 92 per cent by fiscal 2023, largely driven by relatively slow economic growth.
Moody's said India's financial sector is the main driver of potential event risk to the sovereign.
"So far, the second wave has increased financial risks to households and small businesses, which may hurt bank profitability. New loan forbearance and liquidity measures by the central bank, and government plans to set up an asset reconstruction company to take over stressed loans, along with modest recapitalisation of public sector banks, will mitigate, but not eliminate, sector risks," it added.