COVID-19 second wave: India's GDP growth can slip to 8.2% in FY22, says CRISIL

India's gross domestic product (GDP) growth may slip to 8.2 per cent in financial year 2021-22 if the second wave of coronavirus pandemic in the country peaks by June-end, rating agency CRISIL said on Monday while maintaining its baseline estimate of 11 per cent growth.

Risk is "firmly tilted downwards" to its projection of 11 per cent growth in FY22, CRISIL said and presented two scenarios for the second wave of the pandemic. In the moderate case, under which second wave peaks by May-end, India's GDP growth will drop to 9.8 per cent, while GDP growth will slip to 8.2 per cent in the severe scenario under which the second wave peaks by June-end. In both the cases, the permanent loss to GDP over the medium-term will rise to 12 per cent from 11 per cent in the base case.

However, the rating agency said its 11 per cent growth estimate will still hold if the surge in COVID-19 cases and lockdowns peak by mid-May. In this scenario, the economy will return to pre-pandemic level by September 2021 quarter.

"The intensity of the second wave of COVID-19 infections in India has come as a surprise, and is haemorrhaging the country's healthcare infrastructure. That has made lockdowns and restrictions inevitable," CRISIL said.

While the restrictions on movement and commerce are less stringent that during the first wave, they are increasing across the country as caseload is spreading in rural areas where healthcare infrastructure is weak.

During April-September of FY22, the economic activity will be supported by lower base effect in the previous year, but will be clouded by the spread of pandemic, with the second wave already leading to softening of high-frequency indicators. However, October-March period will see a better spread of economic growth due to increase in COVID-19 vaccination and better adaptability to the pandemic, which would also support sectors that are lagging.

Besides, the second half of FY22 is also likely to see stronger global growth, which would support India's exports to an extent, the rating agency said.

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The agency said two "gigantic challenges" confront the country, including the spread of the second wave and vaccination. On the former, it said while the second wave has been bigger spreader globally, the death rates are falling in India with the rise in infections. However, India ranks lowest among fully vaccinated populations, it said, recommending that rendering jabs to half of the population by festivities in October would be good.

The rating agency maintained its 15 per cent revenue growth estimate for India Inc during the fiscal, adding that demand impact is most pronounced for the services sector, followed by discretionary. The large companies are more resilient, it said, pointing out that operating profit margins of such players show a superior bargaining power.

About 10 per cent of India's GDP and workforce is the most vulnerable because of the surge in cases, CRISIL said. Among the sectors, contact-based services are most vulnerable, while rise in reverse migration could also impact construction activity. It said construction is a highly labour intensive sector and will remain a key monitorable from employment perspective, but pointed out that the second wave could be less severe on employment.

Monetary policy will remain accommodative, helped by food-led moderation of headline CPI inflation which is projected to cool down to 5 per cent in FY22, CRISIL said.

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