Second COVID wave could crimp India's long-term growth: Moody's

India`s severe second wave of coronavirus infections will slow near-term economic recovery and could weigh on longer-term growth dynamics, rating agency Moody`s Investors Service said in a note on Tuesday.

"Deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further credit pressure," said Gene Fang, Moody`s Associate Managing Director.

India`s COVID-19 crisis showed little sign of easing on Tuesday, with a seven-day average of new cases at a record high and international health authorities warning the country`s variant of the virus poses a global concern.

Moody`s, which rates India at "Baa3" with a negative outlook, the lowest investment grade, expects the surge in the virus to contribute to a marginal shortfall in government revenues and a redirection towards healthcare and virus response relative to the government`s budgeted estimates in February.

"The reimposition of lockdown measures will curb economic activity and could dampen market and consumer sentiment. However, we do not expect the impact to be as severe as during the first wave," Moody`s note said.

The agency said at this point it expects the negative impact on economic output to be limited to the April-June quarter, followed by a strong rebound in the second half of the year.

Moody`s now forecasts real GDP growth will fall to 9.3% from 13.7% for the fiscal year ending March 2022 and to 7.9% from 6.2% in fiscal 2022/23. Over the longer term, it expects growth of around 6.0%.

"The second wave has been driven by a highly contagious variant, putting significant strain on India`s healthcare system with hospitals overrun and medical supplies in limited supply," the agency wrote.

Moody`s anticipates a wider fiscal deficit of about 11.8% of GDP in 2021/22, compared with its previous forecast of 10.8% and an estimated 14% in 2020/21.

It also said it expects the combined impact of slower growth and a wider deficit to increase the general government debt burden to 90% of GDP in 2021/22, gradually rising to 92% in fiscal 2022/23.