Ratings agency CRISIL on June 7 revised its forecast downward for India's GDP, to grow by 9.5 percent in FY22 from 11 percent projected earlier on the back of lockdown restrictions by states and daily cases which continue to fare above the peak of the first wave.
"The downward revision is premised on the clearly evident hit to the two engines of growth, private consumption and investment and by the second wave," it said.
India's GDP bounced back to the pre-pandemic level by the fourth quarter of last fiscal, after a sharp contraction in the first quarter. However, the second wave has likely erased those gains in the first quarter of this fiscal, Crisil said.
It said it would take more than a quarter to reach the pre pandemic level.
According to Crisil, if a third wave hits the country, it would pose a significant risk to the growth forecast, as would a slower than anticipated pace of vaccination. In such a pessimistic case, it estimates the GDP to at 8 percent.
The second wave has presented a humongous health challenge, overwhelming the health infrastructure. Cases at the peak of this wave, at 4 lakh+ daily, were more than four times that seen at the peak of the first wave in September 2020. Further, it has also penetrated in rural areas, it said.
Crisil also said that while the restrictions announced by the states were not as stringent as the national lockdown of 2020, however, the current wave is yielding a devastating impact as lockdowns are getting extended to the third month in several states due to uncertainty around vaccine supply and possibility of a third wave.
"Private final consumption expenditure (PFCE) is the biggest demand-side driver of India’s GDP. Last fiscal, PFCE contracted a massive 9.1% on-year. This meant PFCE, at Rs. 75.6 lakh crore, got pushed back to nearly fiscal 2018 levels (Rs 73.3 lakh crore), " it said.
Crisil said that due to pent up demand and improvement in situation, PFCE had improved and the household savings trend normalised and people started spending again after the first wave. It however said that in the second wave, the pattern appears to be different as there is a rise in medical expenditure and that the prospects of pent up demand are therefore bleaker this time.
"The pandemic took a toll on investments, the second largest demand side driver of the economy. Gross fixed capital formation (GFCF) declined 10.8% on-year last fiscal to Rs 42.2 lakh crore, a level similar to fiscal 2018’s Rs 40.8 lakh crore. Much of this decline was due to a cut in planned private capital expenditure , on account of the pandemic," it said.
Crisil further noted that as capacity utilisations are low in manufacturing sector, and the resurgence of infections, private sector investment is likely to remain subdued.
Crisil said that ramping up vaccination pace to cover larger proportions of populations is the only way to achieve a broad based recovery.
"But India’s vaccination progress is far from encouraging. Instead of picking up speed, vaccination rate has only slowed in the past 2-3 weeks. The average daily vaccination rate dropped from 1,666 per million in the last week of April, to 1,265 per million in the last week of May, due to shortage of vaccine supplies," the ratings agency said.