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NEW DELHI : S&P Global Ratings on Tuesday said there were indications of a strong rebound in economic activity in India after the second wave of the pandemic waned, while it pared China’s growth forecast citing rising near-term uncertainty due to policy actions of the Asia’s largest economy and imminent default fears of real estate firm Evergrande.
The rating agency maintained its FY22 growth forecast for India at 9.5%, and cut estimates for China by 30 basis points to 8% for 2021, citing rising risks.
“The April-June period saw a steep contraction in activity on the back of a severe COVID-19 wave, but high-frequency indicators suggest a strong rebound over July-September. Households and micro and small enterprises were most affected in the latest downturn and will slow the recovery while they repair their balance sheets. Inflation remains relatively high, and public debt worries persist," S&P said.
The rating agency said faster-than-expected tapering could cause capital flow risks as monetary policy in India remains highly accommodative with real interest rates in negative territory. “Other fundamentals such as the reserve buffers and current account shortfalls are better than in 2013, when India was one of the "Fragile Five" economies caught in the crosswinds of Federal Reserve tapering," it added.
In China, S&P said, a spate of regulatory actions was weighing on both sentiment and economic activity even as private demand growth remains tepid. Over the past few months, China's policymakers have tightened regulations for technology sector, enforcing various anti-monopoly and data-security regulations; in the gig economy space, companies such as Meituan (food delivery) and Didi (ride-hailing) have been asked to improve conditions for their operators, including minimum wages for delivery riders; in internet gaming, authorities have restricted gaming time for everyone under 18, which is a significant blow to a large industry; private tutoring, where authorities felt these companies were making child-raising too costly and effectively shut down the sector by making profits non-attributable to shareholders.
“Further uncertainty stems from property developer Evergrande, which is on the brink of defaulting, as of this writing. A default could have wide-reaching negative ramifications for other developers, suppliers and contractors, and the banks and financial institutions that lend to them. We do not expect the government to provide any direct support to Evergrande. We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy. Evergrande failing alone would unlikely result in such a scenario, given the property development sector is highly fragmented in China--Evergrande's market share is relatively low," S&P said.
The rating agency said the larger risk involves China's medium-term growth outlook. “China has benefited massively from integrating with the rest of the world in previous decades, including through the transfer of technology and best practices, which have boosted productivity and per capita growth. A model of excessive self-reliance runs the risk of materially slowing trend growth. The effects will not only be domestic. Given China's established position in propelling global growth, the impact of any material slowdown will be felt by a wide swathe of other economies as well," it added.
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The rating agency maintained its FY22 growth forecast for India at 9.5%, and cut estimates for China by 30 basis points to 8% for 2021, citing rising risks.
“The April-June period saw a steep contraction in activity on the back of a severe COVID-19 wave, but high-frequency indicators suggest a strong rebound over July-September. Households and micro and small enterprises were most affected in the latest downturn and will slow the recovery while they repair their balance sheets. Inflation remains relatively high, and public debt worries persist," S&P said.
The rating agency said faster-than-expected tapering could cause capital flow risks as monetary policy in India remains highly accommodative with real interest rates in negative territory. “Other fundamentals such as the reserve buffers and current account shortfalls are better than in 2013, when India was one of the "Fragile Five" economies caught in the crosswinds of Federal Reserve tapering," it added.
In China, S&P said, a spate of regulatory actions was weighing on both sentiment and economic activity even as private demand growth remains tepid. Over the past few months, China's policymakers have tightened regulations for technology sector, enforcing various anti-monopoly and data-security regulations; in the gig economy space, companies such as Meituan (food delivery) and Didi (ride-hailing) have been asked to improve conditions for their operators, including minimum wages for delivery riders; in internet gaming, authorities have restricted gaming time for everyone under 18, which is a significant blow to a large industry; private tutoring, where authorities felt these companies were making child-raising too costly and effectively shut down the sector by making profits non-attributable to shareholders.
“Further uncertainty stems from property developer Evergrande, which is on the brink of defaulting, as of this writing. A default could have wide-reaching negative ramifications for other developers, suppliers and contractors, and the banks and financial institutions that lend to them. We do not expect the government to provide any direct support to Evergrande. We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy. Evergrande failing alone would unlikely result in such a scenario, given the property development sector is highly fragmented in China--Evergrande's market share is relatively low," S&P said.
The rating agency said the larger risk involves China's medium-term growth outlook. “China has benefited massively from integrating with the rest of the world in previous decades, including through the transfer of technology and best practices, which have boosted productivity and per capita growth. A model of excessive self-reliance runs the risk of materially slowing trend growth. The effects will not only be domestic. Given China's established position in propelling global growth, the impact of any material slowdown will be felt by a wide swathe of other economies as well," it added.
S&P retains India’s FY22 growth forecast at 9.5%
There are signs of strong rebound in economic activity, says rating agency
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