NEW DELHI: S&P Global Ratings said on Tuesday that there were indications of a strong rebound in economic activity in India after the decline of the second wave of the pandemic, as it lowered growth forecasts by China citing growing near-term uncertainty over political actions by Asia’s largest economy and fears of looming failure of real estate company Evergrande.
The rating agency kept its growth forecast for India for fiscal 22 at 9.5% and lowered the estimate for China by 30 basis points to 8% for 2021, citing growing risks.
“The April-June period saw a sharp contraction in activity following a severe wave of COVID-19, but high-frequency indicators suggest a strong rebound in July-September. Households and micro and small businesses were hit hardest in the last recession and will slow the recovery as they repair their balance sheets. Inflation remains relatively high and public debt concerns persist, ”S&P said.
The rating agency said that a faster-than-expected cut could lead to capital flow risks, as monetary policy in India remains very accommodative with real interest rates in negative territory. “Other fundamentals such as reserve buffers and current account deficits are better than in 2013, when India was one of the ‘five fragile’ economies caught in the headwinds of weakening Reserve federal “, he added.
In China, S&P said, a range of regulatory measures were weighing on both sentiment and economic activity, although private demand growth remains subdued. In recent months, Chinese policymakers have tightened regulations for the tech sector, enforcing various anti-monopoly and data security regulations; in the concert economy space, companies such as Meituan (food delivery) and Didi (car-car) were invited to improve the conditions of their operators, including minimum wages for delivery people; in Internet gaming, the authorities have limited playing time for all under 18, which is a blow to a large industry; private lessons, where authorities felt these companies were making children’s education too expensive and effectively shut down the sector by making the profits non-attributable to shareholders.
“Additional uncertainty stems from property developer Evergrande, which is on the verge of default, as of this writing. A default could have far-reaching negative ramifications for other developers, vendors, and contractors, as well as the banks and financial institutions that lend to them. We do not expect the government to provide direct support to Evergrande. We believe that Beijing would only be forced to intervene if there was a large-scale contagion causing the failure of several major developers and posing systemic risks to the economy. Failure of Evergrande alone would be unlikely in such a scenario, given that the property development industry is highly fragmented in China – Evergrande’s market share is relatively small, ”S&P said.
The rating agency said the most significant risk relates to China’s medium-term growth prospects. “China has benefited enormously from its integration with the rest of the world in previous decades, especially through the transfer of technologies and best practices, which have boosted productivity and growth per capita. A model of excessive self-sufficiency runs the risk of slowing trend growth significantly. The effects will not only be domestic. Given China’s established position in propelling global growth, the impact of any significant slowdown will also be felt in a large part of other economies, ”he added.
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