India recovery depends on controlling virus, warns Moody’s chairman

The chairman of Moody’s has warned that India will struggle to launch an economic recovery unless New Delhi can flatten the coronavirus infection curve.

Henry McKinnell, who previously served as chief executive of pharmaceutical company Pfizer and a frequent visitor to India since the 1970s, said the surge in Covid-19 cases meant that reviving Asia’s third-biggest economy would remain a “major challenge”.

“The only tool we have right now [to fight coronavirus] is social distancing and that’s exceptionally hard to do in India,” said Mr McKinnell. Hopefully we’ll have a vaccine, but I think the vaccine is going to take longer than people understand.”

India has the world’s fourth highest number of confirmed cases, behind the US, Brazil and Russia, and has been reporting a daily rise of more than 18,000 new cases for the past five days.

The total number of confirmed cases in India as of Saturday night was 648,315, according to Johns Hopkins University.

Prime Minister Narendra Modi’s coronavirus strategy has swung from a strict lockdown to a swift reopening as the government struggles to revive growth. But Indians are wary of returning to work while the disease continues to spread.

The capital New Delhi and the financial centre of Mumbai have been particularly hard hit, with hospitals overwhelmed by a surge of cases.

“The virus will dictate the pace of that recovery,” said Mr McKinnell. “If I’m correct and economic activity is a function of control of the virus, India has a major challenge.”

Moody’s expects India’s economy, which was set to record its lowest level of growth in a decade even before coronavirus struck, to contract 3.1 per cent in 2020.

In June it downgraded India to Baa3, the lowest grade investment rating. S&P and Fitch also rate India one notch above junk, and the latter last month lowered its outlook for the country to negative.

The rating agencies said that the pandemic had exacerbated the challenges India was facing and highlighted the deep stress in the country’s financial sector, which risked weighing down on growth in the longer term.

A high burden of non-performing loans had strained asset quality at financial groups, leading to a series of collapses at lenders. Yes Bank, which had been one of India’s fast-growing private banks, was taken over by the government in March. The ensuing credit crunch has made it difficult for many Indian companies to raise funds.

Ashish Gupta, head of Indian equity research at Credit Suisse, said India’s rising caseload ruled out a V-shaped rebound.

“Given that the infection is still around [and] medical capacities are overwhelmed, people are fearful of venturing out and going to business as usual,” he said, speaking from Mumbai.

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“The big question is at what level does the economy stabilise? We certainly don’t know how that will pan out.”

Mr Modi in May announced a stimulus package equivalent to $266bn, or 10 per cent of gross domestic product, aimed at reviving the economy.

But some economists estimated that the true value of the stimulus was less than 2 per cent. They said the government had repackaged some previously budgeted schemes as relief measures.

Yet Mr McKinnell said that once India was able to control the spread of the disease, it was well placed to attract more manufacturers looking to diversify their supply chains from China in areas such as chemicals, pharmaceuticals or electronics.

“Everybody now is looking for alternative sources of supply . . . The opportunity in India is to move up the supply chain.”