Global ratings agency S&P on Tuesday said additional financial stimulus is "necessary" in India to fight the COVID-19 pandemic, despite the country's weak fiscal position.
The stimulus is necessary to support the vulnerable segments of the society and also to prevent additional structural damage to the economy amid the lockdown which has suddenly stopped the business activity, S&P said in a report.
In March, the government announced a Rs 1.7 lakh crore relief package focusing on providing food security to the poor and providing money in their hands to fight COVID-19.
Many industry watchers have said the package was too less, while some have backed the Centre for not front-loading the package, saying the longevity of the pandemic is not known.
The quantum of a new stimulus package is a highly speculated aspect, with some industry watchers advocating caution and others pushing for more spending given the unprecedented nature of the pandemic.
"In our view, the Indian government is likely to introduce additional fiscal stimulus measures, which could be broader in scale relative to efforts so far," the agency, which has a 'BBB-/Stable/A-3' rating on the sovereign, said.
It added that apart from the direct fiscal transfers to the affected individuals, government officials have indicated a willingness to use a range of options available in their policy toolbox which may include additional support for the corporate and the financial sector as well.
The agency said India's fiscal position has been weak for a long time now and is a major factor constraining sovereign credit rating along with the government debt.
"Though the fiscal space is limited owing to the government's already-elevated deficit, additional measures could be necessary to support the vulnerable segments of the society, and to prevent additional structural damage to the economy amid the recent sudden-stop in the business activity," it said.
S&P added that India will show a "powerful recovery" in the economy in 2021-22, if it is assumed that the pandemic is contained and there is a significant improvement in the global economic conditions.
However, if the damage to India's domestic economy is not sufficiently mitigated, the fallout could weigh on the recovery and result in downward pressures on the sovereign and Indian banks, it warned.
The agency said systemic pressures for Indian banks could rise owing to the recently announced extension of the nationwide lockdown to check the COVID-19 spread.
It said the Rs 1.7 lakh crore relief package along with liquidity easing moves from the Reserve Bank through the targeted long term repo operations will help temper economic risks.
Amid speculation of an extension in the three-month moratorium, it said such a move can help borrowers suffering from temporary liquidity issues.
Drawing from the commentary and data from Axis Bank, which announced its results last month, the agency said a fourth of the lender's borrowers by loan quantum opting for loan moratorium suggests that some of the stronger borrowers are also opting to conserve liquidity in these tough times.
The agency said it will compare the same numbers with the commentary from other banks to assess Axis Bank, but maintained that its Rs 1,400 crore loss for the March quarter reflects a "rise in systemic risk".
As of now, its negative outlook on the lender is reflective of the economic risks for the bank, and the Indian economy at large, remaining high, S&P said.
The bank will maintain its strong market position and adequate capitalisation over the next 18 months, it said, warning that a large unanticipated asset quality shock can result in a downgrade of the bank's rating.