IMF Post-COVID 19 Economic Outlook: the World, South Asia and A Hysterical India

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by Muhammad Mahmood     26 October 2020

Held during the middle of this month 2020 the Annual Meetings of the World Bank Group (WBG) and the International Monetary Fund (IMF) have painted a very sobering picture  – these reports indicate that the pandemic COVID 19 has resulted in the largest global economic contraction since the 1930s Great Depression. The reports presented at the meeting further added that the pandemic is impacting all economies – developed, developing, and emerging. IMF/World Bank’s projects suggest along with dwindling economic growth global poverty and social inequities would deepen in the coming years.

The current crisis is expected to severely impact the developed economies like the US which is expected to contract by -6.1%, also the European Union (EU) by -9.1%, and Japan by 6.1% this year.

South Asia

In line with the global economic outlook, South Asia’s economic outlook also looks very grim. According to the latest South Asia, Economic Focus entitled “Beaten or Broken?” by the WB,  regional growth in South Asia is expected to contract by 7.7 percent in 2020, after topping 6 percent annually in the past five years with India contracting by 9.9 percent, the Maldives by 19.5 percent and Sri Lanka by 6.8 percent.

The report further says that South Asia is experiencing its worst-ever recession, with economic activity in the area brought “ to a near standstill”. Although the WB optimistically expects South Asia to rebound to a 4.5%  growth rate in 2021, it’s per capita income will be 6% lower than in 2019 due to population growth. The report clearly indicates that the expected rebound will not offset the lasting economic damage caused by the pandemic making its people far poorer than in 2019.

The report also estimates that over 75% of the workforce in the region is in the informal sector and more people will be added to the ranks of the extremely poor in the South Asian region than in any other region in the world. Already 27 percent of the extremely poor (who earn less than US$1.90 a day) in the world are in India ( 24%) and Bangladesh (3%).

To add to the economic woes of the region caused by the pandemic, the Atlantic Council reports that South Asia faces rising interest rates which would increase its borrowing costs while at the same time, reduce its exports and remittances earnings by 22%. More alarmingly, the Council adds that Foreign Direct Investments (FDI) in these countries would fall – already foreign investors have pulled US$26 billion out of developing Asian economies of which US$16 billion have gone out of India alone.

As for Bangladesh, the report expects the growth rate to fall from 8.1% in 2019  to 2% in 2020 and poverty is likely to “increase significantly”   with the greatest impact on ‘daily self-employed workers in the non-agriculture sector and salaried workers in the manufacturing sector”.

Furthermore, World Bank reports that the average earning of wage earners and daily workers in Bangladesh have already declined by 37 percent compared to the usual earnings immediately prior to the outbreak of the pandemic.  About 68 percent of the directly affected workers are located in Dhaka and Chittagong numbering 26 million which accounts for 16 percent of the country’s total population.

Hysterical India

While the overall picture for the world as a whole and South Asia is grim, it is the IMF report that says Bangladesh would do better than India in per capita GDP  has put India’s mainstream media and Indian economic pundits, home and abroad in a spin, in a state of a national hysteria of sorts. Among other things, the report says that the Indian economy, which is severely hit by the pandemic, is projected to contract by 10.3% this year, but will bounce back to 8.8% growth in 2021. India’s central bank, the Reserve Bank of India (RBI) also projected a contraction of the economy by 9.5% for the same period. Prior to the outbreak of the pandemic, India’s economy was already on a downward slide, achieved only 4.2% growth in 2019.

The latest IMF report has made the mainstream Indian media inconsolable, not so much about the economic gloom per se which was already on their own card, but it is the finding of the IMF that India’s per capita income would be lower in FY 2021 than that of its neighbour, Bangladesh – a country that it once helped in liberating –  hit the fan.

The IMF projection puts India’s per capita income at US$1,877 while that of Bangladesh at US$1,888 – a mere US$11 lead by Bangladesh over India. The projection which is only an estimate is being treated almost as a national humiliation, where reactions have varied from condescending (to Bangladesh) to rage. What is interesting is that the Indian media which has reacted so strongly against Bangladesh’s relatively better performance is quite oblivious to the fact that the same IMF report has also put Bhutan, Maldives, and Sri Lanka ahead of India. In fact, Sri Lank has been outperforming India in most the economic and social indicators for quite some time now and similarly, in recent years, Bangladesh has also outperformed India in reducing Infant mortality, in Immunisation, reducing hunger, improving Gender equity and also ranks higher in World happiness index.

Just to get an idea why India’s media is so incensed with Bangladesh doing better than India, a commentator in one of India’s media outlet, the Print, reassured his country’s men and women not to bet on Bangladesh becoming South Asia’s economic champion and berated Bangladesh as ungrateful by recalling his experience from his visit to the country which coincided with latter’s national day celebration were observed that ”no mention of the India army’s role in getting the country its freedom – which irritated India’s diplomats”. He was quite meticulous in nit-picking on the Bangladesh economy and its deficiencies, without engaging in a similar intellectual exercise that would help his own country, India to improve its dismal performance, not just at economic but at social development aspects as well.

India’s outrage with the findings of the IMF report has been widespread. Andy Mukherjee in the Bloomberg Opinion wrote, “India’s Covid-19 economic gloom turned into despair this week, on news that its per capita gross domestic product may be lower for 2020 than its neighbour Bangladesh”.  He then bemoaned “The relative underperformance may also dent self-confidence. If a country with large-power ambitions is beaten in its own backyard – by a smaller nation it helped liberate in 1971 by going to war with Pakistan – its influence in South Asia and the Indian Ocean could wane.’’

Kaushik Basu, an eminent Indian economist now a Professor at Cornell University  and a former Chief Economist of the World Bank was shocked at the news of India’s underperformance relative to Bangladesh and tweeted ”it’s shocking that India, which had a lead of 25 percent five years ago, is now trailing.’’

However, former Chief Economic Adviser to the Indian Government, Arvind Subramanian took a different position, he was a little upbeat who is of the view that on “more appropriate’’ economic metric Bangladesh has not surpassed India and is unlikely to do so in the future. He then downplayed the importance of GDP by asserting that GDP per capita is an estimate for one indicator of the average standard of welfare in a country. May be true but not sure of what other indicators Mr. Subramanian can offer that makes India look better.

Looking further ahead, IMF also reports that Bangladesh’s per capita GDP will stand at US$2,756 compared to India’s US$2,729 in 2025. But outstripping these two countries, Sri Lanka’s projected per capita GDP will be US$3,698 in the same year. So, the near to medium-term economic outlook for India does not look promising. Besides, it is a known fact that India is home to 24 percent of the world’s poorest and the number is increasing. It’s ranking in the World Hunger Index is below Bangladesh and Sri Lanka. 732 million Indians do not have any toilets. These are not great news concerning the welfare of average Indians. Thus the question that arises is what India’s   “higher per capita income’’ relative to its neighbours is doing to enhance the average welfare for the vast majority of its people?

There are several reasons for India’s current economic slowdown such as falling investment, the downturn in exports, and declining private consumption which is projected to be 10 percent lower this year, and all these, of course, have been induced by the pandemic. But a recent research paper outlines far more deep-rooted factors that apparently cause the slowdown – it indicates that India’s basket of exports is composed of “comparative advantage -defying specialisation’’. In other words, India exports a lot of high-skill manufacturers where it does not have a comparative advantage and the policy also does not help to create jobs for millions who enter the job market each year in India. On the other hand, Bangladesh has followed a low-skilled labour-intensive industrialisation policy where it has a comparative advantage, has yielded impressive macro-economic benefits while creating jobs for its poor especially women.

Instead of treating it with hysteria, the IMF report may have given India the opportunity to do some soul searching to strategize its economic growth in a manner that addresses the realities on the ground and not underpinned by its lofty “large-power ambitions”!

 

 

Dr. Muhammad Mahmood is an economist and a political analyst

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